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Audit Committee Oversight Effectiveness Post Sarbanes-Oxley Act (Portfolio 5401)

BNA Tax and Accounting Portfolio 5401, Audit Committee Oversight Effectiveness Post Sarbanes-Oxley Act, 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.

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BNA Tax and Accounting Portfolio 5401, Audit Committee Oversight Effectiveness Post Sarbanes-Oxley Act, 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. This portfolio 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.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5401, Rezaee, Audit Committee Oversight Effectiveness Post Sarbanes-Oxley Act (Accounting Policy and Practice Series). Within the Accounting Portfolio Series, however, references to the Portfolios will include only the Portfolio numbers and titles.


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AUTHORS

ZABIHOLLAH (ZABI) REZAEE, CPA
Zabihollah (Zabi) Rezaee, CPA, CFE, CMA, CIA, and CGFM, is Thompson-Hill Chair of Excellence and Professor of Accountancy at The University of Memphis. Mr. Rezaee received a B.S. (Accounting) from The Iranian Institute of Advanced Accounting; an M.B.A. from Taleton State University in Texas; and a Ph.D. from The University of Mississippi. He is a Certified Public Accountant (Texas); Certified Fraud Examiner (CFE); Certified Management Accountant (CMA); Certified Internal Auditor (CIA); Certified Government Financial Manager (CGFM); and a former Member, Standing Advisory Group, Public Company Accounting Oversight Board. Professor Rezaee has published over 150 articles in a variety of accounting and business journals and has authored three books: Financial Institutions, Valuations, Mergers and Acquisitions (John Wiley & Sons 2001); Financial Statement Fraud: Prevention and Detection (John Wiley & Sons 2002); and U. S. Master Auditing Guide (3rd ed. CCH 2004), and co-authored, with Lynn Turner and Cynthia Richson, the forthcoming book, Corporate Governance Effectiveness Post-Sarbanes-Oxley Act: Regulations, Requirements, and Integrated Processes (John Wiley & Sons 2007).
The author dedicates this Portfolio to his daughter Rose and thanks his wife Soheila and son Nick for their support.

TABLE OF CONTENTS

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

Introductory Material

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

Introductory Material

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


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