Tag Archives: CEO

Really Massive Changes in Accounting, Auditing, Reporting and Communicating – The End Of Accounting?

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Although I practice as an attorney, I previously practiced as a CPA and I have experienced several times over the years when there were significant changes occurring in the accounting practice and profession. But right now, I believe that I am witnessing multiple massive changes that have been long in the making. The following is a link to an Accounting Today article which does a pretty good job of discussing some of the changes, and also includes a question whether this is the end of accounting – click on the following link, CLICK HERE

It’s not like these changes are screaming at you in the headlines, but the cumulative effect is significant, new changes are continuing and will continue, and perhaps more important, the reasons for the changes are permanent.

For a long, long time the value of the audit and of the audit report have been questioned.

For a long, long time, the value of the information provided by an accounting that is prepared in conformity with generally accepted accounting principles has been questioned.

Different stakeholders also have different needs, and speed at which the flow of information is needed and expected is ever-increasing. Audited financial statements, for example, don’t tell you very much about the future investment or business generating value of the entity or of the transactions reported, or of the risks that are associated.

So now, for example, in addition to GAAP accounting we have non-GAAP accounting and reporting, we are seeing an increased ability to audit all transactions by computer software, GAAP is moving from the more detailed and specific rules based approach back to the more principles based approach that was in place when I first became a CPA, and non-GAAP measurements or criteria are becoming or should become more important such as some of the governance criteria (integrity, tone-at-the-top, culture, etc.), sustainability, transparency, risk management, and more emphasis on internal controls such as COSO.

However, I don’t agree with the suggestion or question in the title to the above linked article – it’s not the end of accounting. Traditional accounting serves a useful purpose – can you imagine what a free for all it would be without traditional accounting? There would be absolutely no checks or balances. There would be a “zero” reliability factor, and no comparability between different entities or industries.

But there is no question that the changes that have occurred and that continue to occur in accounting and auditing create both opportunities and risks for investors, financial institutions and other stakeholders, executive, financial, accounting and audit officers and professionals, boards, and audit and risk committees. The people who will excel are the people who will embrace and become expert in these changes. It’s a lifetime of learning to stay ahead and relevant.

Best to you. Dave Tate, Esq.

The following is a link to my Tate’s Excellent Audit Committee Guide, updated January 2016, CLICK HERE

What Insight Do Audit Committees Receive From Internal Audit – Not Enough Or Much – KPMG Survey

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What insight to audit committees receive from IA

The above chart is from a new KPMG survey of audit committee chairs and CFOs. You can find the survey at

Click to access GM-OTS-1653_SeekingValueThrough_IAB_V1.pdf

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The survey and the above chart identify ongoing challenges for internal audit to provide and prove enough value to audit committee members and CFOs. It is well-documented that these challenges have existed for years – basically forever. But let’s not over generalize – one size doesn’t fit all, and certainly there are internal audit functions that are up-to-speed and that are providing good value.

If there is a problem in this area, you must also ask the audit committee members, not just the audit committee chair but also the individual members who aren’t the chair, why they aren’t getting the information that they need from internal audit? There’s either a lack of common understanding, and that lack of understanding might also be the fault of the audit committee members if they are not expressing themselves sufficiently, or there is a problem with the internal audit function, or its funding, or the qualifications of its members. In theory, it also is possible that the audit committee or the CFO simply are asking internal audit to perform a task or to provide information that is unreasonable; however, that is like saying “I can’t do that for you,” which of course is a very bad approach.

You can also see Tate’s Excellent Audit Committee Guide (updated January 3, 2016), at http://wp.me/p75iWX-q

Dave Tate, Esq., San Francisco and California, http://auditcommitteeupdate.com

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

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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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Unicorns, Down Rounds, and Independent Directors | Woodruff-Sawyer & Co.

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It’s 2016, and frankly, people are concerned about the valuations of venture-backed private companies. More than 140 “unicorns” exist today–private companies that have been valued at more than $1 billion. …

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

Dave Tate, Esq. comment. A good article from Priya Cherian Huskins, and she suggest in these situations, consider having independent directors sooner rather than later.