Title: Caribbean Association of Audit Committee Members AUDIT COMMITTEES: MAKING CORPORATE GOVERNANCE WORK
1 Caribbean Association of Audit Committee
MembersAUDIT COMMITTEES MAKING CORPORATE
GOVERNANCE WORK IN THE CARIBBEAN
- Castries, St. Lucia
- June 21 22, 2007
2 AUDIT COMMITTEE FUNDAMENTALSTOPIC
- International Financial Reporting Standards
3Agenda
- Introduction to Financial Reporting and Investor
Relations - What are International Financial Reporting
Standards (IFRS) - Introduction to the Framework of Financial
Reporting - Bridging the Gap Management Accounts and
Financial Statements, - Understanding Financial Statement Assertions
- Probing Questions to ask of Management on
Financial Reporting - Closing remarks
-
4 Introduction to Financial Reporting
Investor Relations
5Introduction to Financial Reporting and Investor
Relations
IGNORANCE IS BLISS???
- Think back to the ENRON debacle..
- Who would you say was most disadvantaged by the
undoing of - ENRON?
- Who would you say was most culpable for the
demise of ENRON? - What could the investors have done differently?
- What could those charged with corporate
governance have done - differently?
- How could more timely, higher quality financial
information - have made a difference?
6Introduction to Financial Reporting and Investor
Relations
INVESTOR RELATIONS
- WHAT ARE SOME OF THE NEEDS OF INVESTORS?
- Positive returns on investments.
- Information to assist in deciding when to buy,
hold or sell an equity investment. - More quality investment options from which to
choose to increase their net worth. - Accountability from management, Boards of
Directors, Audit Committees in their stewardship. - Confidence in quality of their investments.
- Confidence in quality of financial information
relating to their investments. - Information to assess (a) the ability of the
entity to pay and provide other benefits to its
employees, (b) the security of amounts lent to
the entity, and (c) current and future
obligations (eg. Litigation, pensions, capital
commitments, etc).
7Introduction to Financial Reporting and Investor
Relations
FINANCIAL REPORTING
- WHAT IS THE MAIN OBJECTIVE OF FINANCIAL
- STATEMENTS?
- To provide information on the financial position,
- overall performance, cash flows and the entity's
ability - to adapt to changes in the economic environment
in - which it operates.
- The main objective of the financial statements is
- decision usefulness.
8Introduction to Financial Reporting and Investor
Relations
FINANCIAL REPORTING
- The 4 characteristics of the content and quality
of financial - statements are as follows
- Decision usefulness
- Qualitative factors Understandability
Comparability -
- Relevance Reliability
-
- Constraints Timeliness Cost-benefit
balance - True and Fair View
9Introduction to Financial Reporting and Investor
Relations
FINANCIAL REPORTING
- The financial reporting characteristics and
constraints are all self - explanatory. We will however take a closer look
at these - Understandability
- The information presented to the users should be
in state that it is not - confusing. There is a reasonable expectation
that financial information is generally
understood by those for whom it is prepared.
10Introduction to Financial Reporting and Investor
Relations
FINANCIAL REPORTING
- Comparability
- Users must be able to compare an entitys
financial statements - through time in order to identify trends in
financial performance. Hence - policies on recognition, measurement and
disclosure must be applied - consistently over time.
- Where an entity changes its accounting for the
recognition or - measurement of transactions, it should disclose
the change in the Basis of Accounting section of
its financial statements and follow the guidance
set out in IFRS. -
11Introduction to Financial Reporting and Investor
Relations
FINANCIAL REPORTING
- Relevance
-
- The information presented to the users is
relevant if it has the capacity to influence
users economic decisions. Relevant information
will help users to evaluate the past, present
and, importantly, the future events in an
entity.
12Introduction to Financial Reporting and Investor
Relations
FINANCIAL REPORTING
- Reliability
- The information presented to the users must
represent faithfully the effect of transactions
and events that it reflects. The true impact of
transactions and events can be compromised by the
difficulty of measuring transactions reliably.
Financial information is reliable if it is free
from material error and is complete. Information
is material if its omission or misstatement could
influence decisions that users make on the basis
of the financial statements. - Reliability is a function of several factors
- Reliability of underlying information prepared by
the Companys information (IT) system - Reliability of underlying management information
- Expertise and competence of the Companys
financial professionals - Expertise and competence of the Board of
Directors and - Expertise and competence of the Audit Committee.
