CAQ calls for ESG standards and frameworks – my view: start small and reasonably certain, but just get started now, and then move forward from there . . . .

David W. Tate, Esq., San Francisco and California – dave@tateattorney.com

I have written about ESG in prior posts. The Center for Audit Quality has now also called for the development of standards and frameworks that present ESG, and, presumably will allow (and lead to?) the auditing of ESG.

In one form or another ESG and concepts similar or relating to ESG have been discussed for years – for how many years, I don’t know, maybe 10, or 20, or 30 years in one form or another.

And it is entirely possible that these concepts will be discussed but will remain in some form of limbo for another 5 to 10 years, or longer. Or, ESG, including the auditing of ESG can start essentially immediately.

Standards exist already.

When you are looking at auditing or an audit you naturally can get into discussions about numbers or amounts that are presented on the financial statements, or notes to the financial statements, or management’s discussion and analysis, and for public companies (of which size?), private businesses (of which status and size – family owned, pre-IPO, small, mid-, or large, or simply regular closely held, etc.), nonprofits, and governmental entities, etc. As the CAQ mentions, you can also get into jurisdictional scope issues, such as statewide, countrywide, or worldwide, etc., standards.

In concept, anything and everything can be discussed, disclosed, and audited. Here’s my recommendation: start small and reasonably certain, but just get started now, and then move forward from there . . . .

I view this from an “A,” “B,” “C” approach (similar to how I view evidence in a case). “A” – this is what you already have in hand. “B” – this is what you reasonably believe exists, and that you reasonably believe you can obtain from a specifically identifiable source, but that you do not now have. “C” – this is essentially uncertain or speculative – it might well exist or should exist but don’t count on getting it.

For ESG, start with standards that exist that generally are recognized by the most influential stakeholders or authorities within a jurisdictional location whether it be local, statewide, countrywide or worldwide. Currently you might only have 8-10 “A” generally recognized standards for “E” environmental, 6-7 “A” standards for “S” social, and 3-4 “A” standards for “G” governance – and that’s fine. ESG will be developing and changing for the next 100+ years. The point is to get going with this, now, and it is possible to do so.

The following is a partial snapshot from the CAQ online discussion.

Best to you, Dave Tate, Esq. (San Francisco and California) – dave@tateattorney.com

Litigation, Governance, Administrations, Investigations, Mediator & Conflict Resolution

Mediation and Conflict Resolution Hexagon Matrix to Help Achieve Resolution and Settlement – Dave Tate, Esq.

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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 and governance committee, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

My law practice primarily involves the following areas and issues:

Trust, Estate, Probate Court, Elder and Dependent Adult, and Disability Disputes and Litigation

      • Trust and estate disputes and litigation, and contentious administrations representing fiduciaries, beneficiaries and families; 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, Business-Related, and Workplace Disputes and Litigation: Private, Closely Held, and Family Businesses; Public Companies; Nonprofit Entities; and Governmental 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.
      • Insurance coverage and bad faith.
      • Access to corporate and business records disputes.
      • Employee, employer and workplace disputes and processes, discrimination, whistleblower and retaliation, harassment, defamation, etc.

Investigations, Governance, and Responsibilities and Rights

      • Corporate, business, nonprofit and governmental internal investigations.
      • Board, audit committee, governance committee, and special committee governance and processes, disputes, conflicts of interest, independence, culture, ethics, etc.; and advising audit committees, governance committees, officers, directors, and boards.

Mediator Services and Conflict Resolution

* * * * *

One possible definition of “Governance” . . . .

One possible definition of “Governance” – from the softer side of my blogging:

“Of or relating to an entity, organization, group, or person’s authority and exercise of authority, leadership, decision-making, ability to communicate and communications, accountability, transparency, expertise, availability to be questioned or challenged, open-mindedness, and trustworthiness, and processes, style and optics relating thereto.”

Governance also is situational and transitional, and depends on the particular facts and the optics at hand.

Best to you, Dave Tate, Esq. (San Francisco and California)

———————————————————————-

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 and governance committee, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

My law practice primarily involves the following areas and issues:

Trust, Estate, Probate Court, Elder and Dependent Adult, and Disability Disputes and Litigation

      • Trust and estate disputes and litigation, and contentious administrations representing fiduciaries, beneficiaries and families; 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, Business-Related, and Workplace Disputes and Litigation: Private, Closely Held, and Family Businesses; Public Companies; Nonprofit Entities; and Governmental 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.
      • Insurance coverage and bad faith.
      • Access to corporate and business records disputes.
      • Employee, employer and workplace disputes and processes, discrimination, whistleblower and retaliation, harassment, defamation, etc.

