Can a CAM lead to or require an internal investigation?

Question: Can a CAM lead to or require an internal investigation?

My answer: Yes, I would say that it certainly can in some circumstances – please read below.

In discussing and describing CAMs (critical audit matters) in relevant part PCAOB Staff Guidance has said:

CAMs Summary

A CAM is defined as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) Relates to accounts or disclosures that are material to the financial statements; and

(2) Involved especially challenging, subjective, or complex auditor judgment.

The determination of CAMs is based on the facts and circumstances of each audit. AS 3101 is principles-based and does not specify any matters that would always constitute CAMs. The Board expects that, in most audits to which the CAM requirements apply, there will be at least one CAM. However, there also may be audits in which the auditor determines there are no CAMs.

Relates to accounts or disclosures that are material to the financial statements

CAMs are required to relate to accounts or disclosures that are material to the financial statements. Materiality is not solely based on quantitative factors; it also reflects qualitative factors.

This element of the CAM definition is grounded in the financial statement presentation and disclosures of the applicable financial reporting framework. Matters that meet the other elements of the CAM definition may or may not be CAMs, depending on whether they relate to accounts or disclosures that are material to the financial statements.

For example:

A potential loss contingency for which management recorded an accrual and/or made a disclosure could potentially be a CAM. However, a potential loss contingency for which the likelihood was appropriately determined to be remote, and which was not recorded in the financial statements or otherwise disclosed, would not be a CAM because it would not relate to an account or disclosure that is material to the financial statements.

A potential illegal act about which management provided disclosure could be determined to be a CAM. Even if the amounts involved were not quantitatively material, such a disclosure on its own may be qualitatively material. On the other hand, if management appropriately determined that no disclosure or accrual was required in the financial statements, the matter could not be a CAM.

Thus, considering, for example, the two PCAOB examples that are quoted above,

1.  In the first PCAOB example of a loss contingency accrual that is made and/or that is disclosed, and that is material, I would say that a CAM certainly could lead to an internal review and evaluation of those processes but in most circumstances would not lead to an internal investigation except possibly in unusual circumstances.

2.  However, in the second PCAOB example of a potential illegal act, if the potential illegal act is either quantitatively or qualitatively material, and if an internal investigation has not been performed which concluded that no disclosure or accrual was required, then the CAM certainly might lead to an internal investigation of the potential illegal act.

And, also consider, for example, the following two hypothetical scenarios in the context of the second PCAOB example:

(1) In a circumstance where an internal investigation had been performed but which concluded that no disclosure or accrual was required, the extent to which the auditor could or would evaluate the sufficiency of that investigation or the conclusion that was reached in that investigation, and whether a CAM could or would be issued if the auditor determined that in the auditor’s view the internal investigation was not sufficiently performed or that the conclusion of the investigation was incorrect, or where the auditor communicated concern to management and/or to the audit committee that the auditor had that the internal investigation was not or might not have been sufficiently performed or that the conclusion of the investigation was incorrect or might not have been correct.

(2) Or in a definitely much more remote circumstance or possibility, where an internal investigation either had or had not been performed but where in the course and scope of the audit the auditor became knowledgeable about internal investigation processes and procedures and the oversight of such, and where the auditor communicated concern to management and/or to the audit committee that the auditor had about possible or actual insufficient internal investigation processes and procedures and the oversight of such.

This second situation certainly could lead to an internal review and evaluation of internal investigation processes and procedures and the oversight of such (and possibly of anonymous reporting processes), but could it also in an extreme situation lead to a CAM if the auditor thought that the deficiency was or could likely be quantitatively or qualitatively material to the financial statements or to the integrity of the financial statements in terms of either effective internal investigation processes and procedures and the oversight of such, or in terms of overall governance or governance oversight processes?

This second situation definitely is much more remote, if possible or probable at all. However, we have seen in the news circumstances were alleged unlawful behavior or actions, or alleged repugnant but not unlawful behavior or actions, by people within an organization or by an organization itself, have gone on, and have been allowed or unwittingly allowed or enabled, for years without internal action being taken – thus, as CAMs are new and we are considering different possible CAM scenarios, it is appropriate to ask and discuss whether this second type of a situation or scenario could lead to a CAM in an extreme circumstance, for example, in a situation where quantitatively or qualitatively material affirmative representations are being made by the organization, or such as in regard to ESG or material ESG disclosures, which might not be correct or which cannot be sufficiently corroborated or assured?

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Remember, every case and situation is different. It is important to obtain and evaluate all of the evidence that is available, and to apply that evidence to the applicable standards and laws. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this post. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly. And please also subscribe to this blog and my other blog (see below), and connect with me on LinkedIn and Twitter.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

I am also the Chair of the Business Law Section of the Bar Association of San Francisco.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

My law practice primarily involves the following areas and issues:

Probate Court Disputes and Litigation

  • Trust and estate disputes and litigation, and contentious administrations representing fiduciaries and beneficiaries; elder abuse; power of attorney disputes; elder care and nursing home abuse; conservatorships; claims to real and personal property; and other related disputes and litigation.

Business and Business-Related Disputes and Litigation: Private, Closely Held, and Family Businesses; Public Companies; and Nonprofit Entities

  • Business v. business disputes including breach of contract; unlawful, unfair and fraudulent business practices; fraud, deceit and misrepresentation; unfair competition; licensing agreements, breach of the covenant of good faith and fair dealing; etc.
  • Misappropriation of trade secrets
  • M&A disputes
  • Founder, officer, director and board, investor, shareholder, creditor, VC, control, governance, decision making, fiduciary duty, conflict of interest, independence, voting, etc., disputes
  • Buy-sell disputes
  • Funding and share dilution disputes
  • Accounting, lost profits, and royalty disputes and damages
  • Access to corporate and business records disputes
  • Employee, employer and workplace disputes and processes, discrimination, whistleblower and retaliation, harassment, defamation, etc.

Investigations and Governance

  • Corporate and business internal investigations
  • Board, audit committee and special committee governance and processes, disputes, conflicts of interest, independence, culture, ethics, etc.

The following are copies of the tables of contents of three of the more formal materials that I have written over the years about accounting/auditing, audit committees, and related legal topics – Accounting and Its Legal Implications was my first formal effort, which resulted in a published book that had more of an accounting and auditing focus; Chapter 5A, Audit Committee Functions and Responsibilities, for the California Continuing Education of the Bar has a more legal focus; and the most recent Tate’s Excellent Audit Committee Guide (February 2017) also has a more legal focus:

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

The following are other summary materials that you might find useful:

An internal investigation summary overview page from a prior blog post which you can find at https://wp.me/p75iWX-dk if the below scan is too difficult to read (and you will also find other posts about investigations on my blog):

 

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

 

AUDIT COMMITTEE SELF-EVALUATION

David W. Tate

Attorney at Law

Certified Public Accountant (inactive California)

Copyright 2019 David W. Tate (however, you are authorized to download and print these materials for your use, and to also pass them to other people who would be interested)

BLOGS

D&O, Audit Committees, Risk Management, Compliance, Investigations & Governance: http://auditcommitteeupdate.com

Trust, Estate, Conservatorship & Elder Abuse Litigation: http://californiaestatetrust.com

Linkedin: http://www.linkedin.com/in/davetateesq

Twitter: http://twitter.com/davidtateesq

Self-evaluation is an important board and committee activity, and can be very helpful if done properly.

A.  Introduction and Overview

The following discussion covers audit committee self-evaluation and provides processes that you can use. As noted elsewhere in these materials, although many board and audit committee functions, responsibilities and tasks are specified by statute, regulation, rule or pronouncement, board and audit committee member standards of care remain significantly dependent on due diligence and prudent judgment.

