The Role Of The Audit Committee Center For April 2018 .
The role of the audit committeeApril 2018Center forBoard Effectiveness
The role of the audit committeeOversight of financial reporting and related internal controlsReview of filings and earnings releasesRisk oversightOversight of the independent auditorEthics and complianceOversight of internal auditOther interactions with management and the boardAudit committee external communications2
Role of the audit committeeThe role of the audit committeeAs an audit committee member, it is important to understand the rulesrelevant to your role. This section provides an overview of an auditcommittee’s responsibilities in overseeing financial reporting and relatedinternal controls, risk, and ethics and compliance. It also discusses thecommittee’s role in overseeing the internal and independent auditors, as wellas how the committee may interact with other members of management andexternal stakeholders. Finally, it highlights the committee’s responsibilitieswith respect to disclosures in the proxy statement.SEC, PCAOB, NYSE, and NASDAQ rules are highlighted where relevant, and wehave noted leading practices, tools, and resources to help audit committeemembers execute their responsibilities.Oversight of financial reportingand related internal controlsThe audit committee, management, and the independentauditor all have distinct roles in financial reporting.Management is responsible for preparing the financialstatements, establishing and maintaining adequateinternal control over financial reporting (ICFR), andevaluating the effectiveness of ICFR. The independentauditor is responsible for expressing an opinion on thefairness with which the financial statements present, inall material respects, the financial position, the results ofoperations, and cash flows in conformity with GAAP, and,when applicable, evaluating the effectiveness of ICFR.To oversee ICFR successfully, the audit committee shouldbe familiar with the processes and controls managementhas put in place and understand whether thoseprocesses and controls are designed and operatingeffectively. The audit committee should work withmanagement, the internal auditors, and the independentauditor to gain the knowledge needed to provideappropriate oversight of this area.Likewise, the audit committee is responsible foroverseeing the entire financial reporting process. To doso effectively, it should be familiar with the processesand controls that management has established anddetermine whether they were designed effectively.3
Role of the audit committeeThe audit committee’s role is one of oversight andmonitoring, and in carrying out this responsibility, thecommittee may rely on management, the independentauditor, and any advisers the committee might engage,provided its reliance is reasonable.The audit committee should consider havingmanagement identify and discuss any significantaccounting policies, estimates, and judgments made.A quarterly analysis of these areas may be useful toprepare for these discussions, and management shouldtailor the analysis to highlight changes and include newor unusual items. Because Regulation S-X, Rule 2-07requires the independent auditor to discuss the effectsof alternative GAAP methods on the financial statements,the information presented by management should becorroborated by the independent auditor.NYSE requirements. NYSE listing standards requirethe audit committee to review major issues regardingaccounting principles and the presentation of thefinancial statements. These include significant changesin the company’s selection or application of accountingprinciples, the adequacy of internal controls, andany special audit steps adopted in response to whatthe NYSE terms “material control deficiencies.” Thesediscussions can be held, generally with management,during the review of the quarterly financial statements tobe filed with the SEC.The audit committee is also required to reviewmanagement’s analyses of significant issues in financialreporting and judgments made in preparing the financialstatements, including the effects of alternative GAAPmethods. This discussion may also be held during thereview of the quarterly financial statements.The audit committee also should review the effectsof regulatory and accounting initiatives, as well as off-balance-sheet transactions, on the financial statements.For example:Audit committee members should be aware of threemain areas of fraud risk: Management and the audit committee shoulddiscuss pending technical and regulatory mattersthat could affect the financial statements, andthe audit committee should be updated onmanagement’s plans to implement new technicalor regulatory guidelines. Financial statement fraud, which includes intentionalmisstatements in or omissions from financialstatements The review of off-balance-sheet structures shouldalso be a recurring agenda item, and may beconducted as part of the committee’s review ofmanagement’s discussion and analysis in the annualand quarterly reports. The exact frequency of thesediscussions will depend on the company’s operationsand preferences. Finally, the