Investigations, Governance, and Responsibilities and Rights

      • Corporate, business, nonprofit and governmental internal investigations.
      • Board, audit committee, governance committee, and special committee governance and processes, disputes, conflicts of interest, independence, culture, ethics, etc.; and advising audit committees, governance committees, officers, directors, and boards.

Mediations and Services as a Mediator

* * * * *

Comments About Going Concern Uncertainties, CAMs, Etc. – Relevant In This Economic Environment

I have pasted below my post from May 28, 2019, because of the discussion about going concern uncertainties. Obviously in this economic environment a going concern issue might be pressing for more entities than usual.

And if you are interested in CAMs (critical audit matters), the May 28, 2019, post also in part discusses CAMs and provides a link to a prior May 9, 2019, post that also discussed CAMs. Subsequent to the May 9 and 28, 2019, posts I have also provided comments about CAMs in three additional posts – those subsequent posts and links to those posts are as follows: July 17, 2019 https://wp.me/p75iWX-im, September 22, 2019 https://wp.me/p75iWX-k8, and February 22, 2020 https://wp.me/p75iWX-pl.

I don’t hear or see much in the news about disclosures about an entity’s going concern, but I have a feeling that this is going to become a bigger issue for certain public companies, their boards and audit committees, and their auditors. Evaluating going concern is a complicated topic – thus, in this post I am highlighting one aspect, but an important aspect. See, FASB ASU No. 2014-15, and subsequent materials relating thereto. I suspect that most people would conclude that evaluating a potential issue relating to going concern involves, or depending on the circumstances could involve, especially challenging, subjective, or complex auditor judgment – thus, potentially raising critical audit matters or CAMs. Click on the following link  https://wp.me/p75iWX-fr for a prior summary post about CAMs. I digress here for one comment: in regard to CAMs, one might ask, for example, “When are the circumstances of an auditor’s judgment simply ‘challenging’ v. ‘especially challenging’”?

Going concern can generally be defined as an evaluation of the entity’s expected ability to continue as an ongoing viable going concern business entity within one year after the date that its financial statements are issued (or within one year after the date that the financial statements are available to be issued, when applicable). Thus, for example, obviously for some business entities it can become a question of liquidity or liquid assets v. rate of cash burn. For the purpose of this post, I am looking at this issue only from an accounting/auditing viewpoint. Many other issues can arise, such as, for example, possible shareholder, investor, and creditor rights, and possible officer, director, and shareholder or majority shareholder liability relating thereto.

Now to the single point of this post, ASU No. 2014-15 provides that when evaluating conditions and events as to whether there is substantial doubt about an entity’s ability to continue as a going concern, the “initial” evaluation does not take into consideration the potential effect of management’s plans that have not been fully implemented as of the date that the financial statements are issued (for example, the initial evaluation might not take into consideration plans to raise capital, borrow money, restructure debt, or dispose of an asset, that have been approved but that have not been fully implemented as of the date that the financial statements are issued). Again, I digress for one comment: in the above discussion, consider, for example, how to evaluate when a matter is “approved” v. “fully implemented.”

Importantly, I note, however, that later in the going concern evaluation process, mitigating factors should be taken into consideration including, for example, the probability that management’s plans will be effectively implemented within one year after the date that the financial statements are issued, and the probability that management’s plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Thus, in the evaluation process there is a timing aspect to considering possible mitigating factors: first they are not considered, but subsequently they are considered including their probability of implementation and success. Obviously, the going concern evaluation can be or can become complicated.

Best to you, Dave Tate, Esq. (San Francisco and California)

———————————————————————-

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 and governance committee, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

My law practice primarily involves the following areas and issues:

Trust, Estate, Probate Court, Elder and Dependent Adult, and Disability 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, Business-Related, and Workplace Disputes and Litigation: Private, Closely Held, and Family Businesses; Public Companies; Nonprofit Entities; and Governmental 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, Governance, and Responsibilities and Rights

  • Corporate, business, nonprofit and governmental internal investigations
  • Board, audit committee, governance committee, and special committee governance and processes, disputes, conflicts of interest, independence, culture, ethics, etc.; and advising audit committees, governance committees, officers, directors, and boards

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 additional materials that you might find useful:

Audit Committee Self-Evaluation Process and Format (and for Boards and Other Committees) – click on the following link https://wp.me/p75iWX-sd for my March 19, 2020, post with an attachment to the discussion and paper.

