Audit Committee Oversight Effectiveness Post Sarbanes-Oxley Act, written by Zabihollah (Zabi) Rezaee, CPA, Thompson-Hill Chair of Excellence and Professor of Accountancy at The University of Memphis, discusses the essential and fundamental aspects and functions of audit committees, focusing on their working relationship with other corporate governance participants including the board of directors, executives, internal auditors, external auditors, legal counsel, financial analysts, investment bankers, governing bodies, standard setters, and other stakeholders.
This Portfolio describes foundations of audit committees including their importance as guardians of the public trust. It discusses the determinants of effective audit committee including structure, attributes, and operations.
Audit Committee Oversight Effectiveness Post Sarbanes-Oxley Act examines the oversight functions of audit committees including corporate governance, financial reporting, internal controls, external auditing, risk assessment, ethics, whistleblower, and tax. It also discusses audit committee reporting responsibility and accountability. Finally, this portfolio elaborates on emerging issues affecting audit committees.
This Portfolio will interest anyone involved with corporate governance, the financial reporting process, and audit functions. Specifically, corporations and their executives, the boards of directors and audit committees, internal and external auditors, accountants, governing bodies, users of financial statements (investors, creditors, pensioners), business schools, and other professionals (attorneys, financial analysts, bankers) will find this portfolio instructive.
Audit Committee Oversight Effectiveness Post Sarbanes-Oxley Act allows you to benefit from:
This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more.
Detailed Analysis
I. Introduction
A. Background
B. Organization and Contents
II. Foundations of Audit Committees
A. Audit Committees as Guardians of the Public Trust
1. Audit Committees as Investor Representative
2. Why Form an Audit Committee?
3. Audit Committee Oversight Effectiveness
4. Audit Committee Framework
B. Audit Committee: A Historical Perspective
C. Authoritative and Advisory Guidance
1. The Treadway Commission Report
2. The Blue Ribbon Commission
3. SEC Final Rules on Audit Committees
4. Federal Deposit Insurance Corporation Improvement Act
5. AICPA
6. Stock Exchange Listing Standards
III. Fundamentals of Audit Committees
Introductory Material
A. Audit Committee Structure
1. Audit Committee Oversight Effectiveness
2. Determinants of an Effective Audit Committee
3. Audit Committee Resources
4. Audit Committee Interactions
a. Relationship With the Board of Directors
b. Relationship With Management
c. Relationship With Internal Auditors
d. Relationship With External Auditors
5. Audit Committee Advisers
6. Audit Committee Authority
7. Audit Committee Funding
8. Audit Committee Legal Obligations
a. Fiduciary Duty
b. Duty of Loyalty
c. Duty of Care
9. Legal Liabilities of Audit Committees
B. Audit Committee Attributes
1. Best Practices
2. Audit Committee Composition
3. Audit Committee Size
4. Audit Committee Meetings
5. Audit Committee Independence
a. SOX and SEC Rules
b. NYSE Audit Committee Independence Requirements
c. NASDAQ Audit Committee Independence Requirements
d. Overall Guidelines and Aspirations
6. Audit Committee Financial Experts
7. Education and Training of Audit Committee Members
C. Audit Committee Operation
1. Audit Committee Charter
2. Oversight Functions of the Audit Committee
3. Audit Committee Minutes
4. Audit Committee Agenda
5. Attendance at Meetings
IV. Oversight Functions of the Audit Committee
A. Corporate Governance Oversight Function
1. Audit Committee Relationship With the Board of Directors
2. Audit Committee Relationship With Other Board Committees
a. Audit Committee Relationship With Compensation Committee
b. Audit Committee Relationship With Nominating/Governance Committee
3. Audit Committee Relationship With Management
4. Audit Committee Relationship With Internal and External Auditors
5. Audit Committee Relationship With Legal Counsel
