Volume 6, Issue 8

August 2012

I. Role of the Audit Committee is Focus of CAQ’s Latest Investor Education Video

The Center for Audit Quality’s (CAQ) third educational video explores the role of the audit committee, which oversees the company’s financial reporting process.

When all is said and done, the audit committee is an important hub for the System of Investor Protection.

“The Audit Committee” has been watched by more than 25,000 individuals since its July 25 release. Earlier videos in this series on “The System of Investor Protection” and “The Financial Statement Audit” have been viewed more than 65,000 times collectively since last October.

The latest production is narrated by External Auditor Ledger Lines and Audit Committee Chair Indy Pendent. Joining them are CFO Lotta Charts, Internal Auditor Ida Figures and Regulator Johnny Law. “Audit committees oversee the company’s financial reporting process, including whether the company has effective controls to deter and detect fraud. They must understand the company and agree with its choice of accounting policies,” Indy Pendent tells viewers. The video also explains that, among other duties, the audit committee hires and oversees the external auditor.

To view the third video, go to www.CAQForInvestors.org, a dedicated website that hosts a variety of resources for investors, including The Guide to Public Company Auditing and “Did You Know?” facts about the audit process.

II. SOX Turns 10

On the 10th anniversary of the Sarbanes-Oxley Act’s (SOX) enactment, the law’s architects told an audience in Washington, D.C. that the Act has been successful in preventing large-scale accounting fraud at public companies. “The Sarbanes-Oxley Act: The First Decade,” an hour-long conversation with former Sen. Paul Sarbanes (MD) and former Rep. Mike Oxley (OH), was moderated by Professor Mark Beasley of North Carolina State University. The event was presented on July 30 by the SEC Historical Society and sponsored by the CAQ.

Asked by Beasley if, on balance, they are satisfied by what has been accomplished as a result of the Act’s passage, Sarbanes said SOX has become part of the standard process for public companies that are listed on U.S. exchanges. “I think that has made an important contribution to providing investor protection and restoring investor confidence, which was at a very low level in the aftermath of Enron and WorldCom. It strengthened our capital markets and helped to sustain and maintain their integrity,” he observed. For his part, Oxley views the law “as an effort to try to restore investor confidence that was badly shaken with revelations of Enron and WorldCom. The tenet behind restoring investor confidence in the Act was more transparency and accountability; that was what the law was all about.”

Sarbanes is hopeful that SOX will become part of the very structure of the business world in the decades to come. “What comes out of that, of course, are higher standards and more ethical behavior to the benefit of everyone,” he told Beasley. “I think we are moving in that direction.”

Oxley made it clear that he sees no linkage between the Act and the financial crisis. Explaining that SOX addressed accounting fraud, he remarked that, “the recent financial situation was based on a lot of opaque activities and unregulated over-the-counter transactions. It was about excessive risk. At the end of the day, I think [SOX] was a different approach and a different time.”

“The Sarbanes-Oxley Act: The First Decade,” presented by the SEC Historical Society and sponsored by the CAQ, featured the authors of the 2002 law that set new or enhanced standards for all U.S. public company boards, management and public accounting firms. Shown during the program at The George Washington University are (left to right) former Rep. Mike Oxley, Professor Mark Beasley of North Carolina State University, who served as moderator, and former Sen. Paul Sarbanes.

The former lawmakers also responded to a question about recent legislation that weakens provisions of the Act (in particular, an exemption for sizable public companies from having an external auditor attest to the effectiveness of their internal control over financial reporting), with Oxley explaining that it would be interesting to see if investors who are used to getting critical information about the corporation and who will no longer have access to it are “willing to take that leap of faith.” Sarbanes added, “I am concerned about this erosion. I don’t support it.”

The program may be viewed in its entirety at: http://www.connectlive.com/events/sechistorical/.

III. CAQ Reacts to SEC’s Staff Report on IFRS

A report issued on July 13 by the staff of the U.S. Securities and Exchange Commission (SEC) on a work plan for the consideration of incorporating International Financial Reporting Standards (IFRS) into the financial reporting system for U.S. issuers shared conclusions on some key issues.

In an introduction to the report, the SEC staff stated, “Although the Staff Report is constructive and an important contribution, the Work Plan did not set out to answer the fundamental question of whether transitioning to IFRS is in the best interests of the U.S. securities markets generally and U.S. investors specifically. Additional analysis and consideration of this threshold policy question is necessary before any decision by the Commission concerning the incorporation of IFRS into the financial reporting system for U.S. issuers can occur.”

The CAQ commended the SEC staff for completing its Work Plan, remains supportive of the adoption and universal application of a single set of high quality global accounting standards and believes IFRS are best positioned to be that single set of standards.