Boards and audit committees of various entities are required by law, regulation or rule to conduct annual committee self-evaluations; however, it is worthwhile for boards and audit committees of all public and private companies and nonprofit entities to conduct self-evaluations. Board and audit committee jobs are challenging, ongoing, and technical in nature, and require the members to significantly interact with many people in different capacities within and outside of the entity. It only makes sense that both boards and audit committees should at least once each year take time to step back and review, evaluate and make improvements to their manners of operation, and also consider helpful actions that can be taken by other people with whom the boards and audit committees interact. Self-evaluation will be worthwhile even if it results in improving only one area of operation.

Board and audit committee responsibilities originate from several different sources at least including (1) activities and responsibilities that boards or audit committees voluntarily undertake or that are delegated to them; (2) the business judgment rule; (3) the specific laws, regulations and rules that are applicable to the entity’s directors and audit committee members; (4) the wording of the board and audit committee charters, if there are charters; (5) shareholder and stakeholder expectations, and (6) for audit committees, accounting and auditing pronouncements relating to the outside auditor’s activities.

Prudent board and audit committee processes and diligence are also important to reduce member and entity liability and reputation risk. An increasing number of cases hold that board and audit committee members can be liable for failure to exercise sufficient diligence, failure to spot and respond to red flags, and failure to take action. Active board, committee and corporate diligence tend to demonstrate prudent business judgment and negate allegations of recklessness, improper intent, intentional wrongdoing, or “scienter” such as in the context of securities litigation, thus reducing the risk of securities liability and damages. In the context of audit committee activities, potential entity, board, and audit committee member liability typically arises in the context of alleged improper accounting practices, written and oral public misrepresentations (such as with respect to financial matters), and improper employment practices.

Although not required, there can be advantages to having a facilitator conduct an interactive interview approach to the self-evaluation process, but without performance grading or rating: it can be difficult to construct a questionnaire with standardized questions that would be similarly understood by each of the participants in the self-evaluation process; different people use different rating scales; different people express responses in different manners; and certain important issues will change from year to year. A facilitated approach may encourage better discussion and comment, compilation, continuity, explanation, and follow-up. Contact me if you are interested in committee self-evaluation assistance at a reasonable fixed fee.

Issues and topic areas to consider during the self-evaluation process will naturally vary from entity to entity, and from board and audit committee to board and audit committee. Thus, to stimulate discussion, below for both boards and audit committees I have provided lists of potential broad issues or topic areas to consider for discussion and evaluation, including both successes and possible improvements; and I have also outlined processes to assist your board and audit committee self-evaluation processes.

B.  Audit Committee Self-Evaluation

1.  Sample List of Issues and Topics to Consider for Audit Committee Self-Evaluation

The following is a list of issues and topic areas to consider for discussion and evaluation. The list is intended to help trigger thought processes, but, of course, is not exhaustive as areas of discussion and evaluation will vary from entity to entity, and from committee to committee. The following list is not intended to and does not suggest that each or any of the below issues and topics must be considered or covered and is not a checklist – instead, if your audit committee is required to conduct a specific evaluation process or to cover certain specific issues and topics, you will need to separately consider the specific requirements, if any, for your audit committee and its evaluation process pursuant to law, regulation or rule. In that regard, please also see the disclaimer and limitations at the beginning of these materials.

-Audit committee meeting agenda preparation and dissemination process.

-Committee member independence and situational independence, financial literacy, experience and expertise.

-Committee member access to information and/or education pertinent to the functions and responsibilities of the audit committee. Are the needs of the committee members being met, so that they are sufficiently knowledgeable and educated about the company or nonprofit and its industry; relevant significant accounting and auditing issues; relevant legal matters; internal controls, risk assessment and management; governance; and new developments in those and other areas?

-Committee and committee member interactions, including interaction between committee members, and between the committee and the board, the CEO, the CFO, the outside auditor, the internal auditor, legal counsel, compliance and ethics, HR, consultants, and other people.

-The committee’s processes for identifying and spotting issues, evaluation and decision making.

-The contents of the audit committee charter, and a mutual understanding of the audit committee’s responsibilities and tasks. The charter is a requirement for public companies, and is a good idea for many private companies and nonprofit entities. The charter is a prudent document to identify and clarify the audit committee’s responsibilities. In addition to the committee itself, it is important for the board, the executive officers, and other stakeholders to have a correct understanding about the committee’s responsibilities and limitations, and the extent to which state or local jurisdiction, U.S. and international requirements and responsibilities apply or may apply to your audit committee.

-Selection of the outside auditor; audit planning; review of the performance of the outside auditor; and review of the quarterly review and annual audit report and process (or compilation if appropriate).

-Review of recent developments relating to the business judgment rule, standard of care and acceptable reliance on other people.

-Review of accounting and financial internal and fraud/embezzlement related controls and processes, risk assessment and management, possible entity and individual liability and reputation risk exposure; and compliance assessment and management relating to laws, regulations, and rules that are within the scope of the audit committee’s functions and responsibilities including issues relating to the Foreign Corrupt Practices Act.

– Review of the accounting department, and accounting and financial reporting for transactions including all of the subcomponents such as principles and policies applied (quality not just acceptability); judgments, estimates and reserves; timing and cutoff procedures; off balance sheet transactions; related party transactions; contingencies and liabilities; revenue recognition; expenses; inventories; goodwill; insider trading; and other matters relating to accounting and financial statement reports.

-Implementing revenue recognition rules, and other important, new or changing accounting principles.

-Review of internal investigation processes, procedures and needs.

-Review of the financial and internal audit functions, and how they can be helpful to the audit committee in the performance of its responsibilities and tasks.

-Review of risk management and uncertainty issues, practices and processes that are within the scope of the audit committee’s function and responsibilities.

-Implementing COSO 2013 or other appropriate processes.

-Documenting and reporting the audit committee’s activities and minutes.

-The audit committee’s use of attorneys and consultants.

-The company’s investor communication processes.

-Whistleblower, ethics, anonymous reporting and complaint handling processes to the extent that the reporting is within the scope of the audit committee’s function and responsibilities.

-Document retention policies.

-Review of the compliance and ethics function and processes that are within the scope of the audit committee’s responsibilities, and how they can be helpful to the audit committee in the performance of its responsibilities and tasks.

-Governance, including tone at the top, financial leadership, transparency and appearance.

-Review of employer, employee and workplace processes, culture, safety, and disciplinary practices that are within the scope of the audit committee’s function and responsibilities.

-Review of tax compliance and reporting issues that are within the scope of the audit committee’s function and responsibilities.

-Review of cybersecurity and internet security issues that are within the scope of the audit committee’s function and responsibilities.

-Insurance.

-Review of pension and health plan related issues that are within the scope of the audit committee’s function and responsibilities.

-Review of information privacy issues, practices and processes that are within the scope of the audit committee’s function and responsibilities.

-Review of asset protection, IP, trade secret, etc. practices to the extent that they are within the audit committee’s function and responsibilities.

-Review of environmental issues and safety that are within the scope of the audit committee’s function and responsibilities.

-Review of product and consumer safety issues, practices and processes that are within the scope of the audit committee’s function and responsibilities.

-Review of ESG, ESG processes, and ESG discussions and disclosures.

-Review of billing and accounting relating to the receipt of funds or revenue from governmental sources such as Medicare and Medicaid; compliance with applicable laws, regulations, rules and other requirements; and oversight of expenses relating to these areas.

-Review of the acceptance, receipt, allocation, expenditure or distribution, and accounting for all charitable and donor funds, grants, contributions, pledges and other resources, including compliance with all requirements, restrictions and special uses.

