The Audit Committee

1
The Audit Committee

• Purpose, Process, Professionalism

2
A New World of Corporate Governance

• Boards of directors and committees must be
• Proactive
• Informed
• Investigative
• Accountable

3
Clarifying Governance

• Governance is the system by which organizations
  are directed and controlled. It includes the
  rules and procedures for making decisions on
  corporate affairs to ensure success while
  maintaining the right balance with the
  stakeholders interest.

4
The IIA Corporate Governance Model
5
The Bad News

• Stakes are greater
• No figure head board members allowed
• Public trust has diminished
• Greater challenges
• More director liability

6
Clarifying Liability

• Directors need to be realistic about their
  personal liability under state and federal law,
  neither exaggerating nor ignoring their exposure.

7
Fiduciary Duties

• The duties of care and loyalty, and the
  expectation that directors will act in good
  faith.
• These are the primary source of director
  liability under state law.
• Source Director Liability Myths, Realities And
  Prevention National Association of Corporate
  Directors

8
Fiduciary Duties (cont.)

• Board members who wish to become empowered
  guardians and builders of corporate value must
• Learn and follow best practices,
• avoid conflicts of interest,
• pay strict attention to board matters,
• drawing on appropriate expertise, including their
  own.
• Source Director Liability Myths, Realities And
  Prevention National Association of Corporate
  Directors

9
Director Evaluations and Qualifications

• 38 of companies performed director evaluations
  in 2005 and 45 are planning to do so in 2006
• 97 of companies have established director
  qualifications up from 87 in 2005
• Harvard Business School

10
What is the ACs Role in Governance?

• Oversight of financial reporting
• Risk management
• Internal control
• Compliance
• Ethics
• Management
• Internal auditors
• External auditors

11
Committee Meetings

• 52 of companies report a significant increase in
  the number or length of meetings of the Audit
  Committee in the past two years.
• Harvard Business School

12
Tone at the Top

• Management, the board, and the audit committee
  all play critical roles in an organizations tone
  at the top.

13
Best Practices in Code-of-Conduct Oversight

• Ensure
• A code of conduct has been developed, reviewed
  and updated as needed.
• All employees receive the code of conduct,
  understand it, and receive training.
• Management exhibits ethical behavior and reported
  violations receive action.

14
Best Practices in Compliance and Ethics Oversight

• Ensure
• Compliance with laws and regulations
• Financial reporting of significant issues
• Management monitoring of program effectiveness
• Staying informed and recognizing trends to ensure
  appropriate action
• Internal audit includes assessment of compliance
  and ethics risks in their audit plan
• AC meetings with program manager to discuss key
  risks, status, issues, investigations,
  disciplinary action and effectiveness.

15
Noses In. Fingers Out.

• The lines of authority for audit committees and
  management should be clear and understood.
• AC members must communicate openly with
  management. They must also challenge management
  as appropriate.

16
Communications Checklist

• Management is easily accessible.
• Management reaches out to the audit committee
  regularly.
• Management answers audit committee questions
  fully and completely.
• Management provides factual information to
  support responses.

17
Communications Checklist (continued)

• Management admits not knowing an answer.
• Management supports the audit committee by
  contacting additional resources and specialists.
• Management advises the audit committee of
  significant issues in a timely manner.
• Management seeks audit committee input in advance
  of key decisions.

18
Key Issues of Concern

• Financial Accuracy
• Risk Management
• Control Assessment
• External Auditor Oversight
• Effective Use of Internal Auditing

19
Statistics on First Full Year of Filings As of
March 30, 2006 - 404 Opinions

• 3710 filers
• 591 (15.9) received adverse opinions from their
  public accountants
• 90 (2.4) of all filers restated their first
  years Section 404 opinion 59 (10) of filers
  with adverse opinions restated their first years
  Section 404 opinion
• Source Section 404 Internal Control Material
• Weakness Dashboard Audit Analytics

20
GAAP/Accounting Areas of Failure for Adverse
Opinions

• Tax-related issues 32
• Revenue recognition (31.3)
• Inventory (27.4)
• Source Section 404 Internal Control Material
• Weakness Dashboard Audit Analytics

21
Internal Controls Over Financial Reporting Issues
Adverse Opinions

• Material year-end adjustments (53.1)
• Personnel issues (48.1)
• Restatements of financials (49.6)
• Source Section 404 Internal Control Material
• Weakness Dashboard Audit Analytics

22
Clarifying the Value of Internal Auditing

• Audit committees must understand internal
  auditings role if they are to work effectively
  and share a healthy interdependence.

23
Understanding Internal Audit

• Objectivity
• Reporting structure
• Risk management
• Staffing
• Prioritization
• Adding Value

24
Asking the Right Questions

• Audit committee members must maintain an in-depth
  understanding of internal audit best practices
  and how internal audit is functioning.

25
Consider

• How does the audit committee live up to its
  significant governance responsibilities and meet
  the high expectations of shareholders and other
  outside parties?

26
Charting the Course

• An audit committee charter is a blueprint for its
  operation and should address
• Processes
• Procedures
• Responsibilities

27
For More Information on Audit Committees and
Governance

• IIA website www.theiia.org/go?toaudit committee
• Research/Publications
• Audit Committee Effectiveness What Works Best
• Tone at The Top (corporate governance newsletter)
• The Professional Practices Framework
• The IIA Bookstore
• Guidance
• Audit Committee Purpose, Process,
  Professionalism
• Audit Committee Discussions on Performance
  (self-assessment)
• 20 Questions Directors Should Ask About Internal
  Audit