Edward F. Smith

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  • American Gas Association/ Edison Electric Institute 2007 Accounting Leadership Conference June 24-27, 2007 Hyatt Regency Tamaya Resort and Spa Santa Ana Pueblo, New Mexico June 25th 10:30 – 11:15 AM Audit Committees Effectiveness
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  • Edward F. Smith

    1. 1. Edward F. Smith Executive Director KPMG’s Audit Committee Institute June 25, 2007 Audit Committee Effectiveness A U D I T C O M M I T T E E I N S T I T U T E
    2. 2. Today’s Discussion <ul><li>Current Environment </li></ul><ul><li>Anticipated Audit Committee Agenda/Priorities </li></ul><ul><ul><li>Oversight of Critical Accounting Policies, Judgments, Estimates </li></ul></ul><ul><ul><li>Oversight of Risk Management </li></ul></ul><ul><ul><li>Information Technology Governance </li></ul></ul><ul><li>Audit Committee Interactions with other Financial Reporting Process Participants </li></ul><ul><li>Other Oversight Processes </li></ul>
    3. 3. Current Environment – What We Hear <ul><li>Evolving role and time commitment of audit committee members </li></ul><ul><li>A renewed focus on “Tone at the Top” and “Tone in the Middle” </li></ul><ul><li>Redefining the roles and relationships of financial reporting process participants </li></ul><ul><ul><li>Higher expectation of participants </li></ul></ul><ul><ul><li>Role and reporting of internal audit </li></ul></ul><ul><li>Reexamining and refining key oversight processes </li></ul><ul><li>Meeting expectations of investors and regulators </li></ul>
    4. 4. Setting the Audit Committee Agenda/Priorities The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever, or vice versa. The KPMG logo and name are trademarks of KPMG International, a Swiss cooperative.
    5. 5. Looking back on 2006, how satisfied are you that your audit committee's 2006 agenda appropriately addressed the issues that required the committee's attention and oversight? Source: Annual Audit Committee Issues Conference (2007)
    6. 6. Agenda Setting: Audit Committee Priorities for 2007 <ul><li>Accounting judgments and estimates </li></ul><ul><li>Internal controls </li></ul><ul><li>Risk management </li></ul><ul><li>Information technology governance </li></ul><ul><li>Legal/regulatory compliance </li></ul><ul><li>Internal and external auditor effectiveness </li></ul>
    7. 7. Audit Committee Oversight of Critical Accounting Policies, Judgments, and Estimates The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever, or vice versa. The KPMG logo and name are trademarks of KPMG International, a Swiss cooperative.
    8. 8. Financial Restatement Trends <ul><li>Restatements by Year Filed </li></ul>Sources: Huron Consulting Group, 2004 Annual Review of Financial Reporting Matters (March 25, 2005) and Glass Lewis & Co., February 2007 Restatements Trends Alert.
    9. 9. How satisfied are you that the audit committee spends enough time discussing management’s critical accounting policies, judgments, and estimates? Source: Annual Audit Committee Issues Conference (2006)
    10. 10. Critical Accounting Policies, Judgments and Estimates – Possible Questions to Consider <ul><ul><li>What are the company’s most critical accounting policies and estimates? </li></ul></ul><ul><ul><ul><li>Focus on initial selection as well as changes </li></ul></ul></ul><ul><ul><li>What is the financial impact of each significant management accounting judgment and estimate? </li></ul></ul><ul><ul><li>What was the range of alternatives and the reason for selecting this policy/estimate? </li></ul></ul><ul><ul><li>What was the process used to arrive at the accounting judgment/estimate? Does the process take into consideration all of the factors that might impact the judgment/estimate? </li></ul></ul><ul><ul><li>What is the external auditor’s judgment about the quality of the accounting principle/estimate? </li></ul></ul><ul><ul><li>What is the likelihood of materially different reported results if different assumptions or conditions were to prevail? </li></ul></ul><ul><ul><li>Is the accounting principle/estimate consistent with GAAP? Does it in any way subvert the intent of the guidance? Is it consistent with the company’s business model? Was it made to achieve an earnings outcome? </li></ul></ul>
    11. 11. Audit Committee Oversight of Risk Management The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever, or vice versa. The KPMG logo and name are trademarks of KPMG International, a Swiss cooperative.