audit committee shouldconsider reviewing off-balance-sheet transactions, orat least material ones, before they are executed. Corruption, which may include schemes such askickbacks, shell companies, bribes to influencedecision makers, or manipulation of contracts.NASDAQ requirements. NASDAQ requires disclosureof the audit committee’s purpose, as set out in itscharter, of overseeing accounting and financial reportingprocesses of the company and audits of the financialstatements. See the audit committee charter sectionof this guide for details.Fraud riskIn conjunction with risk oversight, the audit committeeshould be satisfied that the company has programs andpolicies in place to prevent and identify fraud. It shouldwork with management to oversee the establishmentof appropriate antifraud controls and programs andto take the necessary steps when fraud is detected.The audit committee should also be satisfied that theorganization has implemented an appropriate ethics andcompliance program and established a reporting hotline.See the ethics and code of conduct and reportinghotline procedures sections later in this guide for moreinformation. Asset misappropriation, which may include checkforgery, theft of money, inventory theft, payroll fraud,or theft of servicesOne way the audit committee can help oversee theprevention and detection of financial statement fraud isby monitoring management’s assessment of ICFR.The audit committee should also have an awareness ofthe US Foreign Corrupt Practices Act (FCPA) and othernon-US anticorruption laws that may be applicable(e.g., the UK Bribery Act). As the SEC and Departmentof Justice note in the Resource Guide to the FCPA,anticorruption compliance “begins with the board ofdirectors and senior executives setting the proper tonefor the rest of the company.” To that end, the auditcommittee should: Understand the company’s obligations andresponsibilities regarding anticorruption laws towhich it is subject Determine whether the company has dedicatedappropriate oversight, autonomy, and resources toits anticorruption compliance program; dependingon the company’s size, this could involve assigningan individual who is specifically charged withanticorruption compliance and has a direct reportingline to the committee4
Role of the audit committee Understand specific policies and procedures in placeto identify and mitigate corruption-related risks Discuss with management specific corruption-relatedrisks that have been identified, including allegations ofcorruption that may have been received through thecompany’s monitoring and reporting mechanisms, aswell as management’s plans for responding to suchrisks Monitor any actual violations, includingmanagement’s response.Tools and resourcesThe Anti-Fraud Collaboration released a reporttitled The Fraud-Resistant Organization thatidentifies three central themes critical to frauddeterrence and detection.2013 COSO framework. The 2013 Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission(COSO) provides a formal structure for designing andevaluating the effectiveness of internal control. Itemphasizes the role of the board—and, by delegationor regulation, the role of the audit committee—inoverseeing internal control, which remains an essentialaspect of effective governance. In particular, theframework highlights: The board’s role in the control environment, includingclarification of expectations for integrity and ethics,conflicts of interest, adherence to codes of conduct,and other matters The board’s assessment of the risk that managementcould override internal controls and carefulconsideration of the possibility that management mayoverride such controls The establishment and maintenance of open lines ofcommunication between management and the boardand the provision of separate lines of communication,such as whistleblower hotlines.5
Role of the audit committeeReview of filingsand earnings releasesThe audit committee generally reviews earnings releases,SEC filings containing financial information, and otherfinancial information and earnings guidance provided toanalysts, ratings agencies, and others. The committeeshould consider how it will execute these responsibilitiesto satisfy itself that all information is presented fairly andin a transparent manner. This should include a focus onconsistency of information, tone, and messaging acrossall financial communications.The audit committee should confirm that an appropriatelegal review has been completed to verify thecompleteness of disclosures, including any obligation toreport on trends. This legal review should also considercompliance with the company’s policies on forwardlooking statements and the completeness of any relateddisclaimers.NYSE requirements. NYSE listing standardsrequire that the audit committee meet to discussthe company’s annual audited financial statementsand quarterly financial statements with managementand the independent auditor. They also require theaudit committee charter to address the committee’sresponsibility to discuss earnings press releases and thefinancial information and guidance provided to analystsand ratings