13Introduction to Financial Reporting and Investor
Relations
FINANCIAL REPORTING
- The Organisation as a whole has a responsibility
to ensure the - quality of the financial information disseminated
for the - consumption of the users.
- Specifically, the following groups are
accountable for the - quality and reliability of the financial
information disseminated - Management
- Board of Directors
- Audit Committee
14 WHAT ARE INTERNATIONAL FINANCIAL REPORTING
STANDARDS (IFRS)
15What are International Financial Reporting
Standards (IFRS)?
IFRS
- International Financial Reporting Standards
(IFRS) refers to the - group of standards issued by the International
Accounting - Standards Board (IASB) as guidance in
preparation of financial - statements.
- IFRS is one of several frame works that an
organisation can adopt for the preparation of its
financial statements. E.g., in the UK there is
UK GAAP, in the USA there is US GAAP. Globally
IFRS is one of the most widely used frame-works
for the preparation of financial statements.
16What are International Financial Reporting
Standards (IFRS)?
IFRS
- The Standards provide guidance for preparers to
deal with - The recognition,
- The measurement,
- The presentation and
- The disclosure requirements for transactions and
events. - Most IFRS are intended for application across
industries. A second - tier of guidance comes from the Interpretations
developed by the - Standing Interpretations Committee, now IFRIC.
These - pronouncements clarify or interpret the standards
where the preparer community identifies the need
for improved guidance. - The IASB has issued a total of 68 exposure drafts
(EDs), 41 International Accounting Standards
(IAS), 8 International Financial Reporting
Standardsand 25 Interpretations of IAS (IFRICs).
17What are International Financial Reporting
Standards (IFRS)?
IFRS
- The focus of international standard setting is on
profit-oriented reporting entities, - including non-corporate entities such as mutual
funds. Despite concentrating on - profit-type entities, the IASB envisages that
non-profit entities in the private and - public sectors may nevertheless find its
Standards an appropriate basis for financial
reporting. - A non-profit entity that states compliance with
IFRS should, however, comply with IFRS in full. - A profit-oriented reporting entity is one that
reports to users, who rely on the - financial statements as a major source of
financial information about the entity. - IFRS are directed to the information needs of
users such as investors and potential investors,
employees, lenders, suppliers, creditors,
customers, governments and the public at large.
18What are International Financial Reporting
Standards (IFRS)?
IFRS
- The term financial statements refers to several
statements that - display different aspects of the entity's
financial performance. - Financial position is reflected in the balance
sheet and a statement of changes in shareholders'
equity. - Financial performance is reported in the income
statement and - liquidity position in the cash flow statement.
- These statements are supplemented by a series of
detailed notes.
19 Introduction to the Framework of Financial
Reporting
20INTRODUCTION TO THE FRAME-WORKOF FINANCIAL
REPORTING
International Financial Reporting Standards
- WHY IFRS?
- What GAAP is currently used by your entity?
- What is the recognised / codified frame-work of
your territory/ island/ country? - The IASBs goal is that of establishing an
accounting frame-work which can be used globally
allowing for consistency, transparency and
comparability in financial information and
overall international harmonisation.
21INTRODUCTION TO THE FRAME-WORKOF FINANCIAL
REPORTING
International Financial Reporting Standards
- WHO IS THE IASB?
- The IASB is the international standard setting
body responsible for existing - IASs, IFRSs and future standards.
- The IASB achieves its objectives primarily by
developing and publishing - IFRSs and promoting the use of those standards in
general purpose - financial statements and other financial
reporting. Other financial - reporting comprises information provided outside
financial statements that - assists in the interpretation of a complete set
of financial statements or - improves users ability to make efficient
economic decisions. - In developing IFRSs, the IASB works with national
standard-setters to - maximise the convergence of IFRSs and national
standards.
22INTRODUCTION TO THE FRAME-WORKOF FINANCIAL
REPORTING
International Financial Reporting Standards
- The IASBs objective is to require like
transactions and events to be accounted for and
reported in a like way and unlike transactions
and events to be accounted for and reported
differently, both within an entity over time and
among entities. - Consequently, the IASB intends not to permit
choices in accounting treatment. Also, the IASB
has reconsidered, and will continue to
reconsider, those transactions and events for
which IASs permit a choice of accounting
treatment, with the objective of reducing the
number of those choices.
23INTRODUCTION TO THE FRAME-WORKOF FINANCIAL
REPORTING
International Financial Reporting Standards
- WHY IFRS?
