Sunteți pe pagina 1din 31

Audit Committee

Formation in the
Aftermath of the
20072009 Global
Financial Crisis, VolumeII

Audit Committee
Formation in the
Aftermath of the
20072009 Global
Financial Crisis, VolumeII
Responsibilities and Sustainability
Zabihollah Rezaee

Audit Committee Formation in the Aftermath of the 20072009 Global


Financial Crisis, Volume II: Responsibilities and Sustainability
Copyright Business Expert Press, LLC, 2016
All rights reserved. No part of this publication may be reproduced, stored
in a retrieval system, or transmitted in any form or by any means
electronic, mechanical, photocopy, recording, or any other except for
brief quotations, not to exceed 250 words, without the prior permission
of the publisher.
First published in 2016 by
Business Expert Press, LLC
222 East 46th Street, New York, NY 10017
www.businessexpertpress.com
ISBN-13: 978-1-63157-154-1 (paperback)
ISBN-13: 978-1-63157-155-8 (e-book)
Business Expert Press Financial Accounting and Auditing Collection
Collection ISSN: 2151-2795 (print)
Collection ISSN: 2151-2817 (electronic)
Cover and interior design by S4Carlisle Publishing Services
Private Ltd., Chennai, India
First edition: 2016
10987654321
Printed in the United States of America

Abstract
The audit committee, as an integral component of corporate governance,
has gained considerable attention in the aftermath of 20072009 global
financial crisis. The audit committees role has evolved from a voluntary
liaison between management and external auditors to the standing committee of the board of directors in overseeing all aspects of corporate governance, financial reporting, internal controls, risk assessment, and audit
activities. This book addresses the determinants of audit committee oversight effectiveness, including their composition, independence, authority,
resources, diligence, and activities. Today, audit committees operate in an
environment of ever-increasing corporate governance reforms established
to protect investors and the public from receiving misleading financial
statements and related audit reports. Audit committees, in complying
with emerging corporate governance reforms, are striving to improve
their oversight effectiveness to discharge their oversight responsibilities.
This book is organized into three separate volumes, and each volume
can be utilized separately or in an integrated form. The first volume addresses the formation of the audit committee, its relevance, sources, structure and roles; the second volume focuses on the oversight functions of
the audit committee; and the third volume presents the emerging issues
of audit committees. The first volume consists of five chapters that examine the relevance and fundamentals of the audit committees as well as the
determinants of audit committee effectiveness. The second volume consists of nine chapters on financial, auditing, internal control, risk management, ethics and compliance, antifraud, and other oversight functions of
the audit committee. The third volume consists of several chapters on the
emerging issues of audit committees pertaining to evaluation, education,
reporting, and accountability as well as audit committees of private companies, governmental entities, and not-for-profit organizations.
The three volumes of this book present the essential and fundamental
aspects and functions of audit committees, with a keen focus 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

vi ABSTRACT

bodies, standard setters, and other stakeholders. Anyone who is involved


with corporate governance, the financial reporting process, and audit
functions should be interested in this book. 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 benefit from this
book. The three volumes of the book focus on up-to-date corporate governance measures and best practices in the aftermath of the global financial crisis and their impacts on audit committee effectiveness.

Keywords
Audit Committee, Corporate Governance, Oversight Effectiveness,
Financial Reports, Audit Functions, Risk Assessment, Internal Controls,
Business Ethics, Audit Committee Structure, Composition, Responsibilities and Accountability

Contents
Acknowledgments....................................................................................ix
Introduction...........................................................................................xi
Chapter 1 Corporate Governance Oversight Function
of the Audit Committee.....................................................1
Chapter 2 Financial Reporting Oversight Function
oftheAudit Committee...................................................11
Chapter 3 External Auditor Oversight Function of the Audit
Committee.......................................................................37
Chapter 4 Internal Audit Oversight Function
of the Audit Committee...................................................81
Chapter 5 Risk Management Oversight Function
of the Audit Committee...................................................95
Chapter 6 Antifraud Oversight Function of the Audit
Committee.....................................................................113
Chapter 7 Ethics and Compliance Oversight Function
of the Audit Committee127
Chapter 8 Tax Oversight Function ofthe Audit Committee...........159
Index..................................................................................................173

Acknowledgments
I acknowledge the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the American Institute of Certified
Public Accountants, and Big Four Accounting Firms for permission to
quote and reference their professional standards and other publications.
The encouragement and support of my colleagues at the University
of Memphis are also acknowledged. Specifically, two of my graduate
assistants, Mr. Rob Palmer and Mr. Josh McDonald provided invaluable assistance. I thank the members of the Business Expert Press team
and S4Carlisle Publishing Services for their hard work and dedication in editing the book, including Stewart Mattson, Scott Isenberg,
Scott Showalter and Jan Williams, Mark Bettner, Michael Coyne, and
Premkumar Narayanan.
My sincere thanks are due to my family, my wife Soheila, and my
children Rose and Nick. Without their love, enthusiasm, and support,
this book would not have come to fruition when it did.
Zabihollah Rezaee
May 12, 2016