agencies.The commentary to the listing standards indicates thatthis discussion may be in general terms, and the auditcommittee may discuss the type of information disclosedand the type of presentation made. The commentaryalso indicates that the discussion should pay particularattention to any pro forma or adjusted non-GAAPfinancial information.Note that SEC rules require the audit committee torecommend to the board that the audited financialstatements be included in the company’s annual reporton Form 10-K.Two-thirds of ofcommitteesmeet viameetTwo-thirdsaudit committeesconferencecallcallto discussearningsviaconferenceto discussearningsreleases, whilewhile 22%22% reviewreleases,review earningsearningsreleases atat in-personin-person meetingsmeetings.releasesSource: Deloitte 2016 Board Practices ReportQuestions for audit committees to considerEarnings guidanceThe audit committee should discuss earnings guidance with management. Questions to consider include: When did management last evaluate its approach to providing earnings guidance? Is a change in approachwarranted as a result of the current economic environment and other circumstances facing the company? How can pressures to meet expectations in the short term influence the quality of the company’s reportedfinancial results and management behavior? What practices do the company’s competitors follow with respect to earnings guidance and other forwardlooking information? What are management’s reasons for providing or not providing earnings-per-share targets and other typesof forward-looking information? How confident is management in its ability to forecast earnings accurately? Is the disclosure of a range ofearnings estimates preferable to a specific target? Should the time frame for which estimates are providedbe modified or are more frequent updates necessary? What are the company’s long-term value drivers? What is the specific quantitative and qualitativeinformation—be it financial or nonfinancial in nature—that best reflects these drivers? Is this informationprovided to investors and analysts on a forward-looking basis? Has management considered seeking input directly from shareholders regarding the types of forwardlooking information they would find meaningful? Do current circumstances warrant enhanced audit committee review of earnings estimates and otherforward-looking information before it is made public? If the company changes its approach to the provision of earnings guidance and forward-looking information,should the audit committee modify its practices for reviewing that information?6
Role of the audit committeeQuestions for audit committees to considerTools and resourcesNon-GAAP measuresThe SEC rules regarding the use of non-GAAP financial measures require, among other things, that disclosure ofany material information containing non-GAAP financial measures must include the most directly comparableGAAP financial measures, that the GAAP measures must be disclosed with equal or greater prominence, andthat the GAAP and non-GAAP measures must be reconciled. The SEC has recently taken a hard look at nonGAAP measures in response to concerns about their increased use and prominence. As a result, companies andaudit committees should consider re-examining their use of non-GAAP measures and related controls and thedisclosure of those measures. The audit committee should consider asking the following questions:Deloitte’s publications A Chance to Self-Correct:SEC Urges Companies to Take a Fresh Look at TheirNon-GAAP Measures and A Roadmap to Non-GAAPFinancial Measures provide additional information,including ways for a company to assess theappropriateness of its non-GAAP measures andcontrol considerations. Is the measure misleading or prohibited? Is the measure presented with the most directly comparable GAAP measure and with no greaterprominence than the GAAP measure? Is the measure defined and described appropriately and clearly labeled as non-GAAP? Does the reconciliation between the GAAP and non-GAAP measure clearly label and describe the nature ofeach adjustment, and is each adjustment appropriate? Is there transparent and company-specific disclosure of the substantive reasons why management believesthat the measure is useful for investors and the purpose for which management uses the measure?Additionally, in March 2018, the Center for AuditQuality issued Non-GAAP Measures: A Roadmap forAudit Committees, a guide intended to help auditcommittees enhance their oversight of thesemeasures used by company management. Theroadmap provides key considerations for auditcommittees, including leading practices toassess whether a company’s non-GAAP metricspresent a balanced representation of thecompany’s performance. Is the measure prepared consistently from period to period in accordance with a defined policy, and is itcomparable to that of the company’s peers? Is the measure balanced (e.g., does it adjust not only for nonrecurring expenses but also for nonrecurringgains)? Does the measure appropriately focus on material adjustments and not include immaterial adjustments thatwould not seem to be a focus of management? Do the disclosure controls and procedures address non-GAAP measures? Does the audit committee oversee the preparation and use of non-GAAP measures? Does the audit committee have a clear understanding how non-GAAP measures impact compensation? Arethe audit and compensation committees aligned on this?7
