Tate’s Excellent Audit Committee Guide (02172017) – posted here, and being update

Below I have provided a link to Tate’s Excellent Audit Committee Guide, which I last fully updated February 17, 2017. Since that time developments relating to various of the discussion topics have been posted to this blog. I am starting the process of fully updating the Guide. To be sure there have been changes and developments since February 17, 2017; however, I believe that you will still find the Guide useful.

Click on the following link to the February 17, 2017, Guide Tate’s Excellent Audit Committee Guide 02172017 with Appendix A-2

The following is a screenshot of the Guide’s cover:

 

 

 

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Board understanding of culture and mood are pretty low – per NACD materials

Below I have provided a snapshot from NACD promotional materials that I received – the materials are Benchmark Your Board, with which I tend to agree, if the benchmark evaluation is done with meaningful detail, evaluation, and recommendations, and if the board then takes action to improve the board, and all levels of the organization. I find all of the statistics from the materials (see below) of interest; however, for the purpose of this blog post I am focused on the corporate culture section – earlier this year corporate or business or nonprofit or organization culture was heavily in the news, but these things tend to pass.

I don’t hear as much about culture now. But in my view, culture and values need to stay in the news as they are one of the keys to how the entity (i.e., the people in the entity) act or behave, and perform.

Notice, according to the materials, 87% of directors say that their boards have a high understanding of the tone at the top, but is that true and what does that really mean; only 35% of directors say that their boards understand the mood in the middle, whatever that means, but nevertheless, the percentage is very low; and only 18% have a high understanding of the buzz at the bottom, again whatever that means, but the percentage is very low. These seem like failing grades, evidencing, in addition to other things, that board members need get out and visit and mingle at the facilities more.

NACD Benchmark Your Board promotion stat. page

And here are additional materials from prior posts:

Organization Culture Compass Circle

OVERVIEW OF A RISK MANAGEMENT PROCESS THAT YOU CAN USE 03162018

Audit Committee 5 Lines of Success, Diligence, and Defense - David Tate, Esq, 05052018

COSO Enterprise Risk Management Framework ERM Components and Principles

Best to you, David Tate, Esq. (and inactive California CPA), Royse Law Firm, Menlo Park, California office, with offices in northern and southern California.  My blogs: trust, estate, elder abuse and conservatorship litigation http://californiaestatetrust.com, D&O, boards, audit committees, governance, etc. http://auditcommitteeupdate.com, workplace http://workplacelawreport.com

David Tate, Esq., Overview of My Practice Areas (Royse Law Firm, Menlo Park, California office, with offices in northern and southern California. http://rroyselaw.com)

  • Civil Litigation: business, commercial, real estate, D&O, board and committee, founder, owner, investor, creditor, shareholder, M&A, and other disputes and litigation; and investigations
  • Probate Court Litigation: trust, estate, elder abuse, and conservatorship disputes and litigation
  • Administration: trust and estate administration and contentious administrations representing fiduciaries and beneficiaries
  • Workplace (including discrimination) litigation and consulting
  • Board, director, committee and audit committee, and executive officer responsibilities and rights; and investigations

Royse Law Firm – Overview of Firm Practice Areas – San Francisco Bay Area and Los Angeles Basin

  • Corporate and Securities, Financing and Formation
  • Corporate Governance, D&O, Boards and Committees, Audit Committees, Etc.
  • Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets
  • International
  • Immigration
  • Mergers & Acquisitions
  • Labor and Employment
  • Litigation (I broke out the litigation as this is my primary area of practice)
  •             Business & Commercial
  •             IP – Patent, Trademark, Copyright, Trade Secret, NDA
  •             Accountings, Fraud, Lost Income/Royalties, Etc.
  •             Internet Privacy, Hacking, Speech, Etc.
  •             Labor and Employment
  •             Mergers & Acquisitions
  •             Real Estate
  •             Owner, Founder, Investor, D&O, Board/Committee, Shareholder
  •             Lender/Debtor
  •             Investigations
  •             Trust, Estate, Conservatorship, Elder Abuse, and Administrations
  • Real Estate
  • Tax (US and International) and Tax Litigation
  • Technology Companies and Transactions, Including AgTech and HealthTech, Etc.
  • Wealth and Estate Planning, Trust and Estate Administration, and Disputes and Litigation