- The adoption of IFRS (encouraging international
harmonisation - convergence) is seen to have several potentially
positive affects for - regional development and institutions in
developing economies in - general, with regards to their financial
reporting. Specifically, where - financial information is prepared under a
universally understood frame-work - - Access to international financing and
investment opportunities (growth in foreign
investment) increases. - - Ability to establish linkages, partnerships,
networks, mergers, etc. (e.g., correspondent
banks, international related parties) increases
and - - Ability to comply with non local /
international financial reporting requirements
that may arise as a result of cross-border
transactions increases.
24INTRODUCTION TO THE FRAME-WORKOF FINANCIAL
REPORTING
International Financial Reporting Standards
- HOW SHOULD STANDARDS BE IMPLEMENTED?
- Once an entity adopts IFRS it must comply with
all of the Standards and - Interpretations, despite any differences that may
exist between an entitys local GAAP and IFRS.
(E.g., loan loss provision per IAS 39 versus
local Central Bank). - All changes of each individual standard must be
implemented at the same point. Selective
application of different elements within an
individual standard is not permitted.
25 Bridging the Gap Management Accounts
Financial Statements, Understanding Financial
Statement Assertions
26Bridging the Gap
Management accounts Summary
- These are primarily financial information
prepared for internal purposes only. - Management accounts are prepared for management
information purposes. - These are used for managements decision making
within the business. - These do not generally take a prescribed format.
27Bridging the Gap
Financial statements Summary
- These are primarily financial information
prepared for external purposes. - Financial statements are used by different
stakeholders for varying information purposes. - These are used for a wide range of
decision-making. - These generally take the prescribed format, as
shown below
28Bridging the Gap
Financial statements Summary
- A complete set of financial statements includes
- a balance sheet,
- an income statement,
- a statement showing either all changes in equity
or changes in equity other than those arising
from capital transactions with owners and
distributions to owners, - a cash flow statement, and
- accounting policies and explanatory notes.
- The term financial statements includes a
complete set of financial statements prepared for
an interim or annual period, and condensed
financial statements for an interim period.
29Bridging the Gap
Financial statements Summary
Underlying assumptions Financial statements
must be prepared on the accrual basis of
accounting, and on the assumption that the entity
is a going concern. The accrual basis requires
that the effects of transactions and other events
are recognised as and when they occur and not
when cash is received or paid. Financial
statements should be prepared on the assumption
that the entity is a going concern and will
continue to operate for the foreseeable future.
Hence the user can assume that the entity has
neither the intention nor the need to liquidate
or curtail materially the scale of its
activities. The going concern basis of
accounting should only be abandoned when the
entity cannot or will not continue to operate for
the foreseeable future.
30Bridging the Gap
Can the Gap be Bridged?
The characteristics of financial statements
prepared under a recognised financial reporting
frame-work, results in these being distinctive
from management accounts. There will continue
to be a gap between the level of reliance that
can be placed on management accounts (generally
low) compared to the reliance that can be placed
on financial statements once certain differences
exist. The Gap between the level of
reliability that can be placed on Management
accounts compared to Financial statements is
primarily reflective of the following - The
fact remains that management accounts are
generally not prepared within the context of a
financial reporting frame-work and - They tend
to be less reliable as there information content
is driven by the needs of management (who within
this context is usually the primary and only user
of these statements).
31Bridging the Gap
Understanding financial statement assertions
Accuracy
Completeness
Valuation Allocation
Existence/Occurrence
Cut-off
Classification Understanability Presentation
Disclosure
Rights Obligations
32Bridging the Gap
- Management is responsible for the fair
presentation of the financial statements. This
is a requirement of International Standards on
Auditing (ISA 500.5). - In representing that the financial statements are
true and fair/presented fairly, in all material
respects, in accordance with the applicable
financial reporting framework, management
implicitly makes the assertions as stipulated in
ISA (ISA 500.15). Risks of material misstatement
at an assertion level are assessed by considering
the different types of potential misstatements
that may occur. Management is expected to design
and implement controls and procedures that are
responsive to mitigating against those risks.
Can the Gap be Bridged?
