A Common Sense Look at Sarbanes-Oxley

1
A Common Sense Look at Sarbanes-Oxley

• Presentation to the MIT Auditing Committee of the
  Corporation
• June 8, 2003

2
Overview

• MIT is not governed by Sarbanes-Oxley
• As companies move to conform with requirements,
  standards for best practices in governance
  shift toward the S-ox model
• This affords us the opportunity to reflect upon
  certain governance processes
• Our peers in the main remain on the sidelines

3
MITs Governance Practices

• MITs governance practices are mature
• Have served us well over time
• Have been modified as other opportunities have
  arisen
• Audit Committee Charter adopted in 2001
• We have no compelling need to change existing
  practices in post-Sarbanes-Oxley era but may
  use this time to explore our business needs in
  terms of governance practices in the whole

4
Key Requirements

• Brief summary of the key sections of the Act,
  those with potential applicability to
  institutions of higher education, follows this
  presentation
• Each section shows relevant MIT practices
• (As requested by the Audit Committee)
• The Act is broken into major sections,
  including
• Auditor Independence
• Corporate Responsibility
• Enhanced Financial Disclosures
• Corporate and Criminal Fraud Accountability

5
Topics for Discussion

• Auditor Independence
• Audit Committee structure, composition,
  independence, and oversight role
• External Certifications
• Processes for
• Setting expectations
• Reporting of problems

6
Auditor Independence

• Rotation of auditing firms and audit partners
  will be a matter of audit firm policy, which MIT
  will follow
• Use of our independent auditing firm for non-
  audit services is addressed by MIT policy
• Pre-approval of such services in excess of
  500,000
• Annual review of all fees for services

7
Audit Committee Structure, Composition,
Independence, and Oversight Role

• MITs Audit Committees structure, composition
  and independence and oversight role established
  by the Corporations By- Laws
• Clarified and ratified by the Audit Committees
  Charter, and MITs Conflict of Interest policy
  for Corporation members
• Charter provides for committee member
  independence and financial expertise slightly
  broader definitions than Sarbanes-Oxley
• Charter also addresses oversight of auditors

8
External Certifications

• MIT does not include external certifications in
  the annual financial statement report,
• But desires financial and internal control
  accountability within the organization be clearly
  understood
• Consequently, MIT is committed to study and
  strengthening if necessary the structural and
  control elements providing financial
  accountability
• Subject of the PwC Management Letter in recent
  years
• Conceptually, individuals with responsibility for
  aspects of financial reporting or internal
  control, should be equipped to certify through
  the normal course of their work
• See next slide, Setting Managements
  Expectations

9
Setting Managements Expectations

• Sarbanes-Oxley requires a code of ethics for
  financial officers MIT sees a different need
• MIT plans to clarify expectations for standards
  of business conduct and performance in roles, and
  ensure training and oversight of staff at all
  levels accordingly
• These plans arise from managements and auditors
  observations regarding the risks found in a
  decentralized business processing environment
• Addressing these risks will be a collaborative
  opportunity, initially administration-led,
  eventually engaging of all

10
Reporting of Issues

• Sarbanes-Oxley requires a process enabling
  anonymous reporting of accounting, auditing and
  internal control matters to the Audit Committee
• Even absent formal protocols, MITs Office of
  Sponsored Programs, Senior Counsel and Audit
  Division currently receive and handle matters as
  appropriate
• Management believes formalization of these
  practices may be beneficial to the control
  environment, and will explore a simple web-based
  means, via the Audit Divisions and other areas
  web-sites, to collect potential issues as reported

11
Summary

• Management believes good business practices
  should be under continual review
• As standards for best practices change, MIT
  will remain attentive
• MIT will consider the approaches of peer
  organizations as potential models, to evaluate
  and perhaps emulate
• Absent a regulatory or legal directive, a
  common-sense approach to governance practices
  will be our best posture