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| Additional Resources This section includes additional resources that we believe may be useful to audit committee members in providing oversight to the financial reporting process. This includes selected releases from the SEC, oversight of information security, and other external resources and links. Content in this section includes:
ACI Keynote Address at MIS Super Strategies Conference This presentation, entitled "Audit Committee Issues and Expectations", was delivered by Mark C. Terrell, Executive Director of KPMG's Audit Committee Institute on April 15, 2004 as the Keynote Speaker to the MIS Super Strategies Conference, Chicago IL. Exploring the key components of the Audit Committee and Internal Audit relationship, this presentation highlights the changing environment, increased expectations, as well as other issues being addressed as part of the implementation of the corporate accountability reforms.
This report, issued by the Securities and Exchange Commission’s (SEC) Division of Corporation Finance, highlights the significant accounting and disclosure areas most commonly commented on by the SEC staff in its reviews of annual and quarterly reports of Fortune 500 companies. Areas addressed by the SEC in its report include:
This section contains materials from external law firms that may be of interestto audit committees. (Posted with permission.)
More information can be found at www.mayerbrownrowe.com/sarbanesoxley.
This speech by the new Chairman of the Securities and Exchange Commission (SEC), William H. Donaldson, at the 2003 Washington Economic Policy Conference on March 24, 2003, included remarks on key issues pertaining to corporate governance. In one of his first public appearances, Chairman Donaldson said companies, their management, and their board directors must not only simply conform to the new laws and regulations, but they "must redefine corporate governance with practices that go beyond mere adherence to new rules and demonstrate ethics, integrity, honesty, and transparency." He added, "...[The primary responsibility for guardianship of corporate governance practices must reside with the board of directors and must not be diluted by the power of the chief executive."
Speech by SEC Commissioner Paul
S. Atkins: This speech, presented by Securities and Exchange (SEC) Commissioner Paul S. Atkins on March 25, 2003, to the editors of the International Financial Law Review, included remarks about the recent Sarbanes-Oxley Act rules adopted by the SEC pertaining to expanding the roles and responsibilities of audit committees as well as standards of conduct for attorneys. "Government controls alone - too often paternalistic - will never be a solution if individuals and individual firms are not upholding their own end of simple business ethics through their own effective compliance. Internal controls and the culture of an organization are basic structural aspects to reinforce the inherent nature of most people to do the right thing," he said.
Speech by SEC Commissioner Atkins: This speech, presented by Securities and Exchange (SEC) Commissioner
Paul S. Atkins on February 3, 2003, at the University of Cologne
in Germany, included remarks about the recent Sarbanes-Oxley Act
rules adopted by the SEC and the accommodations that the SEC has
made in response to the concerns of foreign entities. September 27, 2002 - Sarbanes-Oxley and the Idea of “Good” Corporate Governance - Speech by SEC Commissioner Cynthia A. Glassman In her speech before the Washington, D.C.-based American Society
of Corporate Secretaries, Ms. Glassman discusses how ensuring high
standards of good governance at America's public companies has become
even more critical in light of recent events, and especially with
the enactment of Sarbanes-Oxley and the Commission's governance
reforms. She also discusses themes that bind the legislation's various
provisions together as well as some concrete ways in which she believes
