Audit Committee Evolving Trends

Transcription

1 1 Audit Committee Evolving Trends Arthur Bill and Mark Plichta, Foley & Lardner LLP Richard Herlin, Deloitte & Touche LLP Isaac Kaufman, Advanced Medical Management Cheryl Mayberry McKissack, Nia Enterprises, LLC 2 1

2 Evolving Trends Overview The Current Financial Crisis Impact and Lessons International Financial Reporting Standards (IFRS) Adoption by U.S. Companies Extensible Business Reporting Language (XBRL) What is it 3 The Current Financial Crisis 4 2

3 Enterprise Risk Management Think and prepare for: New risks, the unexpected The unthinkable, think outside the box What are the red flags that AC should look for Balance between risk appetite and risk controls Do the internal audit team and compliance team have the appropriate skill-set to take leadership role in identifying key risks Reevaluate current risks to see if they have changed or if the priority has changed 5 Internal Controls Has the company changed the scope of its annual assessment of internal controls over financial reporting (ICOFR) Has ICOFR been impacted by personnel cuts or other cost-cutting measures Any comment letters from regulators, internal auditors, external auditors 6 3

4 Fair Value Measurements FAS 157 What is it How did it change accounting Fair value debate Fair Value Hierarchy Level I assets Level II assets Level III assets How does the company calculate fair value for its assets 7 Impairment Held-to-Maturity securities Are declines other than temporary Impairment of goodwill intangibles and long-lived assets Deferred tax assets valuation allowances 8 4

5 Market Credit Risk, Liquidity & Counterparty Liquidity contingency plans. Does the company expect liquidity issues within a year Fair value of the company s derivative positions, or hedging operations Is the company in compliance with its debt covenants 9 Disclosures Should the company reassess the approach and the amount of disclosure, transparency in light of the current economic situation New disclosure requirements for year end, fair value measurement, etc. Impact of the recession and critical assumptions and judgments Is the board getting the whole story future operations, liquidity impairments Operating segments could impact the evaluation of goodwill impairment. Are the segments properly defined in the financial statements 10 5

6 Audit Plan What changes did the external auditors make to their audit plan in light of the current credit aid economic environment Any audit areas that were impacted Going concern evaluation Management override 11 International Financial Reporting Standards (IFRS) 12 6

7 SEC s IFRS Adoption Roadmap On August 27, 2008, the SEC announced a roadmap for transitioning U.S. issuers to International Financial Reporting Standards (IFRS) On November 14, 2008, the SEC released the details of the roadmap for transitioning to IFRS The 90-day comment period shifted the adoption of the roadmap from the Bush administration to the Obama administration 13 Roadmap Adoption Details and Timeline Three years of audited financial statements in the year of IFRS adoption Early adoption as early as year end of 2009 The SEC will decide in 2011 whether adoption is in public interest and beneficial to investors The determination will be made based on certain milestones 14 7

8 Roadmap Timeline (continued) If approved, transition would begin in 2014 Full adoption by all public companies in 2014 (January 1, 2014 for calendar year companies), or Staggered adoption Large accelerated filers required to file IFRS in 2014 Accelerated filers in 2015 Non-accelerated filers in Benefits of Adopting IFRS Enhanced comparability with international peer companies In theory, a principles-based approach would be better than a rules-based approach 16 8

9 IFRS Benefits (continued) Efficiencies and reduced costs Consistency with statutory financial statements would reduce preparation and audit costs There would be opportunities to centralize and reduce or eliminate redundant national/regional accounting functions Improved internal controls 17 Issues With Adopting IFRS The SEC may change its mind Mary Schapiro (incoming SEC Chairman) has indicated she will not feel bound by the roadmap and that she has some concerns about the IFRS standards generally Congress may not want to defer to an international body to determine U.S. GAAP, especially in light of the current market environment SFAS 157 and IAS 39 controversy The SEC has a history of delays with this type of project 18 9

10 Issues (continued) A principles-based approach could lead to secondguessing management s judgment Potential increased litigation risk Perception that current practice by auditors and regulators in evaluating judgments does not provide an environment in which such judgments may be generally respected CIFR recommendations Significant transition costs (estimated to cost some companies up to $35 million per year) Selective modification of standards by adopting countries reduces comparability Lack of IFRS accounting expertise in U.S. 19 Preparing for Possible Adoption Issuers should establish a multi-disciplinary team/committee Accounting/Reporting Treasury Tax Information technology Legal 20 10

11 Other Implications Governance Issues Audit Committee Financial Expert CEO/CFO Certification Section 404 Audits Tax Planning Financial Covenants Employee Benefit Plans and Executive Compensation 21 Examples of Key Differences Between IFRS & GAAP Key differences are company/industry specific Revenue recognition Accounting for contingencies SFAS 5 amendment is currently on hold LIFO inventory valuation method not allowed under IFRS Under the Internal Revenue Code, companies adopting IFRS would no longer be eligible for LIFO valuation 22 11

12 Key Differences (continued) Business combination standards SFAS 141(R) and IFRS 3 Joint project SFAS 157 requires fair value to be determined based on price that would be received for an asset Trade names 23 Extensible Business Reporting Language (XBRL) 24 12

13 What is XBRL? SEC rules adopted 12/17/08 Interactive data Tag each number in financial statements with one of 13,000 codes 25 XBRL Phase-In Phase-in compliance timetable three phases Two-year tagging deadline schedule 26 13

14 Importance of Compliance Eligibility for Forms S-3 and S-8 Rule 144 current public information requirement Subject to 1933 and 1934 Act antifraud provisions 27 Audit Committee Oversight Financial management understanding Use of outside vendor or handle inhouse Periodic reports to audit committee Use of filer-developed extensions Auditor involvement 28 14