B. Financial Reporting Oversight Function
1. Annual Reports
2. Example: General Motors Corporation
a. Balance Sheet
b. Income Statement
c. Statement of Cash Flows
d. Statement of Stockholders Equity
3. Notes to Financial Statements
4. Management's Discussion and Analysis
5. Overseeing Annual Audited Financial Statements
a. Critical Accounting Policies and Practices
b. Initial Adoption of Accounting Policies and Changes in Existing Policies
c. Accounting Estimates and Reserves
d. Significant Changes in the Content and Format of Financial Statement Presentation
e. End of the Year Transactions and Audit Classifications and Audit Adjustments
f. Independent Auditor Disagreements With Management on Accounting Matters
g. Off-Balance Sheet and Related Party Transactions
6. Overseeing Interim Reviewed Financial Statements
7. Management Certifications of Financial Reports and Internal Controls
C. Internal Audit Oversight Function
1. Audit Committees and Internal Auditors
2. Management's Report on Internal Control Over Financial Reporting
3. External Auditor's Report on Management's Assessment
D. External Audit Oversight Function
1. Appointment, Compensation, and Retention of Independent Auditors
2. Review of Annual Audited Financial Statements
3. Approving Audit and Non-Audit Services
4. Communication Between Audit Committee and Independent Auditor
5. Section 404 Compliance: Internal Control Over Financial Reporting
a. Basic Requirements
b. Circumstances Possibly Indicating Material Weaknesses
c. Classification of Internal Control Deficiencies
d. The Independent Auditor's Report
6. Evaluation of Independent Auditor Performance
7. Audit of Defined Benefit Pensions
E. Risk Assessment Oversight Function
1. Enterprise Risk Management
2. ERM at General Motors
3. The Audit Committee Role in ERM
4. The Audit Committee Role in Preventing and Detecting Fraud
a. Assessing Fraud Risk
b. Establishing an Antifraud Control Environment
c. Design and Operation of Antifraud Programs and Control Activities
d. Communicating and Sharing Information
e. Monitoring Antifraud Programs and Control Activities
F. Ethics Oversight Function
1. Codes of Business Conduct
2. Establishing Codes of Business Conduct
3. Examples
4. Ethics in Practice
G. Whistleblower Oversight Function
1. Whistleblowing
2. Examples of Whistleblower Programs
3. Audit Committee Consideration of Complaints
4. Audit Committee Whistleblower Procedures
5. Retaliation and Whistleblowing
H. Tax Oversight Function
1. Audit Committees and Taxes
2. Corporate Income Taxes
3. Disclosure of Tax Fees
4. PCAOB Rules Related to Taxes
V. Audit Committee Accountability and Reporting
A. Audit Committee Accountability
B. Education and Training of Audit Committees
C. Audit Committee Reports
D. Audit Committee Evaluation
1. Audit Committee Performance Evaluation Process
2. Audit Committee Self-Evaluation
E. Audit Committee Compensation
F. Independent Auditor Evaluation of the Audit Committee
VI. Miscellaneous Issues Concerning Audit Committees
A. Geographical Perspectives
1. Canada
2. United Kingdom
3. Australia
4. Japan
5. Germany
B. Audit Committees of Not-for-Profit Organizations
1. Audit Committee Charter of Not-for-Profit Organizations
2. Governance Structure of Not-for-Profit Organizations
VII. Conclusion
Working Papers
TABLE OF WORKSHEETS
Worksheet 1 Summary of Some Provisions of the Sarbanes-Oxley Act of 2002
Worksheet 2 The Audit Committee Pre- and Post-Sarbanes-Oxley Act
Worksheet 3 Audit Committee Role in Corporate Governance
Worksheet 4 Determinants of Effective (Ineffective) Audit Committees
Worksheet 5 Audit Committee Oversight Framework
Worksheet 6 Audit Committee Oversight Effectiveness
Worksheet 7 Blue Ribbon Commission's Recommendations
Worksheet 8 Audit Committee Requirements: Sarbanes-Oxley Act of 2002 (SOX)
Worksheet 9 Audit Committee Requirements: Rule 10A-3 Under the Securities Exchange Act of 1934: Listing Standards Related to Audit Committees (Adopted April 9, 2003)
Worksheet 10 Audit Committee Requirements: New York Stock Exchange (NYSE) 2004
Worksheet 11 Audit Committee Requirements: National Association of Securities Dealers Automated Quotation Market (NASDAQ), 2004