    12. 12. Why Risk Management Matters to Audit Committees <ul><li>NYSE Listing Standards Requirements </li></ul><ul><ul><li>The Audit Committee must “discuss policies with respect to risk management and risk assessment.” </li></ul></ul><ul><ul><li>NYSE Commentary – “The audit committee is not required to be the sole body responsible for risk… management, but…the committee must discuss guidelines and policies to govern the process by which risk assessment and management is undertaken.” </li></ul></ul><ul><li>Evaluation of Adequacy of Internal Controls </li></ul><ul><ul><li>S-O 302 certifications </li></ul></ul><ul><ul><li>S-O 404 assertions and opinions </li></ul></ul><ul><li>Critical Accounting Judgments and Estimates </li></ul><ul><ul><li>How risks affect the estimation process </li></ul></ul><ul><li>“ Risk Factors” in the Company’s 33 and 34 Act Filings </li></ul>
    13. 13. Audit Committee vs. Board (Committee): Who Oversees What Risks? All Other Risks Board/Board Committee Oversight Responsibility Until Risk Poses Financial Reporting Implications Financial Reporting Risks Audit Committee Oversight Responsibility Risk Risk Risk Risk
    14. 14. For what categories of risk should your audit committee have primary oversight responsibility? Percentages may not add to 100% due to rounding. Source: ACI’s Spring 2006 Audit Committee Roundtables
    15. 15. Oversight of Risk Management – Key Elements to Consider <ul><li>How deeply should audit committee probe? </li></ul><ul><li>Adequacy of management’s reports to the audit committee </li></ul><ul><li>Who does the reporting? </li></ul><ul><li>Commitment of senior management </li></ul><ul><li>Support from auditors </li></ul><ul><li>Communication/Coordination with Other Board Committees </li></ul>
    16. 16. Audit Committee Oversight of IT Governance The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever, or vice versa. The KPMG logo and name are trademarks of KPMG International, a Swiss cooperative.
    17. 17. IT Governance: a Critical Imperative <ul><li>Information and IT are… </li></ul><ul><li>Vital to the Financial Reporting Process </li></ul><ul><li>Integral to Compliance </li></ul><ul><li>Essential to the Business </li></ul><ul><li>Increasingly Complex </li></ul><ul><li>Becoming Even More Important…but May Lack Focus and Attention at the Board Level </li></ul>
    18. 18. How satisfied are you with your audit committee’s oversight of the company’s financial reporting-related IT risks? Source: Annual Audit Committee Issues Conference (2007)
    19. 19. IT Governance Oversight Challenges <ul><li>“IT” is often a “foreign language,” lacking business context </li></ul><ul><li>Fragmented IT governance (people, responsibilities, policies) </li></ul><ul><li>Tone at the Top </li></ul><ul><li>Alignment of board oversight responsibilities </li></ul>
    20. 20. Audit Committee Interactions with Other Financial Reporting Process Participants The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever, or vice versa. The KPMG logo and name are trademarks of KPMG International, a Swiss cooperative.