-Review of accounting for collaboration and joint venture arrangements, including the allocation of receipts/income and distributions/expenses between the entities.

-And, in this economic environment, review of the fair value of funds and investments, including loss of value; liquidity concerns; possible going concern issues; estimates for uncollectibles and related reserves; debt/loan covenants; and funding source uncertainties including those that relate to collaboration and joint venture arrangements.

-It is also important for the audit committee to clarify with the board what responsibilities it has, if any, for oversight of the numerous and various areas of taxation and compliance; ERISA, pension and health and welfare plans; investments; tax exempt status including fund raising, dues, solicitation, and political, campaign and lobby activities; and other areas significant to the entity.

-Discussion about audit committee membership and recruitment needs.

-Additional significant topics or issues that should be discussed.

2.  A Self-Evaluation Process and Format for Audit Committees

The following eight primary steps outline a proposed audit committee self-evaluation process that is workable for audit committees of public companies, private companies and nonprofit entities, whether using or not using, an outside facilitator.

 

Step 1. Determine the people who will be participating in the evaluation process, including the audit committee members, and other people, if any, to interview for comment.

Provide the names of the people who will participate in the evaluation process.

 

 

Step 2. Determine how the participant interviews will be conducted, individually or in a group, in person or by telephone, skype or some other means.

Provide comments or information about how the interviews will be handled with the various different people who will participate in the evaluation.

 

 

Step 3. Arrange participant individual or group interview dates and times.

Provide participant individual or group interview date and time information.

 

 

Step 4. Provide the participants with pre-interview materials and a list of possible issue or topic areas (broad and specific) for consideration and discussion. Of course, the participants can add additional issues or topics. Use this paper for that purpose.

Provide information regarding the status of disseminating the pre-interview materials.

 

 

Step 5. Have each participant provide a list of one to five, or more, issues or topic areas that the participant would specifically like to discuss during the evaluation process.

Provide comments and information regarding receipt of issues or topic areas from the self-evaluation process participants, and the respective issues or topic areas listed.

 

 

Step 6. Conduct information intake or interviews with participants individually or as a group.

Provide comments and information from the participants or the status of such – the input can be made by the participants themselves or by a facilitator during self-evaluation interviews.

 

 

Step 7. Summarize in a report format the issues and topic areas, information received, and suggestions made during the self-evaluation process.

Provide a summary in a report format.

 

 

Step 8. Provide a report back to the audit committee, and possibly conduct a committee group review of the self-evaluation process, information obtained, and suggestions made, and possible future actions or follow-up.

Provide additional comments and information about the self-evaluation process or results.

 

 

Concluding comments. I hope you have found this discussion helpful and at least a good starting point for your audit committee self-evaluation. Feel free to contact me if you are interested in discussing the audit committee self-evaluation process, or if you would like help with facilitation of committee self-evaluation at a reasonable fixed fee.

Best to you,

David Tate, Esq.

* * * * *

World Economic Forum and Big Four Draft Toward Common Metrics and Consistent Reporting of Sustainable Value Creation

I am providing two links: the first link is to the Cooley PubCo post about the January 2020 World Economic Forum in collaboration with Deloitte, EY, KPMG, and PwC draft paper titled Toward Common Metrics and Consistent Reporting of Sustainable Value Creation, and the second link is to the draft paper.

The Cooley PubCo post is a good discussion about the progress of sustainability with links to other prior posts and materials.

The draft paper is 45 pages of materials based on four primary or core metrics: Pillar 1 – Principles of Governance; Pillar 2 – Planet; Pillar 3 – People; and Pillar 4 – Prosperity. Beginning at page 26 the paper provides an Appendix: Supplemental Information on Metrics and Disclosures which further breaks down the four Pillar’s and is quite eye opening.

I seldom spend too much time posting about drafts and proposals, and I am keeping to that habit now, but I will say that it will be interesting to see if and how this progresses, and to also keep apprised of other developments in sustainability and ESG metrics and reporting.

Here is a link to the Cooley PubCo post: https://cooleypubco.com/2020/01/29/world-economic-forum-big-four-sustainability-framework/

Here is a link to the draft paper titled Toward Common Metrics and Consistent Reporting of Sustainable Value Creation: http://www3.weforum.org/docs/WEF_IBC_ESG_Metrics_Discussion_Paper.pdf

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Remember, every case and situation is different. It is important to obtain and evaluate all of the evidence that is available, and to apply that evidence to the applicable standards and laws. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this post. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly. And please also subscribe to this blog and my other blog (see below), and connect with me on LinkedIn and Twitter.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

I am also the Chair of the Business Law Section of the Bar Association of San Francisco.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

 

 

 

Forwarding Stanford research re Loosey-goosey governance four misunderstood terms in corporate governance.

The following is a link to a recent discussion posted by Stanford in which the authors discuss four aspects of or terms used in corporate governance; however, additionally, the paper also at least references in part many additional possible aspects of each: “good governance,” “board oversight,” “pay for performance,” and “sustainability.”

https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-closer-look-79-loosey-goosey-governance.pdf

—————————————————————

Remember, every case and situation is different. It is important to obtain and evaluate all of the evidence that is available, and to apply that evidence to the applicable standards and laws. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this post. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly. And please also subscribe to this blog and my other blog (see below), and connect with me on LinkedIn and Twitter.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

I am also the Chair of the Business Law Section of the Bar Association of San Francisco.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

My law practice primarily involves the following areas and issues:

Probate Court Disputes and Litigation

  • Trust and estate disputes and litigation, and contentious administrations representing fiduciaries and beneficiaries; elder abuse; power of attorney disputes; elder care and nursing home abuse; conservatorships; claims to real and personal property; and other related disputes and litigation.

Business and Business-Related Disputes and Litigation: Private, Closely Held, and Family Businesses; Public Companies; and Nonprofit Entities

  • Business v. business disputes including breach of contract; unlawful, unfair and fraudulent business practices; fraud, deceit and misrepresentation; unfair competition; licensing agreements, breach of the covenant of good faith and fair dealing; etc.
  • Misappropriation of trade secrets
  • M&A disputes
  • Founder, officer, director and board, investor, shareholder, creditor, VC, control, governance, decision making, fiduciary duty, conflict of interest, independence, voting, etc., disputes
  • Buy-sell disputes
  • Funding and share dilution disputes
  • Accounting, lost profits, and royalty disputes and damages
  • Access to corporate and business records disputes
  • Employee, employer and workplace disputes and processes, discrimination, whistleblower and retaliation, harassment, defamation, etc.

Investigations and Governance

  • Corporate and business internal investigations
  • Board, audit committee and special committee governance and processes, disputes, conflicts of interest, independence, culture, ethics, etc.

The following are copies of the tables of contents of three of the more formal materials that I have written over the years about accounting/auditing, audit committees, and related legal topics – Accounting and Its Legal Implications was my first formal effort, which resulted in a published book that had more of an accounting and auditing focus; Chapter 5A, Audit Committee Functions and Responsibilities, for the California Continuing Education of the Bar has a more legal focus; and the most recent Tate’s Excellent Audit Committee Guide (February 2017) also has a more legal focus:

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

The following are other summary materials that you might find useful:

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

From a prior blog post which you can find at https://wp.me/p75iWX-dk if the below scan is too difficult to read:

* * * * *

AUDIT COMMITTEE SELF-EVALUATION

David W. Tate

Attorney at Law

Certified Public Accountant (inactive California)

Copyright 2019 David W. Tate (however, you are authorized to download and print these materials for your use, and to also pass them to other people who would be interested)

BLOGS

D&O, Audit Committees, Risk Management, Compliance, Investigations & Governance: http://auditcommitteeupdate.com

Trust, Estate, Conservatorship & Elder Abuse Litigation: http://californiaestatetrust.com

Linkedin: http://www.linkedin.com/in/davetateesq

Twitter: http://twitter.com/davidtateesq

 

Self-evaluation is an important board and committee activity, and can be very helpful if done properly.

