Home > Uncategorized > >COSO Guidance on Monitoring Internal Control Systems, for Audit Committees (2.13.08)

>COSO Guidance on Monitoring Internal Control Systems, for Audit Committees (2.13.08)

>Dated 2.13.08. I have changed the format of this blog. The following are a few of the most recent entries that were posted on the original Yahoo blog. For earlier entries you can still click on the original blog. Dave Tate

COSO Guidance on Monitoring Internal Control Systems, for Audit Committees (2.13.08)

For those of you who are familiar with some of my writings, you know that I have some concern about the further expansion of audit committee duties, and also believe that the duties that exist need to be fairly specifically defined so that all of the stakeholders involved have an understanding about the duties that exist, and that do not exist.

The COSO draft document (the comment period is closed, but the final document has not been released), Guidance on Monitoring Internal Control Systems, briefly discusses the role of the board/audit committee. The discussion paper can be found at http://www.coso.org/publications.htm
In pertinent part, the discussion paper states:

“Controls performed below the senior-management level can be monitored by management personnel or their objective designees. However, controls performed directly by senior management, and controls designed to prevent or detect senior-management override of other controls, cannot be monitored objectively by senior management or its direct reports. In these limited circumstances, monitoring should be performed by the board — often through the audit committee — and its resources (e.g., internal audit).

The board is also in the best position to evaluate whether management has implemented effective monitoring procedures elsewhere in the organization. It makes this assessment by gaining an understanding of how senior management has met its responsibilities.

In most organizations, it is neither feasible nor necessary for the board to understand all of the details of every monitoring procedure, but the board should have a reasonable basis for concluding that management has implemented an effective monitoring system. Boards obtain persuasive information in support of their conclusions through inquiry, observation and oversight of management; the internal audit function (if present); hired specialists (when necessary); and external auditors. They might also consider the output from ratings agencies and financial analysts. Finally, in some circumstances, boards might make inquiries of nonmanagement personnel, customers, and/or vendors.”

I do like the fact that the COSO position does not expand the duties of the audit committee (or board) with respect to monitoring controls. I also like the references to reliance on internal audit and other sources of evaluation and input. To a significant extent the audit committee has to rely on other people to help the committee satisfy its due diligence. I might even suggest that in some circumstances the COSO position understates the audit committee’s responsibilities with respect to monitoring internal controls. As in most circumstances, it would be helpful for the COSO discussion to be more detailed and specific, as long as that detail does not overly expand the audit committee’s responsibilities.

Dave Tate, CPA, Esq., http://davidtate.us, tateatty@yahoo.com
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Why People Settle Disputes—Why People Don’t Settle Disputes (2.10.08)

Dave Tate, CPA, Esq., http://davidtate.us, tateatty@yahoo.com

The following discussion can also be found in PDF format at http://davidtate.us/files/Why_People_Settle_Disputes–Why_People_Don_t_Settle_Disputes_Dave_Tate_CPA_Esq._2.10.08.pdf

After 20 years of experience in disputes, litigation, settlement and mediation, I can conclude that people settle their differences for reasons that in fact are quite limited in number. Basically, the answer isn’t technical or complicated, until you get into the details of the dispute or case. Similarly, the reasons why people do not settle their differences also tend to be limited in number. When working toward resolution of a dispute it is important to consider both why people do settle and why people do not settle.

People settle disputes because they decide that they prefer the terms of settlement to the alternative current options available and the perceived future circumstances and events that may exist or occur if a resolution is not achieved. That does not mean that the parties necessarily like the terms of settlement. In many and perhaps the majority of settlements the parties might very well tell you that they do not like the terms of the agreement, or that they believe the terms are unfair or just not “right.” They might say or suggest that they intensely dislike the agreement, or that they are more likely than not to obtain a better final result by fighting longer or by having the dispute determined by a judge, jury or other tribunal. However, by far in a super majority of disputes the parties “voluntarily” decide to reach resolution before the dispute reaches a stage where resolution will be determined by an outside person or panel.

Each dispute or case is different, involving different people with different life experiences, personalities and emotions, different facts and circumstances, different laws, and different needs, interests and motivating factors. Nevertheless, the reasons why people decide to settle tend to include the following:

-Consideration of the future additional costs, disruption, stress and other possible or negative consequences if the dispute continues;

-Current and future reputation, publicity and control or dominance risks (as those risks pertain to the parties, and also as they pertain personally to the settlement decision makers with respect to their individual reputations, employment, stature or status, control, dominance or command);

-Uncertainty about the likelihood of ultimately prevailing;

-The eventual remedy that an uninvolved judge, jury or other tribunal might award, or even be authorized to award;

-The actual or perceived strengths, weaknesses and resources of the various parties;

-The unpredictability of the discovery, admissibility and interpretation of favorable and unfavorable evidence;

-The possible impact of the burden of proof at trail, etc.; and

-The opportunities that exist through mediation to fashion a resolution that avoids possible future negative consequences, or that maintains the status quo, or that creates a better environment for the parties and/or the settlement decision makers now, and perhaps also in future events, relationships and dealings.

Similarly, the reasons why people do not achieve resolution also tend to be limited in number. Consider the following challenges to settlement:

-Unreasonable expectations;

-A hidden or different agenda or objective;

-A belief that a benefit will be maintained or gained by the party or by the settlement decision maker by not settling;

-Mistaken or different beliefs about the law or evidence;

-Wanting to have his or her day in court (“justice“);


-Teaching or demonstrating the other party, or other outside people, a lesson;

-A perceived strength of one party over the other party (not a level playing field);

-A perception that there is a lack of risk to the party or to the settlement decision maker if the dispute is not settled;

-A lack of a sufficient understanding about the needs, objectives and driving forces of the parties and the settlement decision makers;

-A need for greater evaluation of or creativity in the range of possible terms or options that are available for settlement;

-A party needs additional information or discovery, or case evaluation before resolution;

-A lack of involvement of the settlement decision makers, or not sure who the decision makers are (or, in some cases, a person with decision making authority or power may in fact be lacking or missing); and

-“Just not yet ready to settle“–need more time or other motivating factors–keep working on it, or try again later.

