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© 2004 KPMG International. KPMG International is a Swiss ...

© 2004 KPMG International. KPMG International is a Swiss ...






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    © 2004 KPMG International. KPMG International is a Swiss ... © 2004 KPMG International. KPMG International is a Swiss ... Presentation Transcript

    • Audit Committee: Interaction with External Auditors, Training and Evaluation of Internal Controls September 17, 2004 © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.
    • Today’s Discussion
        • The Current Environment
        • Interaction with the Audit Committee, Management and the External Auditor
        • Audit Committee Training
        • SOX 404 Matters
    • The Current Environment
    • What They Were Saying in 1926
        • “ … There can be no hope for the independent audit unless and until it be tied in with the positive creation of some body independent of management to which the auditor shall be accountable.”
        • – William Ripley, “Main Street and Wall Street” - 1926
    • Many of the Corporate Governance Reforms Are Far Reaching
      • Resulting in redefined roles, responsibilities and accountabilities of:
        • Boards of Directors (including the Audit Committee)
        • Senior Management
        • Internal Auditors
        • External Auditors
        • Legal Counsel
        • Other Participants in the Capital Markets
      • In some cases, these reforms are the most dramatic, rapidly-enacted and far reaching changes to ever affect corporate accountability and financial reporting oversight.
    • Audit Committee Definition – Redefined?
      • A committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing:
        • The accounting and financial reporting processes of the issuer, and
        • audits of the financial statements [“financial reporting process”] of the issuer.
      • “ Under the PCAOB’s proposed standard, the audit of a public company is now an audit of the company’s financial reporting process.”
      • Douglas R. Carmichael, Chief Auditor PCAOB
      • Speech to the American Accounting Association January 2004
    • Reporting Relationships and Interaction with the Audit Committee, Management and the External Auditor
    • The Three Legged Stool
      • “ The board, including the Audit Committee, management (which includes Internal Audit), and outside auditors form a "three-legged stool" of responsible disclosure and active oversight, laying the foundation for financial integrity and greater accountability.”
      • - SEC Chairman Arthur Levitt
      • December 12, 2000
    • Audit Committee Internal Audit Management External Auditor
      • Provide oversight, challenge & influence
        • “ Tone at the Top”
        • Risk and control environment
        • Reporting process
          • - Estimates
          • - Unusual transactions
        • Direct responsibility for external auditor
        • Management and internal audit
        • Evaluate process
        • Encourage continual improvement
      • Reporting & Risks
        • Design
        • Implement
        • Test and maintain
        • Communicate
        • 302 Certification
      • Evaluate
        • Test financial reporting
          • Internal control
        • Risk management process
        • Improvement suggestions
      • Audit of financial statements and internal control over financial reporting in accordance with PCAOB auditing standards
        • Render opinion
        • Integrated audit for Public Co.
        • SAS 61 communications
        • Test and challenge elements of
          • Financial reporting process
          • Risk and control environment
        • Improvement suggestions
    • Audit Committee’s Direct Responsibility for External Auditor
        • Appointment, compensation and oversight
        • Pre-approval of services
        • Resolution of disputes with management
        • Annual evaluation of qualification, performance and independence of auditor and communication requirements including quality controls (NYSE)
        • Review with the external auditor the responsibilities, budget and staffing of the Internal Audit Department (NYSE)
        • Hold executive sessions with management, internal and external auditors (NYSE)
    • Oversight of the External Auditors
      • Audit Committee:
      • “… Must be directly responsible for the appointment, compensation, retention, and oversight of the work of [the Company’s independent auditor]”
      • Independent Auditors :
      • “… Must report directly to the audit committee”
      • SEC Standards Relating to Listed Company Audit Committees
      • April 9, 2003
      • “… The audit committee should be the external auditor’s biggest fan and harshest taskmaster.”
      • SEC Chief Accountant Donald T. Nicolaisen
      • December 11, 2003
    • Audit Committee Organization and Operation – Issues to Consider
        • Membership
        • Annual and “New Member” Orientation
        • Charter
        • Setting “The Tone” with Management and External and Internal Auditors