Introduction
To effectively fulfill their new challenging oversight functions and responsibilities in the aftermath of the global 20072009 financial crisis, audit
committees are seeking guidance and best practices. This volume is intended to provide such guidance and best practices regarding oversight
functions of the audit committee in the areas of corporate governance, financial reporting, internal controls, and audit activities. The ever-changing
corporate governance and the financial reporting process continue to present audit committees with challenges and opportunities to improve the
effectiveness of their oversight function. Recent regulatory reforms have
shifted some of managements financial reporting and audit involvement
responsibilities to the audit committee. New regulatory reforms and best
practices have conferred upon audit committees certain duties that were
previously the domain of management (e.g., hiring and firing external auditors, overseeing internal audit functions, setting audit fees).
To be able to effectively perform the above oversight functions and
discharge their responsibilities to investors, audit committees must understand what information they need, how to analyze it and what questions to ask to gain insights and make informed decisions. Thus, best
practices of audit committees will continue to be in the following areas:
1. Governance and strategic oversight
2. Risk oversight and risk management
3. Committee composition, independence, effectiveness, and dynamics
4. Oversight of financial reporting
5. Oversight of internal controls
6. Oversight of compliance, ethics, and whistle-blowing programs
7. Oversight of IT technologies and their challenges, opportunities,
and threats
8. Relationship with independent auditor and oversight of audit activities
9. Interaction with management and review of operational, reporting,
governance, and compliance activities

xii INTRODUCTION

The oversight function of corporate governance is assumed by the


entire board of directors as representative of shareholders and is typically delegated by the board of directors to various board committees.
However, the entire board remains responsible for the oversight of these
delegated functions. The eight chapters presented in this volume examine the major oversight functions of audit committees. Chapter 1 discusses the corporate governance oversight function of audit committees
in overseeing strategic managerial decisions. Chapter 2 presents the financial reporting oversight functions of audit committees in overseeing
the quality, quantity, integrity, reliability, credibility, and transparency
of financial reports. Chapter 3 examines the external auditing oversight
function of audit committees in overseeing the objectivity, credibility, and
effectiveness of audit and permissible non-audit services provided by external auditors. Chapter 4 discusses the internal audit oversight function
of audit committees in overseeing the effectiveness of both the design
and operation of internal controls in general and internal control over
financial reporting in particular. Chapter 5 examines the risk oversight
function of audit committees in general and the enterprise risk management (ERM) in particular. Chapter 6 describes the fraud risk assessment
oversight function of audit committees in overseeing antifraud programs
designed to prevent, detect, and correct occupational fraud including financial statement fraud, money laundering, and corruptions. Chapter 7
presents the ethics and compliance oversight function of the audit committee in overseeing the establishment, implementation, and compliance
with a corporate code of ethics. Chapter 8 discusses the tax consideration
oversight function and the whistle-blower oversight function of audit
committees in overseeing procedures designed to facilitate the whistleblowing process and to protect whistle-blowers.
CHAPTER 1:CORPORATE GOVERNANCE OVERSIGHT
FUNCTION OF THE AUDIT COMMITTEE
CHAPTER 2:FINANCIAL REPORTING OVERSIGHT
FUNCTION OF THE AUDIT COMMITTEE
CHAPTER 3:EXTERNAL AUDITOR OVERSIGHT
FUNCTION OF THE AUDIT COMMITTEE

INTRODUCTION
xiii

CHAPTER 4:INTERNAL AUDIT OVERSIGHT


FUNCTION OF THE AUDIT COMMITTEE
CHAPTER 5:RISK MANAGEMENT OVERSIGHT
FUNCTION OF THE AUDIT COMMITTEE
CHAPTER 6:ANTIFRAUD OVERSIGHT FUNCTION OF
THE AUDIT COMMITTEE
CHAPTER 7:ETHICS AND COMPLIANCE OVERSIGHT
FUNCTION OF THE AUDIT COMMITTEE
CHAPTER 8:TAX CONSIDERATION OVERSIGHT
FUNCTION OF THE AUDIT COMMITTEE

CHAPTER 1

Corporate Governance
Oversight Function of the
Audit Committee
Executive Summary
As the standing committee of the board of directors, the audit committee is an integral component of corporate governance. The corporate
governance oversight of the audit committee is defined in its charter in
participating with others in charge of governance in ensuring corporate
governance effectiveness. Recent corporate governance reforms require
that the audit committee interact with the board of directors, management, internal auditors, external auditors, legal counsel, financial advisors, regulators, and investors as discussed in this chapter.