Disclaimer. This post is not a solicitation for legal or other services inside or outside of California, and also does not provide legal or other professional advice to you or to anyone else, or about a specific situation – remember that laws are always changing – and also remember and be aware that you need to consult with an appropriate lawyer or other professional about your situation. This post also is not intended to and does not apply to any particular situation or person, nor does it provide and is not intended to provide any opinion or any other comments that in any manner state, suggest or imply that anyone or any entity has done anything unlawful, wrong or wrongful – instead, each situation must be fully evaluated with all of the evidence, whereas this post only includes summary comments about information that may or may not be accurate and that most likely will change over time.

Elon Musk / Tesla – purported SEC settlement, but corporate governance and board member judicial independence questions also remain

To say the least, it must have been a stressful couple of months for Tesla board members – how do you get your undisputed CEO leader and visionary to control himself, to take care of his mental and physical health, stop doing stupid or ill-advised things and making stupid or ill-advised public communications, and stop causing self-inflicted wounds? Or, at this point, how much do you need Mr. Musk to be the CEO of Tesla – can’t some other person take the helm – someone who is better qualified to build cars, and who also is an electric/battery power visionary? And where was the board in all of this? Well . . . we don’t know because they were silent to the public.  

You might have heard the news that the SEC filed suit against Mr. Musk last week as a result of an ill-advised and possibly unlawful public comment that he made. Yesterday (Saturday) I read two articles about possible settlement or actual settlement with the SEC. The following earlier-in-the-day article represents that Mr. Musk had rejected a settlement offer made by the SEC.  But please be aware that I never simply accept a news or other article as being correct – the article might be correct, or some of it might be correct, or none of it might be correct, you can be reasonably certain that the article is not entirely complete, and I also watch for the adjectives used and the opinions and conclusions reached as opposed to facts and whether or not those facts are supported with objective, credible evidence and sources. Thus, although I am using articles below, I am not representing or suggesting that they are correct or entirely correct. 

I found the first, earlier-in-the-day article interesting because of its discussion about the terms (presumably only some of the terms) of settlement purportedly offered by the SEC, and more interesting for the purported reasons why the settlement offer was rejected. The reasons for rejection, for example, do not include whether or not acceptance of the settlement would be in the best interests of Tesla and its stockholders. The reasons suggest that the settlement was rejected based on reasons personal to Mr. Musk, the reasons suggest a desire to maintain and not lose board control, and the reasons suggest a lack of board member involvement in whether or not the settlement should be accepted, and a lack of board member active diligent governance, oversight, and independence. Of course, obviously there are additional facts about which we are not aware.

In terms of board member independence, I am talking about possible lack of judicial independence, not independence as defined by stock exchange or similar rules, or whether or not the board member is an officer of Tesla. Board member judicial independence is an evolving and increasingly important attribute and evaluation – for example, does the board member truly diligently and prudently evaluate the issues at hand in the best interests of the stockholders and the company, and make decisions that are independent of the director’s self interests and independent of the director’s relationships with the executive officers and with the other directors. As you might be aware, judicial independence, for example, also takes into consideration business, financial, social, family, and friend interactions, relationships, and influences or pressures.

The following is the earlier-in-the-day article representing that settlement with the SEC was rejected and at least some of the purported reasons for the possible rejection – see a picture from the earlier-in-the-day first article below or  Click Here For Article

Musk reportedly doesn't settle with SEC

A later-in-the-day article then represented that settlement with the SEC had been accepted, and at least some of the purported terms of the settlement. I would view acceptance of the purported settlement as a good decision in the right direction for Tesla and its stockholders, and also for Mr. Musk. I will be interested in hearing who the two new directors will be, the process for and who nominates/selects the new directors and what Mr. Musk’s involvement will be in that process, and who the independent directors will be and whether they will be and are judicially independent as they should be judicially independent after taking into consideration that matters, issues and people over which they will have specific oversight and responsibility. See a picture from the later-in-the-day second article below or Click Here For Article