companies can put the idea of "good governance" into action. Making the Audit Committee More Effective In this speech, Mr. Herdman discusses the audit committee process and membership and suggests that the major stock exchanges may reevaluate the audit committee regulations related to the "independence and financial literacy of audit committee members". He encourages audit committee members to be diligent, control the audit committee agenda, and understand the economics and accounting behind material transactions, "no matter how complex". February 14, 2002 - Are Current Financial Accounting Standards Protecting Investors? Testimony by Robert K. Herdman, Chief Accountant, U.S. Securities and Exchange Commission before the Subcommittee on Commerce, Trade and Consumer Protection, Committee on Energy and Commerce, U.S. House of Representatives. In this testimony Mr. Herdman discussed the current accounting standard setting process and the improvements that might be made so changes to accounting standards can be implemented more quickly, be more responsive to market changes, and provide more transparent information to investors. January 24, 2002 - Speech by Bob Herdman, Chief Accountant of the SEC, entitled Critical Accounting and Critical Disclosures. In this speech Mr. Herdman discusses disclosures related to critical accounting policies, the SEC's statement with regard to effective disclosure in MD&A, and the release regarding pro forma earnings releases. December 11, 2001 - The Wall Street Journal published this article, How to Prevent Future Enron's, by Harvey L. Pitt, Chairman of the Securities and Exchange Commission (SEC). In this article, Chairman Pitt stated that, "the SEC is investigating Enron's meltdown and its tragic consequences" and "until all the facts are known, there is nothing that can be said about who may be responsible for this terrible failure. Our immediate concern in the wake of this tragedy should be to understand how to prevent more events like this." Chairman Pitt called upon the public and private sector to partner to provide "an approach to reassure investors and restore their confidence." He identified nine key points that, in addition to [the SEC's] existing "after the fact" enforcement actions, would constitute a "sensible and workable approach." December 12, 2000 - Speech to the Federal Reserve
Bank of New York Conference by Arthur Levitt, former Chairman of
the SEC entitled The Rise and Effectiveness of New Corporate
Governance Standards. In this speech, Mr. Levitt discussed
the global marketplace and the premium that investors may be willing
to pay for a company with a strong corporate governance structure.
Mr. Levitt also stated "What's more, when auditors and the board
engage in frank and meaningful discussions about the significant,
but sometimes gray areas of accounting, both the company's and its
shareholders' interests are served. In this way, the board, including
the audit committee, management, and outside auditors form a "three-legged
stool" of responsible disclosure and active oversight, laying the
foundation for financial integrity and greater accountability."
September 28, 1998 - Speech to the New York University
Center for Law and Business entitled The Numbers Game
by Arthur Levitt, former Chairman of the SEC. In this speech Mr.
Levitt expressed his concern surrounding "earnings management" stating
that "In the zeal to satisfy consensus earnings estimates and project
a smooth earnings path, wishful thinking may be winning the day
over faithful representation." He also announced the formation of
a panel which was charged with developing a series of recommendations
to empower audit committees to function as the "ultimate guardian
of investor interests and corporate accountability." This panel
was the Blue Ribbon Committee on Improving the Effectiveness of
Corporate Audit Committees. Its report and recommendations were
the basis for the new audit committee regulations that were passed
in late 1999.
Auditor Independence The SEC rule contains four major provisions:
The rule provides guidance on evaluating the independence of an auditor to an audit client with regard to investment and employment relationships and the scope of services provided by an auditor to an audit client. The rule requires disclosures in the annual proxy statement of audit fees, financial systems design and implementation fees and other fees. Furthermore, the rule requires proxy statement disclosure as to whether the audit committee has considered if the non-audit services were compatible with maintaining the principal accountants independence.
The full text of the release as well as the comment letters that the SEC received during the rule making process can be assessed on the SEC's website at www.sec.gov. Letter sent by former SEC Chairman Arthur Levitt to the chairmen of the audit committees of the 5,000 largest public companies on December 27, 2000 concerning the new auditor independence rules.