Introduction
The analysis of the reported financial scandals of the late 1990s and the
early 2000s as well as the 20072009 global financial crises points to a
consistent pattern of lapses in the audit committee oversight function.
This raises the question: Where was the audit committee? Audit committees should function to protect investors interests by taking the lead
on oversight responsibilities in the areas of financial reporting, internal
controls, risk assessment, audit activities, and compliance with applicable
laws, and regulations. Recent corporate governance reforms have provided
new challenges and opportunities for audit committees. To address these
challenges and opportunities effectively, audit committees are seeking

AUDIT COMMITTEE FORMATION, VOLUME II

an appropriate balance between advising management and overseeing


its performance in the areas of financial reporting; internal controls; risk
management; audit functions; legal compliance; and the establishment of
a whistle-blowing program and codes of business conducts.

Corporate Governance Oversight Function


The companys board of directors as the representative of shareholders has
the ultimate fiduciary responsibility for safeguarding and advancing the
interests of shareholders and thus creating shareholder value. As one of
the three mandatory standing board committees (audit, compensation,
and nominating committees) and in representing the board of directors,
the audit committee often participates in establishing corporate goals
and policies and reviewing managements execution of those policies in
achieving the companys goals. The entire board of directors, including
the audit committee, usually assesses the companys strategic decisions
and actions in creating and enhancing sustainable shareholder value while
protecting the interests of other stakeholders including creditors, suppliers, customers, employees, society, and the environment). An effective
audit committee should understand the companys corporate governance
structure, including the business, economic, social, and political environment performance. Representing shareholders, the audit committee
should understand the companys major operating, investing, and financing activities while taking care not to usurp managerial prerogatives. The
audit committee should oversee managements operating, financing, and
investment activities by reviewing significant and potential opportunities
and challenges facing the company in pursuit of the creation of shareholder value.
Financial reporting information risks are usually affected by business
risks that are associated with the companys business problems. Thus, the
audit committee should review the companys major contracts, investments, and expenditures for various divisions and plants, which might cause
problems and analyze managements responses to those challenges. Recent corporate governance reforms (SarbanesOxley Act of 2002 [SOX]1,
DoddFrank Act [DOF]2, Securities and Exchange Commission [SEC]3)
implementation rules) have created more oversight responsibilities for

CORPORATE GOVERNANCE OVERSIGHT FUNCTION

audit committees and their involvements in corporate governance activities, including accepting more fiduciary and accountability responsibilities.
The audit committee is considered an integral component of the
companys corporate governance, and, as such, the audit committee interacts with other corporate governance participants including management, the internal auditor, the external auditor, legal counsel, users, and
standard-setting bodies. The remainder of this chapter explores the audit
committees interactions with others typically involved in a companys
corporate governance oversight function.
Audit Committee Interactions with the Board of Directors
The board of directors bears full responsibility for the companys decisions, actions, and affairs. An audit committee represents the board of
directors in that the former serves as a standing committee of the latter.
The establishment of the audit committee as the standing committee of
the board is based on the premise of the need for specialization within
the board of directors. The board of directors is ultimately accountable to
investors for the companys performance, affairs, business, and financial
reports. Thus, the audit committee, on behalf of the board of directors,
represents investors and is accountable for protecting their interests. In
this respect, an audit committee represents both the board of directors
and the shareholders. The audit committee assists the board of directors
in fulfilling its responsibilities by bringing specialization and expertise to
the board in the areas of financial reporting, internal controls, and audit
activities. The board of directors typically appoints members of the board
to the audit committee, thereby reinforcing the committees ultimate responsibility to the board of directors.
Effective compliance with new corporate governance reforms, complexity of business, globalization, and technological advances have encouraged the board of directors to more effectively utilize the expertise,
knowledge, and efforts of its audit committee. Boards of directors are
ultimately responsible for overseeing firms strategic decisions, financial
reporting procedures, internal control systems, risk assessment activities,
audit practices, and corporate governance systems to protect interests of
shareholders. The board generally delegates its financial reporting oversight