A.  Introduction and Overview

The following discussion covers audit committee self-evaluation and provides processes that you can use. As noted elsewhere in these materials, although many board and audit committee functions, responsibilities and tasks are specified by statute, regulation, rule or pronouncement, board and audit committee member standards of care remain significantly dependent on due diligence and prudent judgment.

Boards and audit committees of various entities are required by law, regulation or rule to conduct annual committee self-evaluations; however, it is worthwhile for boards and audit committees of all public and private companies and nonprofit entities to conduct self-evaluations. Board and audit committee jobs are challenging, ongoing, and technical in nature, and require the members to significantly interact with many people in different capacities within and outside of the entity. It only makes sense that both boards and audit committees should at least once each year take time to step back and review, evaluate and make improvements to their manners of operation, and also consider helpful actions that can be taken by other people with whom the boards and audit committees interact. Self-evaluation will be worthwhile even if it results in improving only one area of operation.

Board and audit committee responsibilities originate from several different sources at least including (1) activities and responsibilities that boards or audit committees voluntarily undertake or that are delegated to them; (2) the business judgment rule; (3) the specific laws, regulations and rules that are applicable to the entity’s directors and audit committee members; (4) the wording of the board and audit committee charters, if there are charters; (5) shareholder and stakeholder expectations, and (6) for audit committees, accounting and auditing pronouncements relating to the outside auditor’s activities.

Prudent board and audit committee processes and diligence are also important to reduce member and entity liability and reputation risk. An increasing number of cases hold that board and audit committee members can be liable for failure to exercise sufficient diligence, failure to spot and respond to red flags, and failure to take action. Active board, committee and corporate diligence tend to demonstrate prudent business judgment and negate allegations of recklessness, improper intent, intentional wrongdoing, or “scienter” such as in the context of securities litigation, thus reducing the risk of securities liability and damages. In the context of audit committee activities, potential entity, board, and audit committee member liability typically arises in the context of alleged improper accounting practices, written and oral public misrepresentations (such as with respect to financial matters), and improper employment practices.

Although not required, there can be advantages to having a facilitator conduct an interactive interview approach to the self-evaluation process, but without performance grading or rating: it can be difficult to construct a questionnaire with standardized questions that would be similarly understood by each of the participants in the self-evaluation process; different people use different rating scales; different people express responses in different manners; and certain important issues will change from year to year. A facilitated approach may encourage better discussion and comment, compilation, continuity, explanation, and follow-up. Contact me if you are interested in committee self-evaluation assistance at a reasonable fixed fee.

Issues and topic areas to consider during the self-evaluation process will naturally vary from entity to entity, and from board and audit committee to board and audit committee. Thus, to stimulate discussion, below for both boards and audit committees I have provided lists of potential broad issues or topic areas to consider for discussion and evaluation, including both successes and possible improvements; and I have also outlined processes to assist your board and audit committee self-evaluation processes.

B.  Audit Committee Self-Evaluation

1.  Sample List of Issues and Topics to Consider for Audit Committee Self-Evaluation

The following is a list of issues and topic areas to consider for discussion and evaluation. The list is intended to help trigger thought processes, but, of course, is not exhaustive as areas of discussion and evaluation will vary from entity to entity, and from committee to committee. The following list is not intended to and does not suggest that each or any of the below issues and topics must be considered or covered and is not a checklist – instead, if your audit committee is required to conduct a specific evaluation process or to cover certain specific issues and topics, you will need to separately consider the specific requirements, if any, for your audit committee and its evaluation process pursuant to law, regulation or rule. In that regard, please also see the disclaimer and limitations at the beginning of these materials.

-Audit committee meeting agenda preparation and dissemination process.

-Committee member independence and situational independence, financial literacy, experience and expertise.

-Committee member access to information and/or education pertinent to the functions and responsibilities of the audit committee. Are the needs of the committee members being met, so that they are sufficiently knowledgeable and educated about the company or nonprofit and its industry; relevant significant accounting and auditing issues; relevant legal matters; internal controls, risk assessment and management; governance; and new developments in those and other areas?

-Committee and committee member interactions, including interaction between committee members, and between the committee and the board, the CEO, the CFO, the outside auditor, the internal auditor, legal counsel, compliance and ethics, HR, consultants, and other people.

-The committee’s processes for identifying and spotting issues, evaluation and decision making.

-The contents of the audit committee charter, and a mutual understanding of the audit committee’s responsibilities and tasks. The charter is a requirement for public companies, and is a good idea for many private companies and nonprofit entities. The charter is a prudent document to identify and clarify the audit committee’s responsibilities. In addition to the committee itself, it is important for the board, the executive officers, and other stakeholders to have a correct understanding about the committee’s responsibilities and limitations, and the extent to which state or local jurisdiction, U.S. and international requirements and responsibilities apply or may apply to your audit committee.

-Selection of the outside auditor; audit planning; review of the performance of the outside auditor; and review of the quarterly review and annual audit report and process (or compilation if appropriate).

-Review of recent developments relating to the business judgment rule, standard of care and acceptable reliance on other people.

-Review of accounting and financial internal and fraud/embezzlement related controls and processes, risk assessment and management, possible entity and individual liability and reputation risk exposure; and compliance assessment and management relating to laws, regulations, and rules that are within the scope of the audit committee’s functions and responsibilities including issues relating to the Foreign Corrupt Practices Act.

– Review of the accounting department, and accounting and financial reporting for transactions including all of the subcomponents such as principles and policies applied (quality not just acceptability); judgments, estimates and reserves; timing and cutoff procedures; off balance sheet transactions; related party transactions; contingencies and liabilities; revenue recognition; expenses; inventories; goodwill; insider trading; and other matters relating to accounting and financial statement reports.

-Implementing revenue recognition rules, and other important, new or changing accounting principles.

-Review of internal investigation processes, procedures and needs.

-Review of the financial and internal audit functions, and how they can be helpful to the audit committee in the performance of its responsibilities and tasks.

-Review of risk management and uncertainty issues, practices and processes that are within the scope of the audit committee’s function and responsibilities.

-Implementing COSO 2013 or other appropriate processes.

-Documenting and reporting the audit committee’s activities and minutes.

-The audit committee’s use of attorneys and consultants.

-The company’s investor communication processes.

-Whistleblower, ethics, anonymous reporting and complaint handling processes to the extent that the reporting is within the scope of the audit committee’s function and responsibilities.

-Document retention policies.

-Review of the compliance and ethics function and processes that are within the scope of the audit committee’s responsibilities, and how they can be helpful to the audit committee in the performance of its responsibilities and tasks.

-Governance, including tone at the top, financial leadership, transparency and appearance.

-Review of employer, employee and workplace processes, culture, safety, and disciplinary practices that are within the scope of the audit committee’s function and responsibilities.

-Review of tax compliance and reporting issues that are within the scope of the audit committee’s function and responsibilities.

-Review of cybersecurity and internet security issues that are within the scope of the audit committee’s function and responsibilities.

-Insurance.

-Review of pension and health plan related issues that are within the scope of the audit committee’s function and responsibilities.

-Review of information privacy issues, practices and processes that are within the scope of the audit committee’s function and responsibilities.

-Review of asset protection, IP, trade secret, etc. practices to the extent that they are within the audit committee’s function and responsibilities.

-Review of environmental issues and safety that are within the scope of the audit committee’s function and responsibilities.

-Review of product and consumer safety issues, practices and processes that are within the scope of the audit committee’s function and responsibilities.

