Tag Archives: audit

Comments on the DoJ Fraud Section Plan and Guidance

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Recently, on April 8, 2016, I wrote a post about the new DoJ Fraud Section’s Foreign Corrupt Practices Act Enforcement Plan and Guidance. Here is a link to that post and the Plan and Guidance CLICK HERE.

I did not at that time provide comments about the Plan and Guidance, which is only 9 pages in length. Whereas audit committees definitely should read and understand the Plan and Guidance, and take it into consideration for the purpose of pre-policies, processes and practices, and then also if an event or occurrence happens, my additional overview comments are as follows.

As you read through the Plan and Guidance, unfortunately I believe that you will find that for the most part it vaguely says that you should conduct an investigation of everything and everyone who might be relevant to the event or occurrence, that you should self report everything that you find (except for attorney-client information and materials, but of course the Fraud Section might argue about what qualifies as being attorney-client privileged), and that the Fraud Section will then consider what benefits it will grant, if any, to you for doing so. In that regard, I have to say that the Plan and Guidance is noncommittal, vague and overly broad, and might be considered heavy-handed, and as such isn’t particularly helpful or not nearly as helpful as it might have been.

The Plan and Guidance also only applies to the Fraud Section – thus, it does not apply to any of the other numbers of governmental entities, divisions, departments or sections that might also be looking into the event or occurrence. But, please do read and understand the Plan and Guidance anyway.

And the following is a link to my Excellent Audit Committee Guide – read it and pass it around, CLICK HERE.

Best, Dave Tate, Esq. (San Francisco/California)

Auditors – Derivatives – Auditing v. Risk Management, Big Difference – Reporting v. Evaluation

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I have been reading an email thread by some very good auditors and risk management professionals. It struck a chord with me. The discussion was about derivatives in general.

One participant posted recent comments or possible comments by Warren Buffett about the difficulties of evaluating derivative transactions and banks and companies that hold derivative contracts or instruments.

Another participant differentiated auditing and risk management in the context of derivatives – stating that the external auditor audits to determine whether the derivative transaction has been properly accounted for within the context of generally accepted accounting principles.

But the auditor’s clean opinion really doesn’t tell management, or the board, or the audit committee, or the investor how the derivative will behave or react in different situations, or the risk associated with the derivative. Of course, that audit weakness also is true with respect to all audited transactions – the auditor is only telling you that within GAAP and GAAS, and the determined level of materiality, the transactions have been properly recorded. Although proper accounting is important, the risk associated is equally and perhaps more important.

A few of my other posts have discussed derivatives – here is a link to a post about derivatives and audit committees http://wp.me/p75iWX-h.

And, as audit committees have oversight of risk management or certain aspects of risk management (which is too vague of a term (i.e., risk management), and lacking in specifics for my liking, see also http://wp.me/p75iWX-1F re risk management, audit committees, and AC charters ), as an audit committee member should you evaluate whether you and your committee, and management, are sufficiently on top of the derivative issue and the risks that they might present to your entity and its shareholders, and to you and your reputation? I’m not anti-derivative – they can be helpful and prudent – I’m simply saying that as part of your oversight and diligence you should consider whether you and your organization are sufficiently on top of the issue and understand the risks that the different derivative instruments and transactions present.

And here is a link to my audit committee guide, updated January 2016, http://wp.me/p75iWX-q

Thanks for reading. Dave Tate, Esq. (San Francisco/California)

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New Governance Guidance Stretches Thinking on Ethics, Risk, and More

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​The King IV draft code has much to say about governance, risk management, compliance, and assurance. Click on the following link for the discussion by Norman Marks and see my comments below: iaonline.theiia.org

This article by Norman Marks discusses parts of the new King IV code that concentrate on culture, ethics and risk. It’s interesting for thought with respect to your own organization. It is and has been long well-known that all three corporate areas, culture, ethics and risk management, are instrumental to business performance and legal compliance.

And although these areas are discussed, and significant strides have been made in or discussed about risk management during the past couple of years, there still are no universally recognized standards or criteria to evaluate or audit how the business is doing in these areas.

I have long been surprised that the auditing professions, external and internal, have not jumped on these areas and also governance.

See also Tate’s Excellent Audit Committee Guide at CLICK HERE

Best, Dave Tate, Esq. (San Francisco and California), http://auditcommitteeupdate.com, http://californiaestatetrust.com, http://tateattorney.com

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Internal Auditors Not Giving Enough Risk Insights

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CFOs and audit committee chairs are not getting enough insights into corporate risk management from their companies internal audit function, according to a new survey.

Click on the following link for the article: www.accountingtoday.com

Dave Tate, Esq. comment. The results of this survey really shouldn’t be surprising. There isn’t even agreement on what risk management is or a recommended process.

Risk management is a collaborative effort. If I’m on a board risk committee or on audit committee that has been delegated initial risk management oversight, yes, I’m going to request and expect executive management and internal audit to not only provide comments and evaluations about risk management, and also about the processes that are being used, and that should be updated and used.