AUDIT COMMITTEE FORMATION, VOLUME II

function to the audit committee, with the full board maintaining responsibility and accountability for the delegated function. The board normally
establishes the audit committee to assist in effectively fulfilling its fiduciary
duty of protecting investor interests with the keen understanding that the
entire board is responsible for the companys oversight function.
The audit committee should regularly report its activities to the board
of directors and get board approvals for its agendas. Although many audit
committees may employ self-evaluating mechanisms for their performance, the board of directors is ultimately responsible for the annual
evaluation of the audit committee and its members.
Audit Committee Interaction with Other Board
Standing Committees
In order to better discharge its responsibilities, an audit committee often
will work with other standing committees of the board of directors. These
other committees may include governance, compensation, finance, budget, investment, and the nominating committee. Productive working
relationships among the audit committee and other standing board committees can greatly assist a board of directors in effectively coordinating its
overall oversight functions. The audit committees understanding of executive compensation and incentive plans can assist the audit committee
in assessing managements motivations for aggressive earnings management or the use of aggressive accounting policies and practices for meeting earnings targets. The relationship between the audit committee and
nominating committee can help in assessing professional qualifications,
personal integrity, ethical behavior, and the management and operating
style of senior executives, as well as the leadership philosophy of directors.
The audit committees relationship with other standing committees of the
board is explored below.
Audit Committee Interaction with Compensation Committee
Public companies should establish a compensation committee with a
written charter specifying the purpose and responsibilities of the committee. The purpose of the compensation committee is to assist the board

CORPORATE GOVERNANCE OVERSIGHT FUNCTION

in establishing fair and rewarding compensation for the companys directors and officers. Responsibilities of the compensation committee
are to: (1) establish a compensation plan consistent with the companys
goals; (2) recommend to the board of directors the CEOs compensation; (3) recommend to the board a non-CEO compensation plan; and
(4) prepare the compensation committee report to be included in the
proxy statement. The compensation committee can play an important
role in corporate governance because of substantial increases in executive compensation during the past several years and public interest in
and scrutiny of executive compensation. The audit committee should interact with the compensation committee to obtain an understanding of
executive compensation and incentive plans and their impact on the fair
presentation of the companys financial statements. The audit committee
may interact with the compensation committee in several ways: (1) both
committees are mandatory standing board committees, and, as such,
participate in activities requiring the entire boards deliberation; (2)the
compensation committee may seek the advice of the audit committee
pertaining to the tax, audit, and reporting requirements of directors and
officers compensation plans (long-term incentive plans, stock options);
(3) the entire board, including the audit committee, normally evaluates
the performance of mandatory standing board committees; and (4) in
a small-sized board (e.g., less than seven directors), an audit committee
member may also serve on the compensation committee.
Audit Committee Interaction with Nominating Committee
Public companies should establish a nominating committee comprised
solely of independent directors. The nominating governance committee
should have a written charter specifying the purpose and responsibility of
the committee. Suggested oversight functions and responsibilities of the
nominating governance committee are to: (1) recruit candidates qualified
for board membership according to board-approved criteria; (2) identify
the qualifications and expertise needs of the board of directors; (3) select and recommend nominees to the board of directors; (4) present the
selected director nominees at the next annual shareholders meeting; (5)
establish and recommend to the board of directors a set of appropriate

AUDIT COMMITTEE FORMATION, VOLUME II

corporate governance principles; (6) participate with other committees


of the board (compensation, audit) in the evaluation of the board and
management; and (7) submit the committees annual report to the board.
The nominating committee should also nominate candidates for the
audit committee and assist the board of directors in appointing audit
committee members. Although legally permissible, the appointment of
audit committee members by the companys CEO may compromise the
members objectivity and independence. The audit committee often assists the board of directors in evaluating members of the nominating committee. In a board of directors with a small number of directors (fewer
than seven) and several standing committees (more than two), a director
may serve on both the audit committee and the nominating/governance
committee. A collegial relationship between the nominating and audit
committees can improve the effectiveness of both. Nevertheless, no director should chair both committees.
Audit Committee Interaction with Management
An effective audit committee oversight function requires considerable interaction with management and can only be achieved by an audit committee forging a close working relationship with management. The audit
committee oversees financial reporting, internal controls, and risk assessment functions. Management should provide the audit committee with
adequate information involving the financial condition, results of operations, financial statements, estimates, reserves, accruals, financial reporting risk assessment, internal control over financial reporting, significant
deficiencies, material weaknesses in internal controls, and managements
interactions with both internal and external auditors.
A close working relationship between management and the audit
committee can substantially improve the effectiveness of corporate
governance. The audit committee may meet privately with management, particularly financial managers, to discuss matters pertaining to
the appointment and evaluation of the independent auditor, the appointment, compensation, and evaluation of internal auditors, internal
controls, risk assessment, whistle-blower programs, and the financial
reporting process.