Musk reportedly settles with the SEC

Best to you, David Tate, Esq. (and inactive California CPA), Royse Law Firm, Menlo Park, California office, with offices in northern and southern California.  My blogs: trust, estate, elder abuse and conservatorship litigation http://californiaestatetrust.com, D&O, boards, audit committees, governance, etc. http://auditcommitteeupdate.com, workplace http://workplacelawreport.com

David Tate, Esq., Overview of My Practice Areas (Royse Law Firm, Menlo Park, California office, with offices in northern and southern California. http://rroyselaw.com)

  • Civil Litigation: business, commercial, real estate, D&O, board and committee, founder, owner, investor, creditor, shareholder, M&A, and other disputes and litigation; and investigations
  • Probate Court Litigation: trust, estate, elder abuse, and conservatorship disputes and litigation
  • Administration: trust and estate administration and contentious administrations representing fiduciaries and beneficiaries
  • Workplace (including discrimination) litigation and consulting
  • Board, director, committee and audit committee, and executive officer responsibilities and rights; and investigations

Royse Law Firm – Overview of Firm Practice Areas – San Francisco Bay Area and Los Angeles Basin

  • Corporate and Securities, Financing and Formation
  • Corporate Governance, D&O, Boards and Committees, Audit Committees, Etc.
  • Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets
  • International
  • Immigration
  • Mergers & Acquisitions
  • Labor and Employment
  • Litigation (I broke out the litigation as this is my primary area of practice)
  •             Business & Commercial
  •             IP – Patent, Trademark, Copyright, Trade Secret, NDA
  •             Accountings, Fraud, Lost Income/Royalties, Etc.
  •             Internet Privacy, Hacking, Speech, Etc.
  •             Labor and Employment
  •             Mergers & Acquisitions
  •             Real Estate
  •             Owner, Founder, Investor, D&O, Board/Committee, Shareholder
  •             Lender/Debtor
  •             Investigations
  •             Trust, Estate, Conservatorship, Elder Abuse, and Administrations
  • Real Estate
  • Tax (US and International) and Tax Litigation
  • Technology Companies and Transactions, Including AgTech and HealthTech, Etc.
  • Wealth and Estate Planning, Trust and Estate Administration, and Disputes and Litigation

Disclaimer. This post is not a solicitation for legal or other services inside or outside of California, and also does not provide legal or other professional advice to you or to anyone else, or about a specific situation – remember that laws are always changing – and also remember and be aware that you need to consult with an appropriate lawyer or other professional about your situation. This post also is not intended to and does not apply to any particular situation or person, nor does it provide and is not intended to provide any opinion or any other comments that in any manner state, suggest or imply that anyone or any entity has done anything unlawful, wrong or wrongful – instead, each situation must be fully evaluated with all of the evidence, whereas this post only includes summary comments about information that may or may not be accurate and that most likely will change over time.

More on Culture/NACD, and Risk Management

I did some weekend reading. The following are two items of interest.

New NACD Report on Culture

The following is a link to the page for the NACD Commission Report on Culture as a Corporate Asset – the complimentary material (28 pages) is worthwhile reading if you are not a NACD member: https://www.nacdonline.org/Resources/Article.cfm?ItemNumber=48256

Of course, the NACD culture report doesn’t carry with it any force of law or requirement, and, although the report is fairly specific while at the same time also vague in that it often refers to comments by commission members who are unnamed, the report is significant because it is provided and supported by a leading board director organization as an indicator that entity culture is an important area for board oversight.

New Post by Norman Marks About Risk Management

And from part of a blog post by Norman Marks about risk management, which you can see at the following link  https://normanmarks.wordpress.com/2017/10/14/is-it-about-managing-risk/

” . . . board should be asking these questions:

  • How likely are we to achieve our objectives?
  • If the likelihood is less than acceptable, why? What can we do about it?
  • If there is a possibility of exceeding our objective, what can and should we do?
  • What assurance do we have that management is taking the right risks, making intelligent and informed decisions?
  • Are there any risks that we should be concerned about, that merit our attention and possibly our action?”

