Effective Audit Committee Practices and Responsibilities

1. Assurance and Advisory Business Services

2. Overview • Enron’s collapse has created a crisis of confidence in financial reporting • Plenty of blame to go around • Current debate on possible solutions includes those aimed at audit firms and audit committees • Our presentation summarizes current issues and best practices relating to audit committees

3. CPA Profession’s Views • Little need for changes in audit committee guidance • Room for improvements in implementation

4. Responses to Calls for Change • Financial community efforts • Blue Ribbon Committee • Blue Ribbon Commission • Panel on Audit Effectiveness • Independence Standards Board • Regulatory and profession responses • SEC, securities exchanges, and ASB rules in response to BRC • Recent frauds, restatements, etc.

5. Roles and Responsibilities • Management – financial reporting and internal control • Internal audit – assess internal control • Independent audit – attest to fairness of financial statements • Committee – oversight of the process and participants

6. Reporting and Disclosure • Audit Committee Report • Proxy Disclosures • Identify Committee members • Number of meetings held • Describe functions • Consideration of nonaudit services • Existence of charter • Nonindependent directors

7. Understanding the Business • Knowledge of the Company • Structure • Financial reporting process • Sophisticated or complex transactions • Current environment • Regulatory requirements • Suppliers and customers • Use of technology

8. Understanding the Business • Internal Control • Control environment • Code of conduct • System of internal control

9. Understanding the Business • Risk of Fraud • Earnings management issues • Aggressive accounting policies • Consider restructuring charges, R&D costs, subjective estimates, and premature recognition of revenue

10. Understanding the Business • Legal and Ethical Matters • Enterprise Risk Issues • Emerging Issues

11. Oversight of the Financial Reporting Process • Need to understand: • Financial results • Adequacy and completeness of MD&A • Significant changes or trends • Critical accounting policies • Significant issues, related party transactions, and accounting and auditing matters • Unadjusted audit differences

12. Interim Financial Reporting • Interim periods generally include more estimates and judgments than annual financial statements • Discussions with management and auditors may be via conference calls, meetings, or both

13. Oversight of Audit Function • Audit process • Audit resources • Quality, experience, and staffing of internal auditors • Qualifications and performance of independent auditors • Scope and fees • Non-audit services

14. Audit Committee Communications • Discussions with independent auditors • Audit planning and results • Results of timely interim reviews • Required communications • Other meetings

15. Other Characteristics of Audit Committees • Audit Committee Charter • Indicates responsibilities, including receipt of disclosures from auditor on independence • States that independent auditors are ultimately accountable to Board and Committee

16. Other Characteristics of Audit Committees • Financially literate, independent members • Diverse backgrounds of members • Typically 3-6 members • Qualified, experienced Chair • Terms of members • Structuring effective meetings

17. Other Characteristics of Audit Committees • Orientation and continuing education • Provide background information to new members • Obtain information on new accounting or auditing standards, financial reporting process, and significant issues affecting the Company

18. Best Practices • Ask questions of the internal and independent auditors about the Company’s system of internal control • Establish clear expectations with management and auditors about the Committee’s qualitative information needs about internal control—especially controls in higher-risk areas

19. Best Practices • Ask detailed questions of management and the auditors when reviewing the financial statements • Interim discussions occur prior to the earnings release and cover significant matters

20. Best Practices • Consider the presence of risk factors for potential fraudulent financial reporting • Understand why management did not correct audit differences and what the effect would be on the financial statements if such differences were corrected in the current period

21. Best Practices • Develop a meeting planner to make sure that the Committee meets its responsibilities outlined in the Charter • Add a disclosure to proxy that references the Audit Committee Report and Audit Committee Charter for detailed information • Perform a self-assessment of the Committee to identify areas for improvement

22. Legislation and Regulation Status • On July 24, agreement was reached by Congress on a compromise corporate crime bill • The SEC has been very active` • On June 27 issued an order requiring the CEO and CFO of 1000 companies to certify their most recent filings • On June 17 proposed a permanent certification requirement • proposed changes in financial disclosure rules earlier this year • proposed new rules creating an accounting oversight board on June 26 • intends to propose changes in auditor independence and corporate governance rules later this summer • On June 6, the NYSE published a working draft of proposed corporate governance listing requirements

23. Among The Issues Being Debated • Corporate Governance: Increased responsibilities for corporate officers, boards of directors, and audit committees • Accounting Profession Reform: The power and composition of a new auditor oversight board and the scope of services that may be provided to audit clients • Financial Disclosures: Proposals intended to enhance corporate transparency and require real-time disclosure of important financial information

24. Corporate Governance Reform

25. Accounting Profession Reform

26. Financial Disclosure Reform