Oversight of Information Security The technological environment that companies now operate within is dramatically different than it was even five years ago. The very accessibility that makes corporate information so useful and valuable also makes it extremely vulnerable to loss, theft, or manipulation by hackers, competitors or disgruntled employees. This vulnerability represents a tremendous-and often unrecognized-corporate risk. We have included below a few resources that may assist audit committee members and board members improve their oversight of corporate information security. NACD Study - Information Security Oversight: Essential Board Practices The National Association of Corporate Directors (NACD) 2001 study entitled Information Security Oversight: Essential Board Practices was sponsored by the Audit Committee Institute and developed with help from KPMG's Risk and Advisory Services practice. The brochure was created in collaboration with The Institute of Internal Auditors and the Critical Infrastructure Assurance Office of the U.S. Department of Commerce. Some of the issues addressed include how to integrate information security oversight into the board agenda and oversight of corporate policy. The brochure may be ordered through the NACD website. Information Technology (IT) Governance Institute This is the governance definition put forward by the IT Governance
Institute: Representatives of the IT Governance Institute suggest some information security practices for the board room including:
Click here for additional information on the IT Governance Institute and their Web site. Security Transformation:Digital Defense Strategies to Protect Your Company's Reputation and Market Share Staying competitive is tough enough for most organizations. But staying protected in today's Internet environment is even tougher. Security breaches can loom at every turn. That's why many executives are struggling with questions such as:
Security Transformation helps provide answers to these and other vexing security-related issues. Unlike many books which speak from a strictly technological standpoint, Security Transformation places security issues squarely in the context of business, underscoring its role in enhancing customer value, enabling new business opportunities, protecting one's brand and avoiding liability. Written by KPMG's top security strategists, Security Transformation offers insights into what it takes to protect your organization against unwanted attacks to compete successfully in today's virtual marketplace. Put simply, Security Transformation makes the business case for security. Click here for more information on Security Transformation.
Industrial Markets Corporate Information Survey 2001 KPMG's study addresses perceptions of information security trends, major threats, areas of vulnerability, and security measures currently being adopted, within the United States and Europe. The research was conducted among five of the key Industrial Markets industry service sectors; automotive, chemicals & pharmaceuticals, energy, industrial products, and transportation. The sample respondents included: CIO, IT, Operations, Finance, Legal, Purchasing, and Human Resources. The results illustrate three pillars of a comprehensive corporate information security platform and show major gaps in executive understanding of the issues, which may make them vulnerable to security breaches.
A Guide for Directors, Management, and Consultants, Second Edition Audit Committees: A Guide for Directors, Management, and Consultants, written by Frank M. Burke, J.D., CPA and Dan M. Guy, Ph.D., CPA, is now in its second edition. The professionals at ACI have referred to this book often and we've concluded that it is an excellent resource for audit committees and those who interact with audit committees. The following description was provided by the publishers - Aspen Publishers, Inc.. This book is a user-friendly guide that contains the much-needed tools to assist companies, not-for-profit organizations, and public sector entities with creating and maintaining effective audit committees. The Guide is written for directors serving on audit committees, other members of the board of directors, CEOs, CFOs, in-house legal counsel, internal and external auditors, outside legal counsel, and other consultants to audit committees. In addition to explaining the rudiments of setting up an audit committee, it emphasizes the importance of regular evaluations of audit committee performance to help make the audit committee more effective and efficient. This edition of the Guide includes the latest requirements from the American Institute of Certified Public Accountants, New York Stock Exchange, National Association of Securities Dealers, American Stock Exchange, and the Securities and Exchange Commission. The second edition revisions include "Additional Developments from Treadway to 2002", an expanded discussion of the audit committee charter, also a new chapter; "Understanding Financial Statements" , and major revisions to Chapter 9 & 10 that include new discussion on SEC rules specifying the minimum requirements for the audit committee report and recommendations about internal control to audit committees made by the Panel on Audit Effectiveness and more.... This publication may be ordered by contacting Larry Teator at Aspen Publishers, Inc. at 888-871-9918 or e-mail lteator@aspenpubl.com. It may also be ordered online at Aspen Publishers (search using "audit committee").
Some of the leading Corporate Governance organizations and other Governance links The following are links to the Web sites of the leading Corporate Governance organizations that ACI teams with:
Additional Corporate Governance and other Web Links:
ACI Webcasts KPMG's Audit Committee Institute has produced Webcasts that are available at www.boardmember.com/network a free resource center of Corporate Board Member, the journal of Corporate Governance. Featured in these Webcasts are Mark C. Terrell, ACI partner in charge, and Dan M. Guy, coauthor of Audit Committees: A Guide for Directors, Management and Consultants and former vice president-Professional Standards and Services at the AICPA. Look under Interviews/Webcasts.
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