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Audit Committees , Corporate Governance and Sarbanes-Oxley

Audit Committees , Corporate Governance and Sarbanes-Oxley. Using History to Understand the Impact on Auditing – Both Internal and External. Ross Fuerman Fall 2009. Public Company Corporate Governance in a Nutshell. Board of Directors. Market Failure in the Auditing Services Market.

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Audit Committees , Corporate Governance and Sarbanes-Oxley

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  1. Audit Committees, CorporateGovernance and Sarbanes-Oxley Using History to Understand the Impact on Auditing – Both Internal and External Ross Fuerman Fall 2009

  2. Public Company Corporate Governance in a Nutshell Board of Directors

  3. Market Failure in the AuditingServices Market

  4. "I do believe the market is a better place than the government in deciding how the market should be formed." • Joe Berardino (CEO of Andersen) stating his opposition to limits on the auditor providing nonaudit services to an audit client.

  5. Why did Berardino say these things? • Why was he behaving this way? • Why did Boards of Directors, Compensation Committees, Nomination Committees and Audit Committees malfunction? • What did Sarbanes-Oxley, the SEC and the Exchanges do to mitigate these problems in general? • Independence measures

  6. Specific Audit Committee Problems • Audit committees need to be comprised of people who are independent • Just like the Board of Directors and the other Committees • However, they also have to be comprised of people who know something about accounting and auditing

  7. Famous Audit Committee Members • Before Sarbanes-Oxley and the other reforms… • Famous athletes (like football player OJ Simpson) • Famous politicians (like Vice President Dan Quayle) • Famous generals (like Stormin’ Norman Schwarzkopf, Commander of Desert Storm)

  8. Audit Committee Attributes • All companies on any kind of US exchange must have an audit committee comprised entirely of independent directors • NYSE audit committee members must at least be "financially literate"; NASDAQ members must at least be able to read and understand fundamental financial statements • SEC says 1 member must be "financial expert" • Understand GAAP and financials • Understand GAAP re estimates, accruals & reserves • Be experienced in preparing, auditing or analysis • Understand internal controls re financial reporting • Understand audit committee functions

  9. Audit Committee Functions • Directly responsible for the appointment, compensation and oversight of the external auditor • This includes pre-approval of nonaudit services, if any, performed by the CPA firm that is the external auditor (note that certain nonaudit services are now flat out prohibited) • This includes, for NYSE companies, considering whether to periodically rotate the entire CPA firm • Establishment of complaint (confidential, anonymous) procedures re accounting, internal control or auditing

  10. The Internal AuditorCynthia Cooper, Internal Auditor of WorldCom

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