-Review of billing and accounting relating to the receipt of funds or revenue from governmental sources such as Medicare and Medicaid; compliance with applicable laws, regulations, rules and other requirements; and oversight of expenses relating to these areas.

-Review of the acceptance, receipt, allocation, expenditure or distribution, and accounting for all charitable and donor funds, grants, contributions, pledges and other resources, including compliance with all requirements, restrictions and special uses.

-Review of accounting for collaboration and joint venture arrangements, including the allocation of receipts/income and distributions/expenses between the entities.

-And, in this economic environment, review of the fair value of funds and investments, including loss of value; liquidity concerns; possible going concern issues; estimates for uncollectibles and related reserves; debt/loan covenants; and funding source uncertainties including those that relate to collaboration and joint venture arrangements.

-It is also important for the audit committee to clarify with the board what responsibilities it has, if any, for oversight of the numerous and various areas of taxation and compliance; ERISA, pension and health and welfare plans; investments; tax exempt status including fund raising, dues, solicitation, and political, campaign and lobby activities; and other areas significant to the entity.

-Discussion about audit committee membership and recruitment needs.

-Additional significant topics or issues that should be discussed.

2.  A Self-Evaluation Process and Format for Audit Committees

The following eight primary steps outline a proposed audit committee self-evaluation process that is workable for audit committees of public companies, private companies and nonprofit entities, whether using or not using, an outside facilitator.

 

Step 1. Determine the people who will be participating in the evaluation process, including the audit committee members, and other people, if any, to interview for comment.

Provide the names of the people who will participate in the evaluation process.

 

 

Step 2. Determine how the participant interviews will be conducted, individually or in a group, in person or by telephone, skype or some other means.

Provide comments or information about how the interviews will be handled with the various different people who will participate in the evaluation.

 

 

Step 3. Arrange participant individual or group interview dates and times.

Provide participant individual or group interview date and time information.

 

 

Step 4. Provide the participants with pre-interview materials and a list of possible issue or topic areas (broad and specific) for consideration and discussion. Of course, the participants can add additional issues or topics. Use this paper for that purpose.

Provide information regarding the status of disseminating the pre-interview materials.

 

 

Step 5. Have each participant provide a list of one to five, or more, issues or topic areas that the participant would specifically like to discuss during the evaluation process.

Provide comments and information regarding receipt of issues or topic areas from the self-evaluation process participants, and the respective issues or topic areas listed.

 

 

Step 6. Conduct information intake or interviews with participants individually or as a group.

Provide comments and information from the participants or the status of such – the input can be made by the participants themselves or by a facilitator during self-evaluation interviews.

 

 

Step 7. Summarize in a report format the issues and topic areas, information received, and suggestions made during the self-evaluation process.

Provide a summary in a report format.

 

 

Step 8. Provide a report back to the audit committee, and possibly conduct a committee group review of the self-evaluation process, information obtained, and suggestions made, and possible future actions or follow-up.

Provide additional comments and information about the self-evaluation process or results.

 

 

Concluding comments. I hope you have found this discussion helpful and at least a good starting point for your audit committee self-evaluation. Feel free to contact me if you are interested in discussing the audit committee self-evaluation process, or if you would like help with facilitation of committee self-evaluation at a reasonable fixed fee.

Best to you,

David Tate, Esq.

* * * * *

 

A link to Cooleypubco.com, plus my comments (large- v. mid- v. small-cap?): How will companies and CEOs meet the challenges of corporate social responsibility?

I (of course) follow articles and discussions about possible future developments so that I have a feeling about the pulse of where things might be going; however, I seldom post about “future” possible developments because to a certain extent they are speculative in nature both as to timing and whether they will in fact actually occur at all and in what form. But I have included a link below to a December 20, post on Cooleypubco.com that I find to be a worthwhile discussion about several topics including the recent Business Roundtable Statement on the Purpose of a Corporation, ESG, human capital, and CEO compensation, and how they are, or might be, or might not be changing. The discussion also contains many useful links to other prior Cooleypubco.com posts for additional background information.

As I usually don’t post about possible future developments, I have only one direct comment to add, but I believe it is an important comment: aren’t there distinctions, differences and perhaps limitations to be noted about whether and how these issues and possible developments might be, or will be, or even perhaps practically can or cannot be applied in the context of large-cap v. mid-cap v. small-cap companies? So, for example, should we also discuss how would it be expected that a small-cap or mid-cap company and its executive officers and board will be able to meet certain requirements when compared to what a large-cap company with its much greater resources might be able to accomplish?

Here is a link to the Cooleypubco.com post: https://cooleypubco.com/2019/12/20/challenges-of-corporate-social-responsibility/#more-18603

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Remember, every case and situation is different. It is important to obtain and evaluate all of the evidence that is available, and to apply that evidence to the applicable standards and laws. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this post. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly. And please also subscribe to this blog and my other blog (see below), and connect with me on LinkedIn and Twitter.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

I am also the Chair of the Business Law Section of the Bar Association of San Francisco.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

My law practice primarily involves the following areas and issues:

Probate Court Disputes and Litigation

  • Trust and estate disputes and litigation, and contentious administrations representing fiduciaries and beneficiaries; elder abuse; power of attorney disputes; elder care and nursing home abuse; conservatorships; claims to real and personal property; and other related disputes and litigation.

Business and Business-Related Disputes and Litigation: Private, Closely Held, and Family Businesses; Public Companies; and Nonprofit Entities

  • Business v. business disputes including breach of contract; unlawful, unfair and fraudulent business practices; fraud, deceit and misrepresentation; unfair competition; licensing agreements, breach of the covenant of good faith and fair dealing; etc.
  • Misappropriation of trade secrets
  • M&A disputes
  • Founder, officer, director and board, investor, shareholder, creditor, VC, control, governance, decision making, fiduciary duty, conflict of interest, independence, voting, etc., disputes
  • Buy-sell disputes
  • Funding and share dilution disputes
  • Accounting, lost profits, and royalty disputes and damages
  • Access to corporate and business records disputes
  • Employee, employer and workplace disputes and processes, discrimination, whistleblower and retaliation, harassment, defamation, etc.

Investigations and Governance

  • Corporate and business internal investigations
  • Board, audit committee and special committee governance and processes, disputes, conflicts of interest, independence, culture, ethics, etc.

The following are copies of the tables of contents of three of the more formal materials that I have written over the years about accounting/auditing, audit committees, and related legal topics – Accounting and Its Legal Implications was my first formal effort, which resulted in a published book that had more of an accounting and auditing focus; Chapter 5A, Audit Committee Functions and Responsibilities, for the California Continuing Education of the Bar has a more legal focus; and the most recent Tate’s Excellent Audit Committee Guide (February 2017) also has a more legal focus:

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

The following are other summary materials that you might find useful:

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

From a prior blog post which you can find at https://wp.me/p75iWX-dk if the below scan is too difficult to read:

* * * * *

AUDIT COMMITTEE SELF-EVALUATION

David W. Tate

Attorney at Law

Certified Public Accountant (inactive California)

Copyright 2019 David W. Tate (however, you are authorized to download and print these materials for your use, and to also pass them to other people who would be interested)

BLOGS

D&O, Audit Committees, Risk Management, Compliance, Investigations & Governance: http://auditcommitteeupdate.com

Trust, Estate, Conservatorship & Elder Abuse Litigation: http://californiaestatetrust.com

Linkedin: http://www.linkedin.com/in/davetateesq

Twitter: http://twitter.com/davidtateesq

 

Self-evaluation is an important board and committee activity, and can be very helpful if done properly.