33Bridging the Gap
- Assertions about classes of transactions and
events for the period under audit include - Occurrence transactions and events that have
been recorded have occurred and pertain to the
entity - Completeness all transactions and events that
should have been recorded have been recorded - Accuracy amounts and other data relating to
recorded transactions and events have been
recorded accurately - Cutoff transactions and events have been
recorded in the correct accounting period - Classification transactions and events have been
recorded in the proper accounts
34Bridging the Gap
- Assertions about account balances at the period
end include - Existence assets, liabilities and equity
interests exist - Rights and obligations the entity holds or
controls the rights to assets and liabilities are
the obligations of the entity - Completeness all assets, liabilities and equity
interests that should have been recorded have
been recorded - Valuation and allocation assets, liabilities
and equity interests are included in the
financial statements at appropriate amounts and
any resulting valuation adjustments are
appropriately recorded
35Bridging the Gap
- Assertions about presentation and disclosure
include - Occurrence and rights and obligations disclosed
events, transactions, and other matters have
occurred and pertain to the entity - Completeness all disclosures that should have
been included in the financial statements have
been included - Classification and understandability financial
information is appropriately presented and
described and disclosures are clearly expressed - Accuracy and valuation financial and other
information are disclosed fairly and at
appropriate amounts -
36 Probing questions to ask management
37Probing Questions to Ask Management
FINANCIAL STATEMENTS
- What financial reporting frame-work are the
financial statements prepared under? - Has IFRS been followed in its entirety (where
applicable)? - Has IFRS adoption been modified in any way as a
result of custom or local practice or regulation? - What are the accounting policies adopted in
preparing the financial statements? - For each balance sheet and income statement item,
which standard is applicable? Has the standard
been properly applied? - Have the accounting policies been consistently
applied on a yearly - basis?
38Probing Questions to Ask Management
FINANCIAL STATEMENTS
- What are the complex accounting issues in the
Companys financial statements? - Have all assets and liabilities whose recognition
is required by IFRS been recognised? Has all
applicable IFRSs been applied in measuring the
Companys assets and liabilities? - Have all disclosure matters required under the
following (presentation related) standards been
addressed? - - IAS 1 Presentation Disclosure (e.g. Critical
accounting estimates and judgments) - - IAS 24 Related Party Disclosure
- - IFRS 7 Financial instruments Disclosure
- Has revenue been duly reported within the context
of IAS 18?
39Probing Questions to Ask Management
MANAGEMENT INFORMATION
- Have all underlying accounts been reconciled and
reconciling items duly investigated and resolved? - Have all bank accounts been reconciled and agreed
with the Bank? - Have all suspense accounts been reconciled and
cleared out in a timely manner? - Have all provisions and accruals been properly
established within the context of IAS 37? - Has all the information in the underlying sub
ledgers been reconciled to the general ledger and
included in the accounts?
40Probing Questions to Ask Management
MANAGEMENT INFORMATION SYSTEMS
- Have there been any issues / problems during the
year with the Companys IT systems? - Has there been any upgrades or enhancements to
the Companys IT systems ? - How has internal audit been involved with the
internal control environment during the year? - Were there any weaknesses and / break-downs in
internal controls that internal audit became
aware of? How have these been remedied?
41Probing Questions to Ask Management
OTHER QUESTIONS
- Have there been any instances of regulatory non
compliance, breaches of loan covenants, litigious
exposure, etc.? - Have all balances included in the financial
statements that are based on expert information
been supported by the experts report? For
example, pensions based on IAS 19. - Have investment securities been included in the
financial statements at fair value within the
context and guidance of IAS 39? - How has fair value been determined for thinly
traded equity securities? - How has the loan loss provision been derived?
42 Closing Remarks
43 Regional Governance Committees must
take up the challenge posed by a more complex
financial reporting environment, as the
stakeholders expect more accountability and also
become more sophisticated/knowledgeable.IFRS is
a proactive move towards international
harmonisation.Lack of Local GAAP in some
territories continues to undermine regulation,
monitoring and consistency in financial
reporting. A frame-work must be followed for
consistency, transparency and comparability to be
demonstrable.A lack of knowledge and / or
expertise at the senior levels of organisations
can only undermine the decision usefulness of the
financial statements.
44 Membership on a governance committee
must be seen in a new light. This is a position
of fiduciary responsibility and where one lacks
the skill set, expertise, willingness, available
time, etc to act in a effective and efficient
manner, one should not hold such an office as
such a person would generally add no value to
achieving the objectives of a properly
functioning Audit Committee. As a Board sub
committee, the onus is on the Companys directors
to hire suitably qualified committee members!
45 OVER TO YOU!