New COSO ERM Framework – Enterprise Risk Management – Integrating with Strategy and Performance; COSO 2013 Internal Control Framework; the Business Judgment Rule

You may have heard or seen that the new COSO ERM Framework is out as of a day or two ago – Enterprise Risk Management – Integrating with Strategy and Performance. This is a project that COSO announced on October 21, 2014, so it is a longtime in the works. The original (first) framework was issued in 2004. Below I have provided the bare bones outline for the new ERM Framework, in addition to the bare bones outline for the COSO 2013 Internal Control Framework, and a summary of the business judgment rule. Why did I provide all three? Because for boards and audit committees, and for business entities and their executive officers, and sometimes for the employees also, all three are, or should be, tied together.

I will be commenting about and outlining the ERM Framework in detail in later posts (after I have had time to evaluate the detailed materials, and discuss them with colleagues). For now, all I can give you is the outline below. I do note – and I’m not being negative about this – that I have some concern that the five concepts and twenty principles, with the detail added, might be a lot for some small and mid-sized business entities, nonprofits and governmental entities to handle. But it is what it is. And as you may know, although it is now recognized that boards are responsible for oversight of risk management, many audit committees are responsible for risk management oversight pursuant to statute, regulation, or exchange requirements, and a typical audit committee charter lists oversight of risk management as an area of responsibility, generally there is no legally required or mandated risk management framework or process, although some industries (such as banks, for example) are heavily regulated for risk management purposes. It is possible that the new COSO ERM Framework will become the accepted framework to follow, although other frameworks do exist.

COSO (the Committee of Sponsoring Organizations of the Treadway Commission) is a private sector initiative, jointly sponsored and funded by the American Accounting Association, American Institute of Certified Public Accountants, Financial Executives International, Institute of Management Accountants, and The Institute of Internal Auditors.

The new COSO ERM Framework is organized into five interrelated primary or core components, which are supported by a set of twenty principles. The following is a broad outline of the five components and twenty principles. And as I stated above, in later posts I will be adding considerable detail. Below I have also provided an outline for the COSO 2013 Internal Control Framework, and a discussion about the business judgment rule.

Thanks for reading. David Tate, Esq., Royse Law Firm, Menlo Park office, with offices in the San Francisco Bay Area and Los Angeles

 

COSO ERM Framework – Enterprise Risk Management – Integrating with Strategy and Performance (five components, and twenty principles)

I.  Governance and Culture Component:

Supporting Principles:

  1. Exercises Board Risk Oversight
  2. Establishes Operating Structures
  3. Defines Desired Culture
  4. Demonstrates Commitment to Core Values
  5. Attracts, Develops, and Retains Capable Individuals

II.  Strategy and Objective-Setting Component:

  1. Analyzes Business Context
  2. Defines Risk Appetite
  3. Evaluates Alternative Strategies
  4. Formulates Business Objectives

III.  Performance Component:

  1. Identifies Risk
  2. Assesses Severity of Risk
  3. Prioritizes Risks
  4. Implements Risk Responses
  5. Develops Portfolio View

IV.  Review and Revision Component:

  1. Assesses Substantial Change
  2. Reviews Risk and Performance
  3. Pursues Improvement in Enterprise Risk Management

V.  Information, Communication, and Reporting Component:

  1. Leverages Information and Technology
  2. Communicates Risk Information
  3. Reports on Risk, Culture, and Performance

 

Enterprise Risk Management (ERM) and internal controls work together and should complement each other. The following is the broad outline of the COSO 2013 Internal Control Framework.

Sarbanes-Oxley section 404 requires public company management and its external auditors to attest to the design and operating effectiveness of a company’s internal control over external financial reporting. Internal controls should also be designed and implemented for private company, nonprofit and governmental entities.

COSO 2013 Internal Control Framework – 5 Components, and 17 Principles

1.  Control Environment Component:

Mandatory Principles

  1. Demonstrate commitment to integrity and ethical values.
  2. Board of directors demonstrates independence from management and exercises oversight of the development and performance of internal control.
  3. Management establishes, with board oversight, structures and reporting lines and appropriate authorities and responsibilities in the pursuit of objectives.
  4. Demonstrate commitment to attract, develop and retain competent individuals in alignment with objectives.
  5. Hold individuals accountable for their internal control responsibilities in the pursuit of objectives.