CORPORATE GOVERNANCE OVERSIGHT FUNCTION

Audit Committee Interaction with Internal and External Auditors


Audit committees have traditionally been formed primarily to function as
a liaison between management and auditors to preserve the auditors independence. This role remains essential. However, recent corporate governance reforms (SOX, SEC rules, listing standards, best practices) have
expanded and improved the relationship between the audit committee
and both internal and external auditors. The audit committee is directly
responsible for appointing, retaining, compensating, and overseeing the
work of the independent auditor. The audit committee is also responsible
for approving all audit and permissible non-audit services in compliance
with provisions of SOX 2002. This makes the independent auditor ultimately accountable to the audit committee. The audit committee is also
directly responsible for hiring, firing, and compensating the chief audit
executive (CAE, the director of the internal audit function) and other key
internal audit personnel, as well as approving the budget, staffing, and
audit plans of internal auditors. Thus, both internal and external auditors
essentially work with management for the audit committee. The audit
committee relationship with external and internal auditors is further discussed in Chapters 4 and 5, respectively.
Audit Committee Interaction with Legal Counsel
An audit committee should establish strong and candid relationships
with the companys legal counsel (both internal general counsel and outside legal counsel). These relationships can provide the audit committee
with useful information regarding any possible violations of applicable
rules and regulations, noncompliance with the companys code of conduct, and high-risk business and financial areas. For example, an audit
committee may learn from the companys general counsel about significant or unusual transactions that the company is contemplating. On the
basis of this information, the audit committee can investigate whether
these transactions will be structured or might be viewed as being structured inappropriately to manage earnings or achieve financial targets. By
intervening early enough, the audit committee might prevent the company from taking steps that could otherwise result in misleading financial
reports. The companys general counsel should assist the chairperson of

AUDIT COMMITTEE FORMATION, VOLUME II

the audit committee in preparing meeting agenda, should attend meetings of the audit committee, and should review at least the final draft
reports of meetings. If possible violations of laws, rules, and regulations
surface, the audit committee should work closely with legal counsel to
investigate them.

Conclusion
Effective compliance with new corporate governance reforms, complexity
of business, globalization, and technological advances have encouraged
the board of directors to establish standing committees to best utilize
the expertise, knowledge, and efforts of its committees. Several mandatory committees of the board have emerged in recent years. The three
mandatory committees for listed companies are audit, nominating, and
compensation committees. Other board committees, such as budget, finance, executive, special litigation, disclosure, or investment committees,
may also be established by some public companies. Recent developments
in corporate governance reforms have boosted the relevance, importance,
and public profiles of all three mandatory committees for public companies in general and the audit committee in particular. Thus, as public
companies are facing challenges in the global environment, the need for
a better understanding of these committees and their activities is becoming increasingly important. Board committees are normally formed to
assist the companys board of directors in effectively fulfilling its fiduciary
duty of protecting investor interests with the keen understanding that
the entire board is responsible for the companys oversight function. The
audit committee is an integral component of corporate governance and as
such interacts with other corporate governance participants including the
entire board of directors, other board committees, management, internal
auditors, external auditors, and legal counsel.

Action Items
1. Clearly define audit committee oversight functions in its charter.
2. Periodically review the assigned oversight functions.

CORPORATE GOVERNANCE OVERSIGHT FUNCTION

3. Annually evaluate the audit committee effectiveness in achieving its


oversight functions.
4. Ensure audit committee oversight functions are in compliance with
all applicable laws, rules, regulations, and standards.
5. Implement best practices of audit committee oversight functions.
6. Revise the audit committee charter as the focus on the audit committee will continue in the coming years as the global initiatives address the importance of audit committees in corporate governance.

Endnotes
1. Sarbanes-Oxley Act. 2002. Section 301: Audit committee. Available
at: www.sec.gov/about/laws/soa2002.pdf
2. Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010. (pp. 111203). Pub. L.
3. Securities and Exchange Commission (SEC). 2003. Disclosure Required by Section 406 and 407 of the Sarbanes-Oxley Act of 2002
(January 23). Rule No. 33-8177. Available at: www.sec.gov/rules/
final/shtml

Index
Accountability, 69, 102, 114, 115
of internal audit function, 86
Accounting estimates, 2122
Accounting policies, 2021
Accounting profession, 6869. See
also Audit professionals
Accounting reserves, 2122
Accruals, 22
Aggressive tax planning, 168
American Institute of Certified Public
Accountants (AICPA), 18,
30, 31
American Jobs Creation Act of
2004, 166
AMEX, 2425
Annual financial statements, 1225
accounting policies and practices,
2021
accounting estimates and reserves,
2122
changes in content and
presentation, 2223
end of year transactions,
and audit classifications
adjustments, 23
initial adoption and changes in
existing policies, 21
audited, 1820
review of, 4950
executive certification of, 28
General Electric (GE). See General
Electric (GE) company
independent auditor
disagreements, 24
managements discussion and
analysis, 17
off-balance sheet and related-party
transactions, 2425
Antifraud control environment, 120
Antifraud oversight function,
113124
audit committee, role in preventing
and detecting fraud, 117121