A.  Introduction and Overview

The following discussion covers audit committee self-evaluation and provides processes that you can use. As noted elsewhere in these materials, although many board and audit committee functions, responsibilities and tasks are specified by statute, regulation, rule or pronouncement, board and audit committee member standards of care remain significantly dependent on due diligence and prudent judgment.

Boards and audit committees of various entities are required by law, regulation or rule to conduct annual committee self-evaluations; however, it is worthwhile for boards and audit committees of all public and private companies and nonprofit entities to conduct self-evaluations. Board and audit committee jobs are challenging, ongoing, and technical in nature, and require the members to significantly interact with many people in different capacities within and outside of the entity. It only makes sense that both boards and audit committees should at least once each year take time to step back and review, evaluate and make improvements to their manners of operation, and also consider helpful actions that can be taken by other people with whom the boards and audit committees interact. Self-evaluation will be worthwhile even if it results in improving only one area of operation.

Board and audit committee responsibilities originate from several different sources at least including (1) activities and responsibilities that boards or audit committees voluntarily undertake or that are delegated to them; (2) the business judgment rule; (3) the specific laws, regulations and rules that are applicable to the entity’s directors and audit committee members; (4) the wording of the board and audit committee charters, if there are charters; (5) shareholder and stakeholder expectations, and (6) for audit committees, accounting and auditing pronouncements relating to the outside auditor’s activities.

Prudent board and audit committee processes and diligence are also important to reduce member and entity liability and reputation risk. An increasing number of cases hold that board and audit committee members can be liable for failure to exercise sufficient diligence, failure to spot and respond to red flags, and failure to take action. Active board, committee and corporate diligence tend to demonstrate prudent business judgment and negate allegations of recklessness, improper intent, intentional wrongdoing, or “scienter” such as in the context of securities litigation, thus reducing the risk of securities liability and damages. In the context of audit committee activities, potential entity, board, and audit committee member liability typically arises in the context of alleged improper accounting practices, written and oral public misrepresentations (such as with respect to financial matters), and improper employment practices.

Although not required, there can be advantages to having a facilitator conduct an interactive interview approach to the self-evaluation process, but without performance grading or rating: it can be difficult to construct a questionnaire with standardized questions that would be similarly understood by each of the participants in the self-evaluation process; different people use different rating scales; different people express responses in different manners; and certain important issues will change from year to year. A facilitated approach may encourage better discussion and comment, compilation, continuity, explanation, and follow-up. Contact me if you are interested in committee self-evaluation assistance at a reasonable fixed fee.

Issues and topic areas to consider during the self-evaluation process will naturally vary from entity to entity, and from board and audit committee to board and audit committee. Thus, to stimulate discussion, below for both boards and audit committees I have provided lists of potential broad issues or topic areas to consider for discussion and evaluation, including both successes and possible improvements; and I have also outlined processes to assist your board and audit committee self-evaluation processes.

B.  Audit Committee Self-Evaluation

1.  Sample List of Issues and Topics to Consider for Audit Committee Self-Evaluation

The following is a list of issues and topic areas to consider for discussion and evaluation. The list is intended to help trigger thought processes, but, of course, is not exhaustive as areas of discussion and evaluation will vary from entity to entity, and from committee to committee. The following list is not intended to and does not suggest that each or any of the below issues and topics must be considered or covered and is not a checklist – instead, if your audit committee is required to conduct a specific evaluation process or to cover certain specific issues and topics, you will need to separately consider the specific requirements, if any, for your audit committee and its evaluation process pursuant to law, regulation or rule. In that regard, please also see the disclaimer and limitations at the beginning of these materials.

-Audit committee meeting agenda preparation and dissemination process.

-Committee member independence and situational independence, financial literacy, experience and expertise.

-Committee member access to information and/or education pertinent to the functions and responsibilities of the audit committee. Are the needs of the committee members being met, so that they are sufficiently knowledgeable and educated about the company or nonprofit and its industry; relevant significant accounting and auditing issues; relevant legal matters; internal controls, risk assessment and management; governance; and new developments in those and other areas?

-Committee and committee member interactions, including interaction between committee members, and between the committee and the board, the CEO, the CFO, the outside auditor, the internal auditor, legal counsel, compliance and ethics, HR, consultants, and other people.

-The committee’s processes for identifying and spotting issues, evaluation and decision making.

-The contents of the audit committee charter, and a mutual understanding of the audit committee’s responsibilities and tasks. The charter is a requirement for public companies, and is a good idea for many private companies and nonprofit entities. The charter is a prudent document to identify and clarify the audit committee’s responsibilities. In addition to the committee itself, it is important for the board, the executive officers, and other stakeholders to have a correct understanding about the committee’s responsibilities and limitations, and the extent to which state or local jurisdiction, U.S. and international requirements and responsibilities apply or may apply to your audit committee.

-Selection of the outside auditor; audit planning; review of the performance of the outside auditor; and review of the quarterly review and annual audit report and process (or compilation if appropriate).

-Review of recent developments relating to the business judgment rule, standard of care and acceptable reliance on other people.

-Review of accounting and financial internal and fraud/embezzlement related controls and processes, risk assessment and management, possible entity and individual liability and reputation risk exposure; and compliance assessment and management relating to laws, regulations, and rules that are within the scope of the audit committee’s functions and responsibilities including issues relating to the Foreign Corrupt Practices Act.

– Review of the accounting department, and accounting and financial reporting for transactions including all of the subcomponents such as principles and policies applied (quality not just acceptability); judgments, estimates and reserves; timing and cutoff procedures; off balance sheet transactions; related party transactions; contingencies and liabilities; revenue recognition; expenses; inventories; goodwill; insider trading; and other matters relating to accounting and financial statement reports.

-Implementing revenue recognition rules, and other important, new or changing accounting principles.

-Review of internal investigation processes, procedures and needs.

-Review of the financial and internal audit functions, and how they can be helpful to the audit committee in the performance of its responsibilities and tasks.

-Review of risk management and uncertainty issues, practices and processes that are within the scope of the audit committee’s function and responsibilities.

-Implementing COSO 2013 or other appropriate processes.

-Documenting and reporting the audit committee’s activities and minutes.

-The audit committee’s use of attorneys and consultants.

-The company’s investor communication processes.

-Whistleblower, ethics, anonymous reporting and complaint handling processes to the extent that the reporting is within the scope of the audit committee’s function and responsibilities.

-Document retention policies.

-Review of the compliance and ethics function and processes that are within the scope of the audit committee’s responsibilities, and how they can be helpful to the audit committee in the performance of its responsibilities and tasks.

-Governance, including tone at the top, financial leadership, transparency and appearance.

-Review of employer, employee and workplace processes, culture, safety, and disciplinary practices that are within the scope of the audit committee’s function and responsibilities.

-Review of tax compliance and reporting issues that are within the scope of the audit committee’s function and responsibilities.

-Review of cybersecurity and internet security issues that are within the scope of the audit committee’s function and responsibilities.

-Insurance.

-Review of pension and health plan related issues that are within the scope of the audit committee’s function and responsibilities.

-Review of information privacy issues, practices and processes that are within the scope of the audit committee’s function and responsibilities.

-Review of asset protection, IP, trade secret, etc. practices to the extent that they are within the audit committee’s function and responsibilities.

-Review of environmental issues and safety that are within the scope of the audit committee’s function and responsibilities.

-Review of product and consumer safety issues, practices and processes that are within the scope of the audit committee’s function and responsibilities.

-Review of billing and accounting relating to the receipt of funds or revenue from governmental sources such as Medicare and Medicaid; compliance with applicable laws, regulations, rules and other requirements; and oversight of expenses relating to these areas.