2.  Risk Assessment Component:

Mandatory Principles

  1. Specify objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives.
  2. Identify risks to the achievement of its objectives across the entity and analyze risks as a basis for determining how the risks should be managed.
  3. Consider the potential for fraud in assessing risks to the achievement of objectives.
  4. Identify and assess changes that could significantly impact the system of internal control.

3.  Control Activities Component:

Mandatory Principles

  1. Select and develop control activities that contribute to the mitigation of risks to the achievement of objectives and acceptable levels.
  2. Select and develop general control activities over technology to support the achievement of objectives.
  3. Deploy control activities through policies that establish what is expected and procedures that put policies into action.

4.  Information & Communication Component:

Mandatory Principles

  1. Obtain or generate and use relevant, quality information to support the functioning of internal control.
  2. Internally communicate information, including objectives and responsibilities for internal control, necessary to support the functioning of internal control.
  3. Communicate with external parties regarding matters affecting the functioning of internal control.

5.  Monitoring Activities Component:

Mandatory Principles

  1. Select, develop and perform ongoing and/or separate evaluations to ascertain whether the components of internal control are present and functioning.
  2. Evaluate and communicate internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate.

 

The Business Judgment Rule

The business judgment rule also is relevant on these topics (from Tate’s Excellent Audit Committee Guide). The business judgment rule provides a director with a defense to personal liability, holding that as a general principle of law, a director, including a director who serves as a member of a board committee, who satisfies the business judgment rule has satisfied his or her duties. Thus, the business judgment rule provides one standard of care, although other standards may very well also apply to specific tasks and responsibilities. The business judgment rule provides a very good overall approach for directors and audit committee members to follow, although the rule itself is lacking in specific detail. In some states the business judgment rule is codified by statute while in other states the rule is established by case law (see, i.e., Cal. Corp. Code §309 for California corporations, Del. Gen. Corp. Law §141 for Delaware corporations, in addition to relevant case law). The rule also applies to directors as board committee members.

The Business Judgment Rule

In summary, as a general principle the business judgment rule provides that a director should undertake his or her duties:

-In good faith, with honesty and without self-dealing, conflict or improper personal benefit;

-In a manner that the director reasonably believes to be in the best interests of the corporation and its shareholders; and

-With the care, including reasonable inquiry, that an ordinarily prudent person in a like position with like expertise would use under similar circumstances. The rule itself doesn’t require a particular level of expertise, knowledge or understanding; however, as you might be aware, public company audit committee members do have such a requirement, and you can at least argue that, depending on the facts and circumstances, a board or committee member should have or should obtain a certain unspecified level of knowledge or understanding to be sufficiently prepared to ask questions, evaluate information provided, and make decisions.

Reliance Upon Other People Under the Business Judgment Rule

In the course and scope of performing his or her duties, a director must necessarily obtain information from and rely upon other people. An independent director is not involved in the day-to-day operations of the business. The director provides an oversight function. Pursuant to the business judgment rule, a director is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, prepared or presented by any of the following:

-Officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the relevant matters;

-Legal counsel, independent accountants or other persons as to matters that the director reasonably believes are within the person’s professional or expert competence; or

-A committee of the board on which the director does not serve, as to matters within that committee’s designated authority, so long as the director acts in good faith, after reasonable inquiry as warranted by the circumstances, and without knowledge that would cause reliance to be unwarranted.

That’s it for now. Thanks for reading. Much, much more to come on these topics. David Tate, Esq., Royse Law Firm, Menlo Park office, with offices in the San Francisco Bay Area and Los Angeles

* * * * *

Updated Mediation and Dispute Resolution Questionnaire Attached

Greetings all. I have updated my mediation and dispute resolution questionnaire, which is a document that I wrote and use to obtain information that is helpful to facilitate dispute and case settlement. Click on the following link for the pdf, and go ahead and use the questionnaire and pass it to other people as you wish. Thank you. David Tate

Here is the link for the questionnaire: Mediation and Dispute Resolution Questionnaire, David Tate, Esq. 07302017

Here is a link to the Royse Law Firm, PC http://rroyselaw.com/

Comments re post by Norman Marks – internal audit and ERM accused of failing to hit the mark – discussion about management, boards and audit committees – David Tate, Esq., Royse Law Firm

I have provided below a link to a post by Norman Marks, in which Norman discusses and in part compares or contrasts internal audit and ERM. Norman’s post is a good, worthwhile read.

