The Audit

Committee

Purpose, Process, Professionalism

www.theiia.org
 A New World of
Corporate Governance

Boards of directors and

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

www.theiia.org
 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.

www.theiia.org
The IIA Corporate
Governance Model

Effective
Governanc
e

www.theiia.org
 The Bad News

• Stakes are greater

• No “figure head” board
members allowed
• Public trust has diminished
• Greater challenges
• More director liability

www.theiia.org
 Clarifying Liability

Directors need to be realistic

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

www.theiia.org
 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

www.theiia.org
 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

www.theiia.org
 Director Evaluations and
Qualifications
• 38% of companies performed
director evaluations in 2005 and
45% are planning to do so in 2006

• 97% of companies have established

director qualifications up from 87%
in 2005
Harvard Business School

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

www.theiia.org
 Committee Meetings

• 52% of companies report a

significant increase in the
number or length of meetings
of the Audit Committee in the
past two years.

Harvard Business School

www.theiia.org
 Tone at the Top

Management, the board, and the

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

www.theiia.org
 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.

www.theiia.org
 Best Practices in Compliance
and Ethics Oversight:
Ensure:
– Compliance with laws and regulations
– Financial reporting of significant issues
– Management monitoring of program effectiveness
– Staying informed and recognizing trends to ensure
appropriate action
– Internal audit includes assessment of compliance
and ethics risks in their audit plan
– AC meetings with program manager to discuss key
risks, status, issues, investigations, disciplinary
action and effectiveness.

www.theiia.org
 Noses In. Fingers Out.
• The lines of authority for audit
committees and management
should be clear and understood.

• AC members must communicate

openly with management. They
must also challenge management as
appropriate.

www.theiia.org
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.

www.theiia.org
 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.

www.theiia.org
 Key Issues of Concern

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

www.theiia.org
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

www.theiia.org
 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

www.theiia.org
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

www.theiia.org
 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.

www.theiia.org
Understanding Internal Audit

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

www.theiia.org
 Asking the Right Questions

Audit committee members must

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

www.theiia.org
 Consider…

How does the audit committee

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

www.theiia.org
 Charting the Course

An audit committee charter is a

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

www.theiia.org
 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

www.theiia.org