    21. 21. ©2006 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved. Audit Committee Internal Audit Management External Auditor <ul><li>Provide Oversight, Challenge & Influence </li></ul><ul><ul><li>“ Tone at the Top” </li></ul></ul><ul><ul><li>Risk and control environment </li></ul></ul><ul><ul><li>Reporting process </li></ul></ul><ul><ul><ul><li>Estimates </li></ul></ul></ul><ul><ul><ul><li>Unusual transactions </li></ul></ul></ul><ul><ul><li>Direct responsibility for external auditor </li></ul></ul><ul><ul><li>Management and internal audit </li></ul></ul><ul><ul><li>Evaluate process </li></ul></ul><ul><ul><li>Encourage continual improvement </li></ul></ul><ul><li>Reporting & Risks </li></ul><ul><ul><li>Design </li></ul></ul><ul><ul><li>Implement </li></ul></ul><ul><ul><li>Test and maintain </li></ul></ul><ul><ul><li>Communicate </li></ul></ul><ul><ul><li>302 Certification </li></ul></ul><ul><li>Evaluate </li></ul><ul><ul><li>Test financial reporting </li></ul></ul><ul><ul><ul><li>Internal control </li></ul></ul></ul><ul><ul><li>Risk management process </li></ul></ul><ul><ul><li>Improvement suggestions </li></ul></ul><ul><li>Audit of financial statements and internal control over financial reporting in accordance with PCAOB auditing standards </li></ul><ul><ul><li>Render opinion </li></ul></ul><ul><ul><li>Integrated audit for Public Co. </li></ul></ul><ul><ul><li>SAS 61 communications </li></ul></ul><ul><ul><li>Test and challenge elements of </li></ul></ul><ul><ul><ul><li>Financial reporting process </li></ul></ul></ul><ul><ul><ul><li>Risk and control environment </li></ul></ul></ul><ul><ul><li>Improvement suggestions </li></ul></ul>
    22. 22. How satisfied are you with the interaction and the support the Audit Committee receives from the CFO? Percentages may not add to 100% due to rounding Source: 2 nd Annual ACI/NACD Public Company Audit Committee Member Survey (2006-2007)
    23. 23. How satisfied are you that your audit committee’s evaluation process enhances your audit firm’s effectiveness? Source: Annual Audit Committee Issues Conference (2007)
    24. 24. Oversight of Internal Audit <ul><li>How has the role of, and resources needed by, internal audit changed? </li></ul><ul><li>What relationship should exist between the audit committee and internal audit? </li></ul><ul><li>How do you help ensure that internal audit will bring controversial issues to the attention of the audit committee? </li></ul><ul><li>How does the audit committee evaluate Internal Audit? </li></ul><ul><li>What does the Audit Committee value most about Internal Audit? </li></ul>
    25. 25. Who provides primary support to the audit committee in establishing its meeting agenda and in carrying out its oversight activities ? CFO Internal Auditor General Counsel/Secretary External Auditor Other Source: Audit Committee Institute Quick Poll, December 2006 Percentages may not add to 100% due to rounding.
    26. 26. How satisfied are you that your company’s Internal Audit function has adequate resources (budget and people with the training, skills, education, and knowledge of the company) to carry out its responsibilities? Source: The 3 rd Annual Audit Committee Issues Conference Percentages may not add to 100% due to rounding
    27. 27. How confident are you that your company’s Chief Audit Executive would report any controversial issues involving senior management to the Audit Committee? Percentages may not add to 100% due to rounding Source: 2 nd Annual ACI/NACD Public Company Audit Committee Member Survey (2006-2007)
    28. 28. Other Oversight Processes <ul><li>Agenda Setting </li></ul><ul><li>Audit Committee Meetings </li></ul><ul><li>Continuous Improvement </li></ul>
    29. 29. How concerned are you that “compliance activities” detract from substantial discussion concerning company issues, resulting in a negative impact on the overall effectiveness of the Audit Committee? Percentages may not add to 100% due to rounding Source: 2 nd Annual ACI/NACD Public Company Audit Committee Member Survey (2006-2007)
    30. 30. Audit Committee Meetings <ul><li>Which of the following would most improve the effectiveness and efficiency of your audit committee meetings? </li></ul><ul><li>1. More time spent discussing issues versus listening to presentations </li></ul><ul><li>2. Better prioritization of issues </li></ul><ul><li>3. Higher quality/more timely pre-meeting materials </li></ul><ul><li>4. More effective use of executive sessions </li></ul><ul><li>Source : Annual Audit Committee Issues Conference (2007) </li></ul>
    31. 31. How important is audit committee member education (outside of formal audit committee meetings) to the overall effectiveness and efficiency of your audit committee? Source: The 3 rd Annual Audit Committee Issues Conference
    32. 32. How satisfied are you that your Audit Committee’s current self-evaluation approach enhances its effectiveness? Source: ACI/NACD 2006 Survey.
    33. 33. Key Oversight Processes: Audit Committee Effectiveness <ul><li>Setting the audit committee agenda / issue prioritization </li></ul><ul><li>Making the most of audit committee meetings </li></ul><ul><li>Setting clear expectations for each participant in the financial reporting process, including the auditors </li></ul><ul><li>Supporting the CFO, and the internal and external auditors </li></ul><ul><li>Coordinating and communicating with the full Board and other Board committees </li></ul><ul><li>Ensuring continuous improvement (education and self-assessments) </li></ul>

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