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 Process and Format (and for Boards and Other Committees)

I have pasted below the introduction from my paper Audit Committee Self-Evaluation Process and Format (and for Boards and Other Committees)(please excuse the formatting which changed slightly during the copy and paste), and below this paragraph I have provided a link to a pdf of the entire paper. This is an important topic for boards, audit committees, and other committees – please do tell other people about this blog post and the paper, and feel free to print and use the paper and provide it to other people. I hope that you find this useful. You will also find a lot of additional audit committee, board, governance committee and related materials on prior posts to this blog.

Here is the link to the pdf: Audit Committee Self-Evaluation 03192020

Best to you, Dave Tate, Esq.

AUDIT COMMITTEE SELF-EVALUATION PROCESS AND FORMAT

(AND FOR BOARDS AND OTHER COMMITTEES)

 

DAVID W. TATE

Attorney at Law

Inactive Certified Public Accountant (California)


Copyright 2020 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 specifically covers audit committee self-evaluations and provides processes that you can use – this discussion can also be used for board and other committee self-evaluations and processes, such as for governance and risk committees. 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, audit committees and other committees of various entities are required by law, regulation or rule to conduct annual committee self-evaluations; however, it is worthwhile for boards, audit committees and other committees of all public and private companies and nonprofit entities to conduct self-evaluations. Board 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 boards and 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 board, audit committee, or other committee interacts. Self-evaluation will be worthwhile even if it results in improving only one area of operation.

Board and committee responsibilities originate from several different sources at least including (1) activities and responsibilities that boards or 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 committee members; (4) the wording of the board and 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 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, audit committee or other committee to board, audit committee or other 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

* * * * *

A well-written, useful, 9-page paper by Protiviti discussing sustainability and ESG developments and reporting, and what companies should be doing

I have provided below a snapshot of page 1, and below the snapshot a link to a Protiviti Bulletin discussing the evolution of sustainability, the growing importance of ESG reporting, and what companies should be doing. This 9-page Protiviti paper provides worthwhile and useful information. You will find an increasing number of posts on this blog about ESG – in the search box type ESG and click search. Dave Tate, Esq.

 

The following is a link to a pdf of the 9-page Protiviti paper: Protiviti ESG The Bulletin Issue 2 Volume VII — Sustainability Reporting — Time to Get Serious

The following is a link to Protiviti’s website: https://www.protiviti.com/US-en

—————————————————————

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.

* * * * *

2020 governance outlook (corpgov.law.harvard.edu) – with Tate’s comments added

I have provided below a link to a post on corpgov.law.harvard.edu by Friso Van der Oord and Reaa Chadha, National Association of Corporate Directors, on Saturday, February 8, 2020. The bottom line: boards (and board committees) need to continue to work toward being more strategic and forward-thinking in light of current and developing risks; be more proactive, faster thinking and faster responding; and be more transparent and accountable. These are all actions and characteristics that are here to stay – many influential people are now calling for board members to more proactively, diligently, visibly, and independently satisfy their fiduciary duties.

The following are the headings to the “five key shifts” that are discussed:

“Implications for Boards

In NACD’s most recent Blue Ribbon Commission Report, Fit for the Future, we outline five key shifts that board leaders should orchestrate to make their boards fit for purpose. These shifts can help transform how the board is composed, how it operates and interacts with the business and stakeholders, and how it holds itself accountable.

1.  Boards must engage more proactively, deeply, and frequently on entirely new and fast-changing drivers of strategy and risk.

2.  Boards must review their composition through the lens of shifting strategic needs and approach their own renewal to ensure long-term competitive advantage.

3.  Boards must adopt a more dynamic operating model and structure.

4.  Boards must be much more transparent about how they govern.

5.  Boards must hold themselves more accountable for individual-director and collective performance.”

The following is a link to the entire discussion: https://corpgov.law.harvard.edu/2020/02/08/2020-governance-outlook/

 Best to you, Dave Tate, Esq.

—————————————————————

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

 

 

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?

—————————————————————

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.

* * * * *

Forwarding from Michael Peregrine: A ‘Twist’ On Top Ten Governance Trends For 2020 – It’s a Good Read

I have provided below a link to a Forbes and McDermott Will & Emery post by Michael Peregrine titled: A ‘Twist’ On Top Ten Governance Trends for 2020. It’s a good read. As Mr. Peregrine indicates, he writes a governance trends list that is in addition to shareholder activism, cybersecurity, climate risks, and SEC regulation.

Mr. Peregrine’s additional list includes the following headings (and I have added some comments with “DT”) – please read Mr. Peregrine’s article (see the link below) as the value is in the contents, not in the headings:

-Preparing for more volatility (DT: absolutely, always)

-Emphasis on board refreshment (DT: to what extent will it happen?)