Worksheet 12 Audit Committee Requirements: American Stock Exchange (AMEX), 2004
Worksheet 13 Selected Sample of Public Companies for Audit Committee Benchmarking Purposes
Worksheet 14 Selected Sample of Public Companies for Audit Committee Attributes
Worksheet 15 Suggested Audit Committee Size
Worksheet 16 Audit Committee Meetings 20 Top-Ranked US Companies
Worksheet 17 Audit Committee Independence
Worksheet 18 Test of Independence of Audit Committee Members
Worksheet 19 The Four Tiers of Evaluation for a Potential Candidate for Membership in the Audit Committee
Worksheet 20 GENERAL MOTORS CORPORATION AUDIT COMMITTEE OF THE BOARD OF DIRECTORS CHARTER
Worksheet 21 GM Audit Committee Charter
Worksheet 22 General Motors Corporation and Subsidiaries Financial Statements
Worksheet 23 Executive Certification of Annual Report
Worksheet 24 General Motors Corporation CEO Certification of 2004 Annual Report (Section 302)
Worksheet 25 General Motors Corporation CFO Certification of 2004 Annual Report (Section 302)
Worksheet 26 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Worksheet 27 Responsibilities of the Audit Committee Regarding the Internal Audit Function as Stated in the Audit Committee Charter
Worksheet 28 General Motors' Management's Report on Internal Control Over Financial Reporting
Worksheet 29 Report of Independent Registered Public Accounting Firm
Worksheet 30 Report of Independent Registered Public Accounting Firm General Motors Corporation, its Directors, and Stockholders
Worksheet 31 Report of Independent Registered Public Accounting Firm
Worksheet 32 Report of Independent Registered Public Accounting Firm General Motors Corporation, its Directors, and Stockholders
Worksheet 33 Components of Enterprise Risk Management
Worksheet 34 Common Steps Taken by Managements to Successfully Complete the Implementation of Enterprise Risk Management
Worksheet 35 Coca-Cola Code of Business Conduct
Worksheet 36 General Motor's Code of Ethics Outline
Worksheet 37 General Motor's Whistleblower Program
Worksheet 38 Tax is Embedded in Every Aspect of Business
Worksheet 39 General Motors Corporation Audit Committee Charter
Worksheet 40 General Motors Corporation April 21, 2004 Proxy Audit Committee Report
Worksheet 41 Audit Committee Evaluation Form (Checklist)
Worksheet 42 Audit Committee-Self-Assessment Survey
Worksheet 43 Audit Committee Evaluation Questionnaire
Worksheet 44 International Listing Standards Pertaining to Audit Committees
Worksheet 45 Hennepin County, Minnesota Audit Committee Charter Statement
Worksheet 46 City of Las Vegas Audit Oversight Committee
Worksheet 47 Auburn University Board of Trustees Audit Committee Charter
Worksheet 48 Metropolitan Council Audit Committee
Worksheet 49 Audit Committee Guidelines for Not-For-Profit Organizations
Worksheet 50 Audit Committee Guidelines for Governmental Organizations
Worksheet 51 The Committee of Sponsoring Organizations of the Treadway Commission (COSO): Report of the National Commission on Fraudulent Financial Reporting (1987)
Worksheet 52 Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
Worksheet 53 Discussions to Expect From the Independent Auditor-Excerpt from AICPA Toolkit
Worksheet 54 Issues Report From Management-Excerpt from AICPA Toolkit
Worksheet 55 Off-Balance Sheet Transactions: Sample Disclosures
Worksheet 56 Evaluating the Internal Audit Team: Guidelines and Questions
Worksheet 57 The Committee of Sponsoring Organizations of the Treadway Commission (COSO): Internal Control Checklist
Worksheet 58 Microsoft Corporation Disclosures Concerning Audit Committees
Worksheet 59 List of Significant Accounting Pronouncements Principally Discussed
Worksheet 60 Sources and Scope of Authoritative Auditing Standards
Bibliography
OFFICIAL
American Institute of Certified Public Accountants (AICPA)
Statements on Auditing Standards
Other Materials
Financial Accounting Standards Board (FASB)
IRS Notices
Public Company Accounting Oversight Board (PCAOB)
Securities and Exchange Commission (SEC)
Statutes
Stock Exchanges
Miscellaneous Materials
UNOFFICIAL