There are many good writers on these topics – you will also note that there are disagreements between knowledgeable professionals. Just for example, as Norman notes, ERM or enterprise risk management is a management function (I would say a management, board and audit committee function) whereas internal audit is independent; however, there has been for sometime considerable discussion about the role of internal audit and whether it can be or should be or has been expanded in ways that could make it less independent or less of an audit function and more of an advisory function in some circumstances – internal audit endeavors to make itself more valuable and needed as a function and department.

I don’t get into the discussions about whether internal audit should or should not be less independent or more advisory – instead, if internal audit is not being sufficiently utilized I primarily attribute that to one or both of two reasons which can be interrelated: (1) either internal audit needs to do a better job selling to management, the board and the audit committee how internal audit can help, or (2) particularly the board and the audit committee need to be more educated or convinced about how internal audit can help them to satisfy their oversight duties and responsibilities (I can help you with reason (2)).

If you are interested in risk management and enterprise risk management you are aware that COSO is still updating its ERM framework. If you aren’t interested in risk management or ERM but you are a board and/or audit committee member you definitely should be interested as it or parts of it are part of your oversight duties and responsibilities.

COSO has said that its updated ERM function should be out mid-2017, in other words, soon. This is a big deal. Whereas risk management professionals will extensively evaluate and comment about the new framework from an ERM perspective, and although I am also a CPA, I will primarily evaluate the framework from a legal perspective and what the new framework will or may require of management, the board and the audit committee in satisfaction of their duties and responsibilities. Add to this the COSO 2013 updated internal control framework, and the changes that are being made to audit procedures and the audit report, in addition to increasing disclosures about events, practices and procedures not just numbers, and you have a significantly changing environment in terms of management, board and audit committee duties and responsibilities.

That’s all for now. Below is the link to Norman Marks’ new blog post – read his post – it covers more about internal audit and ERM than the title indicates. David Tate, Esq., Royse Law Firm (see below for firm practice areas), Menlo Park, California office, with offices in northern and southern California. The following is a link to my other blog, about trust, estate, and elder, etc., disputes, litigation and difficult or contentious administrations: http://californiaestatetrust.com.

Here is the link to Norman’s post:  https://normanmarks.wordpress.com/2017/07/15/internal-audit-and-erm-accused-of-failing-to-hit-the-mark/

David Tate, Esq. (and CPA, California inactive). Royse Law Firm, Menlo Park Office, California (with offices in both northern and southern California).

Royse Law Firm – Practice Area Overview – San Francisco Bay Area and Los Angeles Basin, http://rroyselaw.com/

  • Corporate and Securities, Financing and Formation
  • Corporate Governance, D&O, Boards and Committees, Audit Committees, Etc.
  • Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets
  • International
  • Immigration
  • Mergers & Acquisitions
  • Labor and Employment
  • Disputes and Litigation (I broke out these areas because they are my primary areas of practice)
  •             Business
  •             Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets
  •             Trade Secrets, NDA, Financial & Accounting Issues, Fraud, Lost Income, Royalties, Etc.
  •             Privacy, Internet, Hacking, Speech, Etc.
  •             Labor and Employment
  •             Mergers & Acquisitions
  •             Real Estate
  •             Owner, Founder, Investor, Board & Committee, Shareholder, D&O, Lender/Debtor, Etc.
  •             Insurance Coverage and Bad Faith
  •             Investigations
  •             Trust, Estate, Conservatorship, Elder Abuse, Etc., and Contentious Administrations
  •             Dispute Resolution and Mediation
  • Real Estate
  • Tax (US and International) and Tax Litigation
  • Technology Companies and Transactions Including AgTech, HealthTech, etc.
  • Wealth and Estate Planning, Trust and Estate Administration, and Disputes and Litigation