external auditors, roles and


responsibilities of, 122123
internal auditors, roles and
responsibilities of, 123124
policies and practices of, 114,
115117
Antifraud programs and controls, 118
design and operation of, 120
monitoring, 121
Audit committee
addressing internal control activities
and issues, 32
charter, internal audit function, 87
code of business conduct. See Code
of business conduct
complaints, consideration of,
146148
cyber security and, 108110
ethics of. See Code of ethics
oversight function
antifraud, 113124
compliance, 139154
corporate governance, 18
external auditor, 3775
financial reporting, 1132
internal audit, 8191
risk management, 95110
tax, 159169
preventing and detecting fraud, role
in, 117121
role in ERM, 98, 101105
role in ICFR, 3032
and SarbanesOxley Act of 2002
(SOX), 128, 130131
and Securities and Exchange
Commission (SEC), 128131
as standing committee of board,
3, 46
suggestions for building relationship
with external auditor, 4647
and taxes, 160163
and whistle-blowing, 139154. See
also Whistle-blower programs

174 INDEX

Audit failure, 43
Audit firm, 3839, 54, 67
compensation of, 48
rotation of, 7375
selection and ratification of, 47
Auditing services, approving, 50,
5355
Auditing Standard (AS), 58, 84, 88,
90, 116
Auditor independence, 45, 73, 102
and competencies, 75
Auditor report, 63, 7072
Auditors discussion and analysis
(AD&A), 71
Audit partner, 74
selection of, 48
Audit practice engagement, structure
and form of, 39
Audit professionals, 44. See
also External auditors;
Independent auditors
sustainability of, 6869
Audit quality, 39, 48, 59, 6869,
7273
framework, 44
independent auditors, role in
improving, 4246
PCAOB initiatives for, 4546
ways to, 4345
Audit Quality Forum (AQF), 69
Balanced portfolio, of audit quality,
4344
Benefit pension plans, audit of, 68
Best practices, 7, 38, 114, 117, 128
Board of directors, audit committee,
101103, 115
external audit function, role in,
3942
interactions with, 36
as representative of shareholders, 2
roles and responsibilities of, 119
Capital markets, integrity and
efficient function of, 29
Center of Audit Quality
(2015), 48

Certified public accountant


(CPA), 68
Chief audit executive (CAE), 83, 85,
88, 91, 102, 105108, 129
Chief ethics officer, 129
Chief executive officer (CEO), 27, 28,
104, 116, 163164
Chief financial officer (CFO), 27,
28, 116
independent auditor and, 22
Civil certification, 2627
Coca-cola, code of business conduct,
132133
Code of business conduct, 129139.
See also Code of ethics
Coco-cola, 132133
establishment of, 130136
ethics reports, 137139
NYSE standards, 129
practical ethics, 136137
SEC rules, 130
SOX provisions, 128, 130131
Code of ethics. See also Code of
business conduct
definition by SEC rules, 128
description of, 127, 131
in General Motors, 134135
in public companies, 129
SEC rules, 130
SOX provisions, 130
Committee of Sponsoring
Organization (COSO), 108
Internal Control Integrated
Framework, 106, 107
report 2010, 117
of Treadway Commission, 96
Commodity Exchange Act (CEA), 151
Commodity Futures Trading
Commission (CFTC),
151152
Compensation committee, audit
committee interactions
with, 45
Continuing professional education
(CPE) program, 68
Corporate gatekeepers, 114,
117118, 125

INDEX
175

Corporate governance, 38, 104,


114115
board of directors, interactions
with, 34
board standing committees,
interactions with, 4
compensation committee,
interactions with, 45
definition of, 1
internal and external auditors,
interactions with, 7
legal counsel, interactions
with, 78
management, interactions with, 6
nominating committee, interactions
with, 56
reforms, 23
responsible and effective, 83
risk management, 96
Corporate income taxes, 160,
163168
Corporate reporting, external
auditors, role in, 3839
Credit risk, 101
Cross-border Audits of Multi-location
Companies, 4546
Cyber hacking, 108109
Cyber risk, 107, 108
Cyber security, 104
audit committee and, 108110
Deloitte & Touche 2003 survey,
55, 142
DoddFrank Act (DOF) of 2010, 2,
98, 139, 152
Enron, whistle blowers at, 141, 147
Enterprise risk management (ERM),
96, 121
audit committee, role in, 98,
101105
components of, 98
definition of, 97
framework, 97
at General Motors, 9798
implementation of, steps for,
99100

internal auditors and, 105108


Ethics. See Code of ethics
Ethics and Independence
Rule 3523, 168
Rule 3526, 168
European Union (EU), 72
Exchange Act
Rule 13a-15(c), 27
Rule 15d-15(c), 27
External auditors, 102
antifraud roles and responsibilities
of, 122123
audit committee
communication with, 6970
interactions with, 7
audit firm rotation, 7375
auditing profession, sustainability
of, 6869
auditor report, 7072
benefit pensions, audit of, 68
board of directors and audit
committee, 3942
communication with audit
committee, 6970
corporate reporting and financial
market, role in, 3839
independent auditors, 4246
performance, 6667
internal control over financial
reporting, 5666
public trust in judgement,
39, 43
responsibilities of, 38
Financial Accounting Standards Board
(FASB), 24
Financial crisis, 127128
global, 97
Financial information, 113, 117
Financial literacy, meaning of, 12
Financial market
external auditors, role in,
3839
financial statements and ICFR
in, 37
Financial reporting fraud (FRF),
113115, 117, 118