During the dispute resolution process it can be beneficial to temporarily step back from the fray, and to review or consider human nature and both the general reasons why people do resolve their disputes, and the correspondingly alternative challenges to resolution. In dispute resolution it is helpful to see the trees and the forest; the stick and the carrot.

Insurance policy not cancelled for failure to promptly notify insurer of claim (2.6.08)

Here is a handy insurance tip that may surprise you: you may still have coverage for a claim even if you breach the policy clause requiring that you promptly notify your insurance company of a claim. In the case of PAJ, Inc. v. Hanover Insurance Co., which is discussed at http://www.insurancescrawl.com, the Texas Supreme Court recently held that an immaterial breach of the duty to provide notice does not deprive the insurer of the benefit of the bargain and thus also does not relieve the insurer of its contractual obligation to provide coverage. The policy language required the insured to notify the insurer of any claim or suit brought against the insured “as soon as practicable.” The insured was unaware that its CGL policy covered the dispute, and did not notify its insurer until four to six months after litigation commenced. The Court held that failure to timely notify the insurer of a claim or suit does not defeat coverage where the insurer is not prejudiced by the delay.

Dave Tate, CPA, Esq., http://davidtate.us, tateatty@yahoo.com

The Audit Committee Institute’s “Ten To-Do’s for Audit Committees in 2008.”

The Audit Committee Institute (see link below for ACI, and my list of audit committee attributes) lists 10 “To-Do’s” for audit committees to consider when planning their 2008 agenda. I particularly like item numbers 5, 6, 8, 9, and 10 which are:

5. Ensure there is a shared vision for internal audit.

6. Encourage (expect) frequent informal communications with the audit engagement partner. I would say, “Plan, schedule and expect . . . .”

8. Make sure the full board is aware of the audit committee’s activities and needs.

9. Assess the tone at the top and throughout the organization. Tone at the top is important for account function and financial statement integrity, but I would not use the word “assess” in a manner that might imply that the audit committee is formally responsible for making an evaluation. Additionally, tone at the top in general is an issue that should be considered at the full board level and should not be delegated solely to the audit committee.

10. Take a hard look at the audit committee performance (see additional link below for my audit committee performance evaluation overview).

The remaining ACI “To-Do’s” are:

1. Be a catalyst for improving risk management and oversight. Risk management is an aspect of the audit committee function, but I did not list this item above because the topic as stated is too broad and general, whereas I suggest that the areas of audit committee risk management oversight should be specifically defined.

2. Closely monitor management’s disclosure committee. Perhaps this “To-Do” is appropriate, but this issue also could be a board level responsibility, and I would say that if the board delegates this oversight to the audit committee (1) it should still be subject to continuing board oversight, and (2) it should be delegated only if there is an understanding regarding what the audit committee is expected to do to “closely” monitor the disclosure committee.

3. Be up-to-speed on fair value, IFRS, and other key financial reporting issues and developments. Yes, perhaps, but I would not necessarily single out this issue for special mention.

4. Make sure the CFO and the finance organization have what they need to succeed. I would say, exercise oversight of the accounting and finance, CFO and internal audit functions. Of course you want them to “succeed,” but oversight of those functions is defined by more specific criteria than just making sure that the CFO and finance functions have the necessary resources.

7. Be prepared for a crisis. I believe that this is an issue for oversight and planning by the full board.

For more information:

-The ACI link is http://www.kpmg.com/aci/docs/aci_publications/ACIs_Ten_To_Do_for_Audit_Committees_in_2008.pdf

-The link to my list of audit committee attributes is http://davidtate.us/files/30_Attributes_of_Effective_Audit_Committees_Dave_Tate_CPA_Esq._10.6.07_.pdf

-The link to my audit committee performance evaluation overview is http://davidtate.us/files/Sample_Audit_Committee_Performance_Evaluation_Outline_Dave_Tate_CPA_Esq.pdf

Best regards,
Dave Tate, CPA, Esq.,
tateatty@yahoo.com, http://davidtate.us

ISS vote against audit committee members for poor accounting practices (1.27.08)

ISS Governance Services (“ISS”) has issued it current proxy voting position for 2008 regarding corporate governance and accounting practices. ISS indicates that it will continue to focus on what it perceives to be “poor” accounting practices, fraud, and misapplication of GAAP. With respect to internal control, ISS policy will recommend that votes be withheld or made against members of audit committees where a material weakness identified under section 404 of the Sarbanes-Oxley Act rises to a level of serious concern, or where there is “an absence of effective internal control.” ISS also states that it recommends a vote against ratification of the independent auditor if “there is reason to believe” that the auditor has issued an opinion which is not accurate or representative of the company’s financial position. You can read more at http://www.issproxy.com/pdf/2008ISS_USPolicyUpdates.pdf

Of course, an occurrence of fraud, a “misapplication” of GAAP, an auditor opinion that is not accurate or representative of the company’s true financial position (e.g., in the case of a restatement), and even a material weakness in internal control do not necessarily indicate that an audit committee or that all of the audit committee members have failed to exercise diligent oversight.

Additionally, an inaccurate audit opinion also does not necessarily indicate that the auditor should be replaced. Deciding what to do and how to vote in circumstances in which these issues are present require a much more detailed investigation and evaluation process.

Dave Tate, CPA, Esq., http://davidtate.us, tateatty@yahoo.com

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