-Corporate accountability returns (DT: to what extent will it happen?)

-Re-examining purpose (DT: to what extent will it happen?)

-Emphasis on business judgment rule (DT: I hope so, including processes and governance)

-A closer focus on innovation (DT: absolutely)

-Greater emphasis on human capital (DT: and culture)

-Pushing change with compliance programs (DT: yes)

-Retooling structure and process (DT: I hope so).

Here is a link to Mr. Peregrine’s discussion https://www.forbes.com/sites/michaelperegrine/2020/01/02/a-twist-on-top-ten-governance-trends-for-2020/#7b9276016a28

Consideration also should be given to industry, types of services and products produced and provided, size of entity (pre-micro-, micro-, small-, mid-, and large-cap), and type of entity including public, private, nonprofit, and governmental.

To be fair to any such discussion, of course each of us can add to or subtract from such a list, or expand upon the length and content of the discussions. I would add, for example, review of and improvements to risk and uncertainty management processes, additional discussions about the functions and performances of the board’s committees, reviewing and improving board and board committee self-evaluation processes, reviewing and improving crisis response processes, making sure that directors have the assistance, resources and information that they need to perform their diligence and oversight (possibly including, for example, legal counsel, internal and independent audit, and executive and mid-management involvement), and reviewing and improving internal reporting, investigation, and related disciplinary or “taking subsequent action” processes.

—————————————————————

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.

* * * * *

 

 

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.

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Forwarding and Discussing – IIA, Richard Chambers’: From the Epicenter of Corporate Governance, Internal Audit Exposes Weaknesses

I have provided immediately below the link to a blog post by Richard Chambers, CEO of the Institute of Internal Auditors, in which Mr. Chambers provides comments about the new American Corporate Governance Index. Below the link to Mr. Chambers’ post, I have provided snapshots of three comments by Mr. Chambers in his post, a link that you can use to download a free copy of the American Corporate Governance Index, and a listing of the eight Principles on which the Index is based.

Here is the link to Richard Chambers’ blog post:

https://iaonline.theiia.org/blogs/chambers/2019/Pages/From-the-Epicenter-of-Corporate-Governance-Internal-Audit-Exposes-Weaknesses.aspx

Below are snapshots of the three of Mr. Chambers’ blog comments that I found most significantly interesting. The discussion in the third snapshot would raise additional issues including, for example, how does or how would internal audit actually go about auditing governance and using what criteria, who would need to be convinced to have internal audit perform a governance audit (the board, the audit committee, the CEO, etc.?), does your internal audit function currently have the expertise to audit governance, if internal audit does audit governance, what will be done with the resulting report and findings, should governance and governance criteria be identified and evaluated different depending on the size and type of the entity (such as large-cap, mid-cap, small-cap, micro-cap, public, private, nonprofit, governmental, etc.), etc.?

Snapshot 1: Board members unwilling to offer opinions contrary to the CEO – well . . . this certainly is an issue that would need to be further explored on a case by case basis.

Snapshot 2: Board members not verifying the accuracy of information they receive – again, this would need to be evaluated on a case by case basis – note, however, that the business judgment rule allows for some reasonable, trustworthy reliance.

Snapshot 3: Evaluation of governance by internal audit – see my comments above, and I have long advocated for boards and audit committees to make the best possible use of internal audit, to help the board and audit committee perform and satisfy their oversight responsibilities. Obviously the board and audit committee need to communicate their needs to internal audit, and internal audit needs to communicate its abilities, and have the experience and abilities to perform the agreed upon tasks.

The following is a link that you can use to download a free copy of the American Corporate Governance Index, followed by a listing of the eight Principles as defined by the Index. Whereas I don’t necessarily agree with each of the Principles listed or as they are described, and we definitely can discuss how the survey is performed and evaluated, whether comparisons and generalities can be made, and that governance will or can reasonably and logically vary from entity to entity, I do encourage the effort that has been made and I do hope that it is useful to promote discussions about and developments in governance and the evaluation of governance.

https://na.theiia.org/about-us/Pages/American-Corporate-Governance-Index.aspx

AMERICAN CORPORATE GOVERNANCE INDEX – EIGHT PRINCIPLES

DEFINITION

Corporate governance is the overarching set of policies, procedures, and relationships that enables an organization to establish objectives, set ethical boundaries to the acceptable means with which those objectives will be met, monitor the achievement of objectives, reward successful achievements, and discipline unsuccessful or inappropriate attempts to meet objectives, in order to keep the organization aligned with the needs and interests of its primary stakeholders.