176 INDEX

Financial reporting oversight function


(FROF), 34, 1132
annual financial statements. See
Annual financial statements
interim reviewed financial
statements, 2526
management certifications of,
2630
policies and practices of, 12
Financial reports, 162
information risk, 2
management certifications of,
2630
Financial risk, 31, 49, 101
Financial scandals, 1, 38, 73, 127,
128, 139, 144
Financial statements, 86, 116, 118, 122
actions for addressing and
assessing, 31
annual. See Annual financial
statements
audited, 1820, 4950, 5153
audits of, 37
footnotes accompanying, 17
interim reviewed, 2526
Foreign Corrupt Practice Act, 103
Form 10-K, 26
Form 10-Q, 26
Form 11-K, 68
Fraud risk
assessing, 119120
assessment, 107
factors, 118
General Electric (GE) Company, 12, 29
balance sheet, 13, 1516
condensed consolidated financial
statements of, 1415
income statement, 13, 16
independent registered public
accounting firm, 5153,
6364
statement of cash flows, 15, 16
statement of stockholders equity,
15, 17
Generally accepted accounting
principles (GAAP), 11, 18, 49
General Motor (GM), 63
code of ethics, 134135

ERM at, 9798


whistle blower program, 145
Global financial crisis, 73, 96, 97
Global investor confidence, 39, 43
Global risks report, 107
Governance, risk, and compliance
(GRC), 105107
Grant Thornton LLP, 105
Human resources, 117
Independent auditors, 24, 86, 90
audit committee and, 5556
audit firm, selection and ratification
of, 47
audit quality improvement, role in,
4246
disagreements with management on
accounting matters, 24
performance, evaluation of,
6667
report, 6066
responsibilities of, 37
Institute of Internal Auditors (IIA),
81, 9091
Integrated approach, for risks, 106
Integrated Financial and Internal
Control Reporting
(IFICR), 57
Interim reviewed financial statements,
2526
Internal audit, 105, 106, 107
charter, 84, 85
oversight function, 8191, 102,
107, 108
accountability of, 86
budget and staffing of, 85
plans and activities, 8586
Internal audit opinion (IAO), 91
Internal auditors, 8182, 83, 84, 86,
102, 116, 121
antifraud roles and responsibilities
of, 123124
audit committee interactions with, 7
and ERM, 105108
and internal controls, 8891
Internal control over financial
reporting (ICFR), 27, 5666,
91, 164

INDEX
177

audit committee role in, 3032


circumstances indicating material
weaknesses, 5960
effectiveness of, 57
independent auditors report, 6066
internal control deficiencies,
classification of, 60
reports on, 8890
Internal controls, 84, 103105
and internal auditors, 8891
management certifications of,
2630
Internal Revenue Service (IRS), 159,
166, 167
International Auditing and Assurance
Standards Board (IAASB), 44
Interpretive Guidance (IG), 27
IR Global Rankings, 13
KPMG 2003, 83
Legal counsel, 117
audit committee interactions
with, 78
Management
audit committee interactions
with, 6
discussion and analysis, 17
Management Override of Internal
Controls: The Achilles Heel of
Fraud Prevention, 3031
Managing the Business Risk of Fraud:
A Practical Guide, 119
Mandatory audit firm rotation
(MAFR), 7375
National Institute of Standards
Technology (NIST), 109
National Stock Exchanges, 19, 82, 83
New York Stock Exchange (NYSE)
2003, 101, 129130
Nicolaisen, Donald, 159
Nominating committee, audit
committee interactions with,
4, 56
Non-audit services, 50, 5355,
167168
prohibitions on, 74