Role of the audit committeeQuestions for audit committees to considerRelated-party transactionsNASDAQ and NYSE listing standards each contemplate that the audit committee of a listed company, or anotherindependent body of the board, will review all related-party transactions. In some instances, this responsibilityis assigned to the audit committee. The following questions may help the audit committee assess its process forapproving related-party transactions: What process will the committee follow in reviewing and approving related-party transactions? Is thisprocess documented? Will special meetings be called as potential transactions arise, or is there a process to review transactionsbetween scheduled meetings? What information does the committee need to make an informed judgment about the appropriateness ofa transaction? Who will be responsible for presenting this information?For each transaction brought for approval, the committee may consider asking: What are the business reasons for the transaction? Are these reasons in line with the company’s overallstrategy and objectives? When and how will the transaction have to be disclosed? How will investors view the transaction when itis disclosed? Which insiders could benefit from the transaction and in what way? What impact will the transaction have on the financial statements? Are any outside advisers needed to help understand the implications of the transaction?8
Role of the audit committeeRisk oversightGiven the dynamic business environment, which createsan ever-changing risk landscape, boards should makesure the risk oversight function is well defined andeffective. The board plays a critical role in understandingand influencing management’s processes for identifying,assessing, and continually monitoring risks. The boardshould clearly define which risks the full board shoulddiscuss regularly versus the risks that can appropriatelybe delegated primarily to a board committee. Whilemany boards have a defined risk governance structure inplace, it is important to continually assess the structureas companies face new risks.A leading practice is for management to maintain a listof all enterprise-wide risks, which are then mapped tospecific board committees with the expertise to overseethem. For example, human resource and compensationrisks may be delegated to the compensation committeefor oversight, and the audit committee should have akey role in overseeing financial risks. In many instances,the full board takes direct responsibility for and regularlydiscusses the company’s most strategic risks, whichinclude risks that could disrupt and materially impact thecompany’s business strategy. Committee charters shouldbe updated to align with the defined risk governancestructure.For companies outside the financial services industry,where many companies have separate board riskcommittees, any risks not assigned to a specificcommittee during this process are often delegated tothe audit committee. While it may be appropriate forthe audit committee to take responsibility for reviewingthe guidelines, processes, and policies managementhas in place to identify, assess, and manage risk, boardsshould take care not to overburden the audit committeeQuestions for audit committees to considerRisk oversightWhen the board or audit committee is considering the effectiveness of the company’s enterprise riskmanagement—the process of planning, organizing, leading, and controlling activities to minimize the effect ofdownside risk on the organization—it may consider the following questions: Which board committees are responsible for various aspects of risk governance? Has the risk governancestructure been defined? How do the various board committees oversee risk? Is there appropriate coordination and communicationbetween all relevant stakeholders? Does the board consider the relationship between strategy and risk? What are the potential internal andexternal risks to the success of the strategy? Does management provide the board with the information needed to oversee the risk managementprocess effectively? What a
Note that SEC rules require the audit committee to recommend to the board that the audited financial statements be included in the company’s annual report on Form 10-K. Questions for audit committees to consider Earnings guidance The audit committee should discuss earnings guidance with management. Questions to consider include:
May 02, 2018 · D. Program Evaluation ͟The organization has provided a description of the framework for how each program will be evaluated. The framework should include all the elements below: ͟The evaluation methods are cost-effective for the organization ͟Quantitative and qualitative data is being collected (at Basics tier, data collection must have begun)
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