In our paper, The Effect of Audit Committee Industry Expertise on Monitoring the Financial Reporting Process, forthcoming in The Accounting Review, we examine the impact of audit committee (AC) industry expertise on the AC’s effectiveness in monitoring the financial reporting process. Despite the increased responsibilities, authority, independence, and financial expertise requirements placed on ACs by the Sarbanes-Oxley Act (SOX), ACs may, nonetheless, lack sufficient industry expertise to understand and thus properly monitor complex industry specific accounting issues. For instance, expertise in the retail industry may assist ACs to ensure that companies take an adequate write-down of inventory when their products face potential obsolescence. Similarly, revenue recognition, a prominent area of accounting manipulation (Beasley et al. 2000, 2010), entails an evaluation and understanding of the earnings process, which is tied to a company’s business processes that are often industry specific.
Posts Tagged ‘Audit committee’
I want to commend the NACD on its mission to “advance exemplary board leadership” with the compelling vision of aspiring to “a world where businesses are sustainable, profitable, and trusted; shareowners believe directors prioritize long-term objectives and add unique value to the company; [and] directors provide effective oversight of the corporation and strive to deliver exemplary board performance.”
Audit committees are instrumental in achieving this vision and maintaining public trust and investor protection through their oversight of corporate financial reporting and auditing. I would also like to recognize the important role and difficult jobs that each of you have as audit committee members in these oversight functions, as well as the many other areas that are being assigned to audit committees during a time of ever increasing business complexity and risk.
While the proxy and annual reporting season for calendar year public companies typically heats up in the winter, by autumn preparations for the 2014 season should be underway. The following key issues for the upcoming season are discussed below:
- Current Say-on-Pay Considerations
- Compensation Committee Independence and Compensation Consultants
- NYSE Quorum Requirement Change
- Pending Dodd-Frank Regulation
- Proxy Access
- Specialized Disclosures
- SEC Interpretations Impacting Reporting
- Iran Sanctions Disclosure
- PCAOB Audit Committee Communications Requirements
- Director and Officer Questionnaires
Achieving optimal board composition and succession planning requires an articulated and clearly communicated enterprise strategy. The ideal mix of director skills and experience depends on a number of company-speciﬁc factors. This report provides a matrix that nominating committees and boards can use to help deﬁne their needs and to provoke discussion about how to improve company-speciﬁc corporate governance.
How do you build the best board for your organization? What attributes and skills are required by law and what mix of experiences and talents will give you the best corporate governance? What commonly required director attributes are a must for each board and how do you customize and fine-tune your search to achieve a high-performing board? Optimal board composition—that is, achieving the best mix of director skills and experience—depends on many company-specific variables. Some of the most important of these include, but are not limited to: (1) stage of company development, (2) the extent to which international markets are mission critical to the company’s future (in which case nominees should have a detailed understanding of target culture, markets and business risk); (3) unique technology dependence; and (4) the need for access to financial and capital markets.
In a Director Note recently published, The Conference Board reviews current corporate practices on risk oversight by members of the board of directors of U.S. public companies. The study is based on findings from a survey of 359 SEC-registered business corporations conducted by The Conference Board in collaboration with NASDAQ OMX and NYSE Euronext. Data are categorized and analyzed according to 22 industry groups (using their Standard Industrial Classification, SIC, codes), seven annual revenue groups (based on data received from manufacturing and nonfinancial services companies) and five asset value groups (based on data reported by financial companies, which tend to use this type of benchmarking).
The publication details where the board assigns risk oversight responsibilities, whether it avails itself of dedicated reporting lines from senior management on risk issues, and the degree to which it adopts a standardized framework on enterprise risk management (ERM). Given the correlation between risk and strategy, data on the frequency and forms of strategic reviews is also presented.
The following are the main findings discussed in the study.