SEC principles for, 165


tax services, types of, 166
Off-balance sheet and related-party
transactions, 2425
Oversight function, of audit
committee
antifraud. See Antifraud oversight
function
corporate governance. See
Corporate governance
ethics and compliance, 127154
external auditor. See External
auditors
financial reporting. See Financial
reporting oversight function
(FROF)
internal audit. See Internal audit,
oversight function
risk management. See Risk
management oversight
function
tax. See Tax services
Pass/fail approach, for audit report,
7071
PCAOB. See Public Company
Accounting Oversight Board
(PCAOB)
Pension plans, audit of, 68
PricewaterhouseCoopers
(PwC), 91
Professional ethics, 128129
Public Company Accounting
Oversight Board (PCAOB),
18, 37, 164
Auditing Standard (AS), 1, 19, 49,
5556, 5759, 65, 84,
88, 90
auditors reporting model, 7172
audit quality indicators, 4344
circumstances indicating material
weaknesses, 5960
initiatives, 4546
inspection reports, 69
internal control deficiencies, 60
internal control over financial
reporting and, 57
related to taxes, 166168

178 INDEX

Risk-based approach, for audit, 88, 105


Risk board committee, 101
Risk compliance committee, 101
Risk management oversight function,
95110
cyber security and audit committee,
108110
internal auditors and ERM,
105108
SarbanesOxley Act (SOX) of 2002,
3740, 67, 117, 165, 168
audit firm compensation, 48
ICFR, responsibilities for, 6566
internal auditors in, 82
key provisions of, 73
Section 201, 53
Section 202, 19, 50, 53
Section 203, 74
Section 204, 19, 20
Section 301, 18, 47, 56
Section 302, 26, 27, 56, 88
Section 401 (c), 24
Section 404, 5657, 88, 90
Section 906, 27
Section 1001 of, 163
and whistle-blowing, 139, 141,
143144, 148151
Securities Act of 1933, 39
Securities and Exchange Commission
(SEC), 19, 38, 40, 74, 164,
165, 168
audit firms, roles and
responsibilities of, 39
Financial Reporting Release No.
72, 17
ICFR and, 57, 8889
Interpretive Guidance for
management, 58
off-balance sheet and related-party
transactions, 24
and whistle-blowing, 139141,
143, 148, 150154
Securities Exchange Act of 1934, 39

SOX. See SarbanesOxley Act (SOX)


of 2002
Statement on Auditing Standards
(SAS), 18, 19, 5556, 78, 118
Tax services, 53, 159169
audit committees and taxes,
160163
avoidance, 159, 162, 166
compliance, 160, 162, 164166,
168, 169
corporate income taxes, 163168
evasion, 162
fees, disclosure of, 165166
PCAOB proposal to, 166168
planning, 159, 160, 165, 166169
risk assessment, 160, 169
The Treadway Commission, 129
U.K. Corporate Governance
Code, 72
Whistle-blower programs, 31, 121
awards, 140, 151
and CFTC, 151
complaints, consideration by audit
committee, 146148
definition of, 140, 150
DOF Act of 2010, 139, 150152
examples, 143146
in General Motors, 145
and OSHA, 143
procedures, audit committee,
148149
programs, 139154
regulatory requirements of, 142
retaliation and, 149150
risks, 141
SEC rule, 139141, 143, 148,
150154
SOX of 2002, 128, 130131, 139,
141, 143144, 148151
WorldCom, whistle blowers at, 141,
147, 149

OTHER TITLES IN OUR FINANCIAL ACCOUNTING


AND AUDITING COLLECTION
Mark S. Bettner, Bucknell University and
Michael P. Coyne, Fairfield University, Editors
Executive Compensation: Accounting and Economic Issues by Gary Giroux
Using Accounting and Financial Information: Analyzing, Forecasting, and
Decision-Making by Mark Bettner
Pick a Number: Internationalizing U.S. Accounting by Roger Hussey and Audra Ong
International Auditing Standards in the United States: Comparing and Understanding
Standards for ISA and PCAOB by Asokan Anandarajan and Gary Kleinman
Accounting for People Who Think They Hate Accounting by Anurag Singal
Accounting for Fun and Profit: A Guide to Understanding Financial Statements
byLawrence Weiss
Audit Committee Formation in the Aftermath of the 20072009 Global Financial Crisis,
Volume I: Structure and Roles by Zabihollah Rezaee
Audit Committee Formation in the Aftermath of the 20072009 Global Financial Crisis,
Volume III: Emerging Issues by Zabihollah Rezaee

Announcing the Business Expert Press Digital Library


Concise e-books business students need for classroom and research
This book can also be purchased in an e-book collection by your library as




a one-time purchase,
that is owned forever,
allows for simultaneous readers,
has no restrictions on printing, and
can be downloaded as PDFs from within the library community.

Our digital library collections are a great solution to beat the rising cost of textbooks. E-books can
be loaded into their course management systems or onto students e-book readers.
The Business Expert Press digital libraries are very affordable, with no obligation to buy in future years.
For more information, please visit www.businessexpertpress.com/librarians. To set up a trial in the United
States, please contact sales@businessexpertpress.com.

S-ar putea să vă placă și