However, as a risk or audit committee member, I’m also going to provide my comments about what I need to see and receive in that regard so that I am comfortable that what I am receiving allows me to perform my oversight responsibilities. Okay, so if internal audit isn’t giving enough risk insight as the article indicates, why is that, and what must be done to correct that dynamic? Those are questions that the risk or audit committee members must ask and act upon to satisfy their responsibilities as required by the business judgment rule, statutes, regulations, rules and the committee charter.

How Can Internal Audit Support the Growing Responsibilities of the Audit Committee?

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Recent 2015 audit surveys report some interesting findings about the current role of audit committees. They highlight not only how complex the world of risk management and oversight has become in the corporate world, but also the enormous breadth of responsibilities that the audit committee is expected to bear.

Click on the following link for the article: corporatecomplianceinsights.com

Dave Tate, Esq. comments: although this is a very brief article, the topics and issues listed are large and complex. The article also offers no help at resolution. But, these issues are here to stay for boards and audit committees. Every internal audit function is different – some are qualified or partially qualified to help with these issues, whereas some are not. For some additional information, see Tate’s Excellent Audit Committee Guide (January 3, 2016, version, 183 pages) at http://wp.me/p75iWX-q.

 

Best. Dave Tate, Esq. (San Francisco and California. See also my other blog re trust, estate, conservatorship, power of attorney and elder abuse litigation and contentious administrations at http://californiaestatetrust.com, and my website at http://tateattorney.com.

Do You Have a Contrarian on Your Team?

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A divergent opinion can lead to more creative and better decisions.

Click on the following for the article: www.gsb.stanford.edu

Dave Tate, Esq. comments – good for thought – every board and management situation is different anyway – but also, did anyone say that there shouldn’t be or can’t be contrarian views on a board or committee? Look at the business judgment rule – there’s nothing there about all having to agree. One vote per person. My website: http://tateattorney.com.

Audit Committee 5 Lines of Defense

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Audit Committee 5 Lines of Defense 02132016 David W. Tate, Esq.

Making crisis simulations matter | Deloitte | Focus on | Crisis Management Services

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This issue of Focus on discusses the importance of crisis simulation and how to manage a maturity-based approach. It offers insights for getting started as well as examples of simulations in action.

Click on the following link for Deloitte’s discussion (I’m a Deloitte alum): www2.deloitte.com

Dave Tate, Esq. comments – I’m passing this along as food for thought. It is fairly basic, but I like the second paragraph, which you might want to use to help you consider simulations that might be useful from the audit committee, board, and management perspectives. And here is the link to my website which contains links to my two blogs (this blog, and the blog for trust, estate and elder abuse litigation): http://tateattorney.com.

Trados: What Happens When Venture Capital Interests and Director Fiduciary Duties Collide | Woodruff-Sawyer & Co.

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Some sales of private companies are terrific events. Big valuations can lead to all investors getting paid, not to mention dancing and high-fives all around. But what happens when the sale is a sad one?

Click on the following link for the article: wsandco.com

Dave Tate, Esq. comments. This is a Woodruff Sawyer December 2014, article, but it remains timely for director of private company fiduciary duties. It’s a very good read. And I have to add, obviously after reading this, if you are a private company director, you need to be sure that you have a good lawyer.

What do you do if you are an audit committee member or a director and you don’t know a relevant subject matter area?

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The answer to this question might seem easy – you could say (1) “learn the area” or you might say (2) “reply upon other people” or you might say (3) “learn the area and rely on other people.” But learning the area even with a good faith effort isn’t necessarily easy or quick, and you need to ask whether relying on other people will satisfy your responsibilities? Many audit committee and board relevant subject matter areas are difficult or complicated.

Based on the business judgment rule, I recommend the third approach. I say that because you might well in part rely upon other people, but you must do so intelligently, and I would ask, other than simple complete trust or deferral, can you intelligently rely on other people if you don’t have sufficient background to gather information and ask questions, let alone evaluate the information and make decisions?

Let me also add, if it’s a specific subject matter area in which you have an oversight responsibility, such as, for example, for audit committees, oversight of the independent or external audit and of the external auditor, oversight of internal controls, oversight of the internal audit function, oversight of significant accounting practices, policies and principles, and oversight of anonymous reporting, and there are also many other specific areas, then for those areas you really do need to have or obtain (yes, it can be okay to “obtain”) the necessary background knowledge about those areas as they are core areas of your responsibility.

Below is a summary of the business judgment rule that I have taken from Tate’s Excellent Audit Committee Guide (in the Guide I have stated the rule in three different ways, because the business judgment rule is so important), and you can find the January 3, 2016, version of the Guide (183 pages) at the following link (note, I do try to update the Guide every 2-3 months, and please tell other people about this blog and the Guide as they are only worthwhile if people read them) – the link for the January 2016 version of the Guide is  http://wp.me/p75iWX-q

  1. THE BUSINESS JUDGMENT RULE

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. I have started with the business judgment rule because it provides a very good overall approach for directors and audit committee members to follow, although 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.

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 committee member 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 would use under similar circumstances.

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. The 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 believes to be reliable and competent in the relevant matters;

-Legal counsel, independent accountants or other persons as to matters that the director 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.

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