In our paper, Audit Committee Elections, which was recently made publicly available on SSRN, we examine whether and in what ways shareholder votes in the elections of directors who sit on the audit committee (AC) are associated with the effectiveness of the audit committee. Within the board, the audit committee is responsible for monitoring the financial reporting process. This process involves oversight over the external auditor, internal controls and overall quality of the financial reports. Aside from voting in director elections, shareholders can do very little to influence or signal their satisfaction to the AC. Yet, research examining director elections does not generally focus on the AC. In this study we aim to fill this void.
Ernst & Young supports effective audit committees and believes that audit committee transparency can promote greater investor confidence in financial reporting. A number of companies currently disclose more information about their audit committees than is required under relevant rules. With this post, we seek to alert audit committees and other stakeholders to current disclosure practices, and also to proposals that have been made for additional disclosures, in order to facilitate consideration and discussion.
Going Beyond the Minimum
Audit Committee Transparency
In general, investor demand and regulatory changes are driving boards of directors of public companies to be more transparent about their activities.
More specifically, investor interest – and policy debate around the role of audit committees and auditor independence – are generating discussion about audit committee disclosures that go beyond the minimum requirements. For example:
As you know, over the past couple of years, together with the board members and staff of the Public Company Accounting Oversight Board, I have been working to enhance the reliability of the external audit function and its usefulness to U.S. capital markets.
I will start off with an overview of some of the more significant issues confronting the audit profession. And then I’d like to open a more interactive discussion.
I. Corporate Governance Has Evolved to Suit the Needs of Capital Markets.
I have known many of you for years. I have watched and admired how you have navigated the many changes we have seen in both the energy industry and corporate governance.
Many of us have gained significantly more experience than we expected in identifying, addressing and preventing future threats to corporate success, such as differences in cultural expectations and business practices around the world and at home. Enron had a profound effect on Houston.
As this morning’s discussion demonstrated, you recognize that your work is never done. There is no perfect governance regime for all time.
The NASDAQ Stock Market LLC (Nasdaq) recently filed with the Securities and Exchange Commission (SEC) a proposed rule  requiring listed companies to establish and maintain an internal audit function.  The SEC is soliciting comments on the proposed rule through March 29, 2013. 
Under the proposed rule, the internal audit function would be required to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control. In addition, new Rule 5645 would require the audit committee to:
- meet periodically with the company’s internal auditors (or other personnel responsible for this function); and
- discuss with the outside auditors the responsibilities, budget, and staffing of the company’s internal audit function.
Companies would be permitted to outsource their internal audit function to a third-party service provider other than their independent auditor. For companies that choose to outsource this function, Nasdaq has stated that the company’s audit committee maintains sole responsibility to oversee the internal audit function and may not allocate or delegate this responsibility to another board committee.
According to Nasdaq, the proposed rule is designed to:
I want to commend the NACD on its mission to “advance exemplary board leadership” and on the extensive training and resources devoted to leading practices for board members, including audit committees and other specialized board committees.
The principal elements of the Sarbanes-Oxley Act — strengthening the role of audit committees, establishing the PCAOB to oversee auditors, and enhancing auditor independence and corporate accountability — aligned the interests of the PCAOB and audit committees. We both focus on auditor oversight to help ensure independent, high quality, and reliable audits to protect investors.
Recent questions about financial reporting and auditing, as well as related regulatory initiatives in the U.S. and around the world, highlight the benefits of and need for greater communications between regulators and audit committees.
Today, following the recent financial crisis, we find ourselves once again evaluating how best to protect investors through high quality financial reporting and reliable audits.
As you know, in pursuing our core mission of protecting investors through audit oversight, the Board has a number of initiatives to consider improvements in major areas of audit practice. I’d like to provide an update on several of the Board’s key initiatives that have a direct impact on audit committees, including our concept release on auditor independence and audit firm rotation, the new auditing standard on communications with audit committees, and our recent informational release that deals with communications with audit committees about PCAOB inspection results.