Principle 1

Effective corporate governance requires regular and constructive interaction among key stakeholders, the board, management, internal audit, legal counsel, and external audit and other advisors.

Principle 2

The board should ensure that key stakeholders are identified and, where appropriate, stakeholder feedback is regularly solicited to evaluate whether corporate policies meet key stakeholders’ needs and expectations.

  • Key stakeholders can change over time, and as such, boards should ensure processes are in place to regularly monitor the identification of key stakeholders.
  • Key stakeholders are those who have a material impact on corporate operations, or on whom the corporate operations have a material impact.
  • Stakeholders can be external or internal and include communities affected by the company’s operations, creditors, customers, employees, regulators, shareholders, suppliers, etc.
  • When evaluating business success, the company should also evaluate its social and environmental impact and determine whether it aligns with corporate objectives and the interests of key stakeholders.

Principle 3

Board members should act in the best interest of the company and the shareholders while balancing the interests of other key external and internal stakeholders.

  • The board should exhibit sufficient independence and objectivity in fact and appearance. There should be a clear form of leadership for the board that is distinct from management. Each board member should employ healthy skepticism in meeting

his or her responsibilities and be willing to challenge the CEO and other board members constructively.

  • Board members should exhibit high integrity and competence, and provide diverse perspectives in terms of industry expertise, technical expertise, culture, and thought.
  • Board members should exhibit a commitment of time and active involvement, including preparation for and direct participation in appropriate board, committee, and shareholder meetings. They should be informed on relevant issues, particularly those involving potential or existing crises, and be available to consult with management, as needed.
  • Board members should receive ongoing education and training to perform their responsibilities, including areas of emerging risk to the company.
  • Board members should be compensated in a way that encourages alignment with key stakeholder interests.
  • Executive sessions should be held regularly and often, as they are critical in establishing an appropriate environment of objectivity and candor. These sessions should include independent directors and those outside directors who do not qualify as independent, but exclude members of management.
  • The board should undergo regular, robust evaluations and, as needed, members should be rotated (including leadership positions within the board) to ensure a balance of company-specific knowledge and new perspectives. Effective board evaluations should lead to improved governance and corporate outcomes.
  • Shareholders should have fair opportunities to nominate and regularly vote on the retention of board members.

Principle 4

The board should ensure that the company maintains a sustainable strategy focused on long-term performance and value. This includes:

  • Defining corporate objectives and approving long-term strategic goals.
  • Evaluating risks, including reputational risks, and seeking to balance risk and reward after considering all relevant stakeholders.
  • Designing management compensation to align with long-term strategic goals, regularly evaluating performance of the CEO, and overseeing management succession planning.
  • Ensuring that all employees receive adequate training and are compensated in a way that encourages achievement of corporate objectives.

Principle 5

The board should ensure that the culture of the company is healthy, regularly monitor and evaluate the company’s core culture and values, assess the integrity and ethics of senior management, and, as needed, intervene to correct misaligned corporate objectives and culture.

Principle 6

The board should ensure that structures and practices exist and are well-governed so that it receives timely, complete, relevant, accurate, and reliable information to perform its oversight effectively.

  • Each board member should have unrestricted access to management, as needed, to fulfill their responsibilities.
  • Board members have a responsibility to protect the confidentiality of non-public information.

Principle 7

The board should ensure corporate disclosures are consistently transparent and accurate, and in compliance with legal requirements, regulatory expectations, and ethical norms.

  • The board should ensure that an independent committee (an Audit Committee or equivalent) with appropriate expertise is responsible for oversight of both internal and external auditors. Internal audit should have direct and unfiltered access to this committee; it should be adequately resourced; and its purpose, authority, and responsibility should be formally defined and consistent with the International Standards for the Professional Practice of Internal Auditing.
  • The board should oversee the company’s assessment of the risk of fraud specifically and ensure that adequate controls are in place to detect and deter fraud.
  • The board should have in place processes for employees or other stakeholders to report suspected fraud or misconduct to independent members of the board without fear of retaliation.

Principle 8

Companies should be purposeful and transparent in choosing and describing their key policies and procedures related to corporate governance to allow key stakeholders an opportunity to evaluate whether the chosen policies and procedures are optimal for the specific company.

  • The board should ensure that the company regularly evaluates the full system of corporate governance to ensure that individual components are operating as expected, and that all components operate in a cohesive manner to achieve corporate objectives.
  • The board should ensure that corporate governance evaluations encourage the reporting of potential deficiencies at all levels, including within the board, without fear of retaliation.
  • The board should ensure that the company addresses any deficiencies in a timely manner.

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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:

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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.

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