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Forces of Changes Presentation

Forces of Changes Presentation






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    Forces of Changes Presentation Forces of Changes Presentation Presentation Transcript

    • Forces of Change Don H. Hansen Health Care Services Partner [email_address] 425.303.3013
      • Enron, WorldCom, Tyco, et al
      • Financial restatements
      • Corporate bankruptcies
      • Confidence in US financial reporting system shaken
      A Period Of Challenges
      • Legislative action
      • Increased regulation
        • Federal
        • State
      • Financial reporting changes
      • New audit standards
      The Response?
      • Applicable to “ Issuers ” (those filing with the SEC)
      • Revises governance standards
      • New responsibilities on executives and boards
      • Adds new disclosure requirements
      • Documentation and testing of controls (Sec. 404)
      • Increases audit committee responsibility
      • Creates new federal crimes related to fraud
      • Significantly increases criminal penalties for violations of the securities laws
      • Creates Public Company Accounting Oversight Board
      Sarbanes-Oxley Act of 2002
      • Over 20 accounting reform proposals in 13 states
      • Another 10 proposals on corporate accountability
      • Other activity ongoing outside of the state legislative / regulatory arena
      State Laws / Regulations
      • Board of Accountancy requesting comments on changes to auditor independence rules
      • Essentially adopting parts of Sarbanes-Oxley
        • CPA firm must rotate audit partner every 5 years
        • Can’t audit a company where CEO/CFO/Chief Accountant was recently employed by CPA firm
        • Prohibit certain non-audit services
      • SAO will apply GAO independence standards
      Washington State
    • An ethics code cannot replace a backbone Jeffrey L. Seglin New York Times
    • Changes to Financial Reporting
      • Changes to governmental reporting as well
        • Not driven by financial reporting scandals
        • Focus on clarifying government financial information
      • Governmental Accounting Standards Board GASB #34 – Financial reporting by state and local governments
        • Significant impact on statements
        • Adds required supplemental information to the statements
          • management discussion and analysis much like SEC filings
          • Other information required
        • Will add complexity to your statements
    • Changes to Audit Standards
      • Public Company Accounting Oversight Board (PCAOB)
        • Will set standards for audits of publicly traded companies
      • Significant changes from the AICPA for all audits
      • New fraud auditing standard this year (SAS 99)
        • Significant increase in auditor’s investigation of fraud
        • Increase in audit time estimated from 10% to 25% over historical audit hours
      • Changes have primarily focused on publicly traded companies
        • Personal gain was driving the fraud
      • Some suggest Sarbanes-Oxley should apply to all companies
      • Questions:
        • What problem are we trying to fix?
        • Is the cost worth the potential benefit?
        • Do hospital’s need an audit committee?
      How Far Should It Go?
      • Hospitals are already heavily regulated
      • Will now have increased cost from regulation of financial reporting
        • GASB #34 - increases complexity
        • Fraud auditing standard - increases audit time
        • Independent auditors required to follow Generally Accepted Governmental Auditing Standards (GAGAS) – increased annual education for CPA
        • Auditor rotation? – start up costs of new auditors
      Cost of Regulation
      • Definitely need to improve confidence in financial reporting
      • Audit independence standards should be strict
      • Mandatory rotation of auditors
        • Will lead to increased cost
        • Reduced understanding of client issues
        • Likely result in more audit failures, not less
      • Where should the focus lie?
      How Far Is Far Enough?
      • Financial reporting is about internal controls
        • Control Environment - Risk Assessment
        • Information and - Control Activities Communication
        • Monitoring
      • Audits happen after the fact
      • Good financial reporting results from day to day activities and regular oversight
      Focus On The Process
      • When the big 3 auto makers had to improve quality, they didn’t just do more inspections once the car was built – they made quality the part of the entire process
      • Accurate financial reporting has to be part of the everyday way of doing business
      How Do You Improve Process?
      • If you want to improve quality, you don’t put emphasis just on inspections done at the end.
      • Integrity has to be a part of the entire organization.
      • It changes how you deal with vendors, suppliers, and customers. It should impact how employees interact, the message administration sends, the message sent to middle managers and employees.
      • It takes Board commitment.
      How Do You Improve Process?
      • Central to Sarbanes-Oxley is increased Board oversight via an audit committee
        • Requires a financial expert who understands the financial and accounting issues
      • Difficult to have with elected officials
        • Can an audit committee be effective?
        • They should be asking the right questions
        • They need to be educated and informed
      Board Involvement
    • How Are CPA Firms Changing?
      • The CPA industry got a wakeup call
      • The profession was founded on ethics and integrity
      • We have a responsibility to the public
      • Many lost sight of that responsibility
      • The AICPA will enhance discipline of members who don’t follow standards
        • Increased use of termination from public practice
    • AICPA Efforts
      • Improved peer review process (audits of the auditors)
      • Center for Audit Committee Effectiveness
      • Developing and anti-fraud and corporate responsibility program
        • Rebuild investor confidence
        • Re-establish audited financial statements as a clear picture window into corporate America
        • Reduce the incidence of financial fraud