The Audit

Committee

Purpose, Process, Professionalism

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 AUDIT COMMITTEE

• An audit committee is one of the

major operating committees of a
company's board of directors that
is in charge of overseeing financial
reporting and disclosure.

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• All U.S. publicly-traded companies
must maintain a qualified audit
committee in order to be listed on
a stock exchange

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• Committee members must be
made up of independent outside
directors, including a minimum of
one person who qualifies as a
financial expert.

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 How an Audit Committee
Works?
• Audit committees maintain
communication with the company's
chief financial officer (CFO) and
controller.

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• The committee also has the
authority to initiate special
investigations in cases where it is
determined that accounting
practices are problematic or
suspect, or when serious issues
arise with employees.

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• An internal auditor would assist
the committee in such efforts.

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• The audit committee's role includes
the oversight of financial reporting,
• the monitoring of accounting policies,
• the oversight of any external
auditors,
• regulatory compliance and the
discussion of risk management
policies with management.

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 A New World of
Corporate Governance

Boards of directors and

committees must be:
– Proactive
– Informed
– Investigative
– Accountable

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 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.

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The IIA Corporate
Governance Model

Effective
Governance

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 Clarifying Liability

Directors need to be realistic

about their personal liability
under state and federal law,
neither exaggerating nor
ignoring their exposure.

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 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

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 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

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 What is the AC’s Role in
Governance?
• Oversight of financial reporting
• Risk management
• Internal control
• Compliance
• Ethics
• Management
• Internal auditors
• External auditors

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 Tone at the Top

Management, the board, and the

audit committee all play critical
roles in an organization’s tone at
the top.

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 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.

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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.

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 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.

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 Key Issues of Concern

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

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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
year’s Section 404 opinion; 59 (10%) of
filers with adverse opinions restated their
first year’s Section 404 opinion

Source: Section 404 Internal Control Material

Weakness Dashboard Audit Analytics

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 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

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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

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 Clarifying the Value of
Internal Auditing
Audit committees must
understand internal auditing’s
role if they are to work
effectively and share a healthy
interdependence.

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Understanding Internal Audit

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

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 Asking the Right Questions

Audit committee members must

maintain an in-depth
understanding of internal audit
best practices and how internal
audit is functioning.

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 Consider…

How does the audit committee

live up to its significant
governance responsibilities
and meet the high expectations
of shareholders and other
outside parties?

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 Charting the Course

An audit committee charter is a

blueprint for its operation and
should address:
– Processes
– Procedures
– Responsibilities

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 For More Information on
Audit Committees and
Governance
• IIA website www.theiia.org/go?to=audit 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

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