-Review of the acceptance, receipt, allocation, expenditure or distribution, and accounting for all charitable and donor funds, grants, contributions, pledges and other resources, including compliance with all requirements, restrictions and special uses.

-Review of accounting for collaboration and joint venture arrangements, including the allocation of receipts/income and distributions/expenses between the entities.

-And, in this economic environment, review of the fair value of funds and investments, including loss of value; liquidity concerns; possible going concern issues; estimates for uncollectibles and related reserves; debt/loan covenants; and funding source uncertainties including those that relate to collaboration and joint venture arrangements.

-It is also important for the audit committee to clarify with the board what responsibilities it has, if any, for oversight of the numerous and various areas of taxation and compliance; ERISA, pension and health and welfare plans; investments; tax exempt status including fund raising, dues, solicitation, and political, campaign and lobby activities; and other areas significant to the entity.

-Discussion about audit committee membership and recruitment needs.

-Additional significant topics or issues that should be discussed.

2.  A Self-Evaluation Process and Format for Audit Committees

The following eight primary steps outline a proposed audit committee self-evaluation process that is workable for audit committees of public companies, private companies and nonprofit entities, whether using or not using, an outside facilitator.

 

Step 1. Determine the people who will be participating in the evaluation process, including the audit committee members, and other people, if any, to interview for comment.

Provide the names of the people who will participate in the evaluation process.

 

 

Step 2. Determine how the participant interviews will be conducted, individually or in a group, in person or by telephone, skype or some other means.

Provide comments or information about how the interviews will be handled with the various different people who will participate in the evaluation.

 

 

Step 3. Arrange participant individual or group interview dates and times.

Provide participant individual or group interview date and time information.

 

 

Step 4. Provide the participants with pre-interview materials and a list of possible issue or topic areas (broad and specific) for consideration and discussion. Of course, the participants can add additional issues or topics. Use this paper for that purpose.

Provide information regarding the status of disseminating the pre-interview materials.

 

 

Step 5. Have each participant provide a list of one to five, or more, issues or topic areas that the participant would specifically like to discuss during the evaluation process.

Provide comments and information regarding receipt of issues or topic areas from the self-evaluation process participants, and the respective issues or topic areas listed.

 

 

Step 6. Conduct information intake or interviews with participants individually or as a group.

Provide comments and information from the participants or the status of such – the input can be made by the participants themselves or by a facilitator during self-evaluation interviews.

 

 

Step 7. Summarize in a report format the issues and topic areas, information received, and suggestions made during the self-evaluation process.

Provide a summary in a report format.

 

 

Step 8. Provide a report back to the audit committee, and possibly conduct a committee group review of the self-evaluation process, information obtained, and suggestions made, and possible future actions or follow-up.

Provide additional comments and information about the self-evaluation process or results.

 

 

Concluding comments. I hope you have found this discussion helpful and at least a good starting point for your audit committee self-evaluation. Feel free to contact me if you are interested in discussing the audit committee self-evaluation process, or if you would like help with facilitation of committee self-evaluation at a reasonable fixed fee.

Best to you,

David Tate, Esq.

* * * * *

Does your government’s sustainability policy encourage and support businesses and jobs to start and stay?

Reading through a few of the local county and California sustainability policy statements, I’m not seeing policies or processes to encourage and support businesses and jobs to start and stay. Without jobs and businesses you lose your economy, people, and tax revenues to other locations. If you lose enough of them, other sustainability efforts will suffer or fail.

Below is an example of one county’s overview of its sustainability policies and efforts. No mention of businesses. Some government sustainability policies do mention businesses; however, in most or many of those circumstances the emphasis is limited to having or forcing the businesses comply with the other sustainability policies and areas – in other words, not an effort to encourage and support businesses and jobs to start and stay.

I have a different view – in addition to the environment, transportation, housing, and other areas, all of which I encourage, a government’s sustainability, ESG, and enterprise risk management (ERM) policies and efforts should specifically include encouraging and supporting businesses and jobs to start and stay.

—————————————————————

Remember, every case and situation is different. It is important to obtain and evaluate all of the evidence that is available, and to apply that evidence to the applicable standards and laws. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

I am also the Chair of the Business Law Section of the Bar Association of San Francisco.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

The following are copies of the tables of contents of three of the more formal materials that I have written over the years about accounting/auditing, audit committees, and related legal topics – Accounting and Its Legal Implications was my first formal effort, which resulted in a published book that had more of an accounting and auditing focus; Chapter 5A, Audit Committee Functions and Responsibilities, for the California Continuing Education of the Bar has a more legal focus; and the most recent Tate’s Excellent Audit Committee Guide (February 2017) also has a more legal focus:

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

The following are other summary materials that you might find useful:

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

From a prior blog post which you can find at https://wp.me/p75iWX-dk if the below scan is too difficult to read:

* * * * *

 

 

The California business judgment rule statutes for corporations, nonprofits, and religious organizations, for your ease of reading and reference

For your ease of reading and reference, the following are the California business judgment rule statutes for:

Corporations – Cal. Corp. Code §309;

Nonprofit public benefit corporations – Cal. Corp. Code §5231;

Nonprofit mutual benefit corporations – Cal. Corp. Code §7231 (and see also §7231.5); and

Nonprofit religious corporations – Cal. Corp. Code §9241 (and see also §9240(c)).

The business judgment rule is state specific – see, for example, Del. Gen. Corp. Law §141 for Delaware corporations, in addition to relevant case law.

Also note that the statutory business judgment rule differs some for corporations, nonprofit public benefit corporations, nonprofit mutual benefit corporations, and nonprofit religious corporations.

Why am I posting this information? Because the business judgment rule is a good rule for people to follow, and to consider, in public company, private business, nonprofit organization, and governmental entity settings and situations. And in this context, when I refer to “people,” I am not referring only to directors, but also to officers, managers and all people throughout the organization. Note: I am not representing that all of these people are legally required to follow the business judgment rule – indeed, the rule is merely a possible defense to liability and possibly relevant to the burden of proof for the people to which it applies and who fact follow the rule – for other people, in the context of this post I am merely suggesting that all people should consider following the rule, or at least keep it in mind as possible guidance in a multitude of public company, private business, nonprofit organization, and governmental entity settings and situations.

Also note that I underlined the provisions below that are underlined (that is, the wording below that is underlined is not underlined in the actual statute).

California Corporations Code Section 309, for corporations:

(a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

(b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following:

(1) One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented.

(2) Counsel, independent accountants or other persons as to matters which the director believes to be within such person’s professional or expert competence.

(3) A committee of the board upon which the director does not serve, as to matters within its designated authority, which committee the director believes to merit confidence, so long as, in any such case, the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances and without knowledge that would cause such reliance to be unwarranted.

(c) A person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person’s obligations as a director. In addition, the liability of a director for monetary damages may be eliminated or limited in a corporation’s articles to the extent provided in paragraph (10) of subdivision (a) of Section 204.

(Amended by Stats. 1987, Ch. 1203, Sec. 2. Effective September 27, 1987.)

California Corporations Code Section 5231, for nonprofit public benefit corporations:

(a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner that director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

(b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by:

(1) One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented;

(2) Counsel, independent accountants or other persons as to matters which the director believes to be within that person’s professional or expert competence; or

(3) A committee upon which the director does not serve that is composed exclusively of any or any combination of directors, persons described in paragraph (1), or persons described in paragraph (2), as to matters within the committee’s designated authority, which committee the director believes to merit confidence, so long as, in any case, the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances and without knowledge that would cause that reliance to be unwarranted.

(c) Except as provided in Section 5233, a person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person’s obligations as a director, including, without limiting the generality of the foregoing, any actions or omissions which exceed or defeat a public or charitable purpose to which a corporation, or assets held by it, are dedicated.