        • Process for the Selection of the Independent Auditor
        • Whistleblower Procedures
        • Resources and Interdependencies
    • Audit Committee Training
    • Audit Committee Training: KPMG’s Audit Committee Survey
      • NYSE listing standards require Corporate Governance Guidelines that address director orientation and continuing education
      • Groups that grade corporate governance are tracking continuing education of directors
      • Survey of Audit Committee Roundtable participants in Spring 2003
        • 33% expected a company-specific education session to be provided to the Audit Committee during the next year
        • 34% did not expect this type of session, 33% were not sure
        • Respondents at companies with revenue in excess of $5 billion were more likely to expect an education session
    • Audit Committee Training: Business Roundtable Survey
      • “ Business Roundtable” surveyed its 150 members in June 2003
        • 90% of Roundtable companies encourage, require or have in place director education programs for new or all directors (vs. 76% in 2002)
        • 33% of Board members surveyed felt a board educational retreat was a minimum requirement for board education
        • 45% expected governance experts to educate at board meetings and 46% expected to attend director education seminars, as a minimum requirement
    • Framework for Audit Committee Education
      • Provide company-specific education targeted to key financial accounting and reporting risks. The framework and content is focused on the Audit Committee’s oversight role – as follows:
        • Provide a general overview of the focus area and relevant accounting guidance
        • Present the risk assessment process conducted by management
        • Discuss the internal controls, monitoring practices, and responsible parties
        • Describe significant estimates and judgments involved in the focus area
    • Approach to Audit Committee Education
      • Audit Committees are expecting much more internal and external support concerning developing trends and issues (company-specific, in the boardroom)
      • Some Audit Committees have been requesting tailored modules led by:
        • Management
        • Internal Audit
        • In-house Counsel or External Counsel
        • External Auditor
        • Other Third Parties
    • Format/Frequency of Education
      • Tailored education modules could be held periodically in a variety of formats:
        • Single topic sessions led by management prior to Audit Committee meetings
        • Educational workshops held twice a year
        • Invited specialists to educate at Board meetings
      • External education in areas such as Corporate Governance and Director Responsibilities could supplement company-specific modules
    • Management Led Sessions
      • Typical management led training session, tailored to the Audit Committee oversight role, can address various aspects of the Financial Accounting and Reporting Process, including:
        • Financial Reporting Risk Management
        • Internal Controls Over Financial Reporting
        • Critical Judgments and Estimates
        • Information Security Risks
        • Disclosure Controls and Procedures
    • Potential Training Topics
        • Reserve Estimation
        • Accounting for Derivatives
        • Stock Compensation
        • Restructuring and Discontinued Operations
        • Asset Impairment and Retirement Obligations
        • Revenue Recognition
        • Accounting for Acquisitions
        • Consolidation of Variable Interest Entities (VIEs)
    • Potential Training Topics continued
        • Goodwill and Intangible Assets
        • Income Taxes
        • Contingencies (environmental, legal, etc.)
        • Depreciation, Depletion and Amortization
        • Pension Accounting
        • M, D & A Requirements/Disclosures
        • Internal Controls over Financial Reporting and Linkage to COSO
    • Internal Control Reporting (SOX 404) Matters
    • Internal Control Reporting – Audit Committee’s S-O 404 Matters
        • Is it worth the effort?
        • Can we get it done in time?
        • Is the cost too high?
        • Will it matter to our shareholders (and others) – what will market reaction be to “bad news”?
        • Will it make management (and the audit committee) more effective?
        • What will be required to sustain it?
        • What involvement should the audit committee have in this process?
        • What issues exist regarding the evaluation of the audit committee’s effectiveness as part of the control environment?
    • Final Thoughts – Audit Committees should…
        • Receive proper orientation and continuing education
        • Set expectations with management, internal, and external auditors concerning responsibilities and accountabilities
        • Work to receive the right information, from the right party, at the right time, and in the right context
        • Focus the nature and timing of Audit Committees activities based on the company’s key financial reporting risks (not driven by a “check the box mentality”)