(Amended by Stats. 2009, Ch. 631, Sec. 14. (AB 1233) Effective January 1, 2010.)

California Corporations Code Section 7231, for nonprofit mutual benefit corporations:

(a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

(b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by:

(1) One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented;

(2) Counsel, independent accountants or other persons as to matters which the director believes to be within such person’s professional or expert competence; or

(3) A committee upon which the director does not serve that is composed exclusively of any or any combination of directors, persons described in paragraph (1), or persons described in paragraph (2), as to matters within the committee’s designated authority, which committee the director believes to merit confidence, so long as, in any case, the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances and without knowledge that would cause such reliance to be unwarranted.

(c) A person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person’s obligations as a director, including, without limiting the generality of the foregoing, any actions or omissions which exceed or defeat a public or charitable purpose to which assets held by a corporation are dedicated.

(Amended by Stats. 2009, Ch. 631, Sec. 24. (AB 1233) Effective January 1, 2010.)

See also Cal. Corp. Code §7231.5:

(a) Except as provided in Section 7233 or 7236, there is no monetary liability on the part of, and no cause of action for damages shall arise against, any volunteer director or volunteer executive officer of a nonprofit corporation subject to this part based upon any alleged failure to discharge the person’s duties as a director or officer if the duties are performed in a manner that meets all of the following criteria:

(1) The duties are performed in good faith.

(2) The duties are performed in a manner such director or officer believes to be in the best interests of the corporation.

(3) The duties are performed with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

(b) “Volunteer” means the rendering of services without compensation. “Compensation” means remuneration whether by way of salary, fee, or other consideration for services rendered. However, the payment of per diem, mileage, or other reimbursement expenses to a director or executive officer does not affect that person’s status as a volunteer within the meaning of this section.

(c) “Executive officer” means the president, vice president, secretary, or treasurer of a corporation or other individual serving in like capacity who assists in establishing the policy of the corporation.

(d) This section shall apply only to trade, professional, and labor organizations incorporated pursuant to this part which operate exclusively for fraternal, educational, and other nonprofit purposes, and under the provisions of Section 501(c) of the United States Internal Revenue Code.

(e) This section shall not be construed to limit the provisions of Section 7231.

(Amended by Stats. 1990, Ch. 107, Sec. 5.)

California Corporations Code Section 9241, for nonprofit religious corporations:

(a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as is appropriate under the circumstances.

(b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, in each case prepared or presented by:

(1) One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented;

(2) Counsel, independent accountants, or other persons as to matters which the director believes to be within that person’s professional or expert competence;

(3) A committee upon which the director does not serve that is composed exclusively of any or any combination of directors, persons described in paragraph (1), or persons described in paragraph (2), as to matters within the committee’s designated authority, which committee the director believes to merit confidence; or

(4) Religious authorities and ministers, priests, rabbis, or other persons whose position or duties in the religious organization the director believes justify reliance and confidence and whom the director believes to be reliable and competent in the matters presented, so long as, in any case, the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances, and without knowledge that would cause that reliance to be unwarranted.

(c) The provisions of this section, and not Section 9243, shall govern any action or omission of a director in regard to the compensation of directors, as directors or officers, or any loan of money or property to or guaranty of the obligation of any director or officer. No obligation, otherwise valid, shall be voidable merely because directors who benefited by a board resolution to pay such compensation or to make such loan or guaranty participated in making such board resolution.

(d) Except as provided in Section 9243, a person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge his or her obligations as a director, including, without limiting the generality of the foregoing, any actions or omissions which exceed or defeat any purpose to which the corporation, or assets held by it, may be dedicated.

(Amended by Stats. 2009, Ch. 631, Sec. 33. (AB 1233) Effective January 1, 2010.)

See also Cal. Corp. Code §9240(c):

(c) A director, in making a good faith determination, may consider what the director believes to be:

(1) The religious purposes of the corporation; and

(2) Applicable religious tenets, canons, laws, policies, and authority.

(Amended by Stats. 1987, Ch. 923, Sec. 1.4. Operative January 1, 1988, by Sec. 103 of Ch. 923.)

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Remember, every case and situation is different. It is important to obtain and evaluate all of the evidence that is available, and to apply that evidence to the applicable standards and laws. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

I am also the Chair of the Business Law Section of the Bar Association of San Francisco.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

The following are copies of the tables of contents of three of the more formal materials that I have written over the years about accounting/auditing, audit committees, and related legal topics – Accounting and Its Legal Implications was my first formal effort, which resulted in a published book that had more of an accounting and auditing focus; Chapter 5A, Audit Committee Functions and Responsibilities, for the California Continuing Education of the Bar has a more legal focus; and the most recent Tate’s Excellent Audit Committee Guide (February 2017) also has a more legal focus:

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

The following are other summary materials that you might find useful:

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

From a prior blog post which you can find at https://wp.me/p75iWX-dk if the below scan is too difficult to read:

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Ethical Lapses, Illegal Actions, And Corporate Governance – What Should A Board And Business Do – Forwarding Post By Scott Wornow – Chocked-Full Of Helpful Information

I am forwarding a timely and helpful discussion by Scott Wornow of the Coblentz firm in which Scott discusses situations that we now regularly see in the multi-media social, business and political news: issues and situations to consider when an executive, or the business, or a high-profile person who is associated with or linked to the business is accused of a significant unethical or illegal act or lapse of judgment. Below I have provided a link to Scott’s discussion, and I have also provided a few snapshots from Scott’s discussion. Headings contained in Scott’s discussion include, for example, topics covering Contracts and Quasi-Contracts; Morals Clauses; Fiduciary Considerations; and Regulatory; Compliance and Risk Management. Scott’s discussion covers a lot of issues in a concise and to-the-point discussion. This is a discussion that is important for all businesses including public companies, nonprofits and NGOs, private companies, and even governmental entities.

These issues can cross into many different areas including law, liability and remedial actions, social and business reputation, crisis management, investigations, internal controls, governance and leadership, “righting the ship,” culture, HR and tone at the top, enterprise risk management (ERM) processes and who has responsibility for risk management, compliance policies and processes, protecting the business’s assets pre- and post-crisis, ESG, boards and audit and risk committees, the FCPA, the new DOJ guidelines on corporate compliance programs, internal and outside audit, executive officers, directors, senior managerial officers and other professionals, and in-house counsel responsibilities and possible liability, dealing with regulatory agencies, and other areas. Also consider whether the industry in which the business operates is subject to additional specific statutes, regulations, rules, or expectations that are relevant to these topics. You will find discussions on many of these topics throughout this blog.

The following are some snapshots from Scott’s discussion (I added the yellow highlights), and below the snapshots I have provided a direct link to Scott’s full discussion.

Click on the following link to access Scott’s full discussion.

Ethical Lapses, Illegal Actions, and Corporate Governance

—————————————————————

Remember, every case and situation is different. It is important to obtain and evaluate all of the evidence that is available, and to apply that evidence to the applicable standards and laws. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

I am also the new Chair of the Business Law Section of the Bar Association of San Francisco.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

The following are copies of the tables of contents of three of the more formal materials that I have written over the years about accounting/auditing, audit committees, and related legal topics – Accounting and Its Legal Implications was my first formal effort, which resulted in a published book that had more of an accounting and auditing focus; Chapter 5A, Audit Committee Functions and Responsibilities, for the California Continuing Education of the Bar has a more legal focus; and the most recent Tate’s Excellent Audit Committee Guide (February 2017) also has a more legal focus:

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

The following are other summary materials that you might find useful:

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

From a prior blog post which you can find at https://wp.me/p75iWX-dk if the below scan is too difficult to read:

* * * * *