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We use a combination of insurance, self-insured retention, and/or self-insurance for
a number of risks including workers™ compensation, general liability, vehicle liabil-
ity and employee-related health care benefits, a portion of which is paid by the As-
sociates. Liabilities associated with the risks that we retain are estimated in part by
considering historical claims experience, demographic factors, severity factors and
other actuarial assumptions. The estimated accruals for these liabilities could be sig-
nificantly affected if future occurrences and claims differ from these assumptions
and historical trends.

For a complete listing of our accounting policies, please see Note 1 to our consoli-
dated financial statements that appear after this discussion.54

Disagreements with the Independent Auditors55 As noted in Part II, Item
9, of the SEC annual 10-K report, a registrant is required to disclose disagreements
on accounting and financial disclosure between management and the independent
auditors. In addition, the SEC requires a registrant to file a Form 8-K and the in-
dependent auditors™ response with respect to reporting the reasons for changes in
independent auditors. This action on the part of the SEC, coupled with Statement
on Auditing Standards No. 50, “Reports on the Application of Accounting Princi-
ples,” is designed to restrict management from audit opinion shopping. Thus,
when the principal auditor™s client company requests a report on the application of
an accounting principle from another accounting firm, the reporting auditor is re-
quired to consult with the principal auditor.56 Such an auditing standard helps en-
sure the independent auditor™s independence.

Environmental Liabilities 57 The board of directors has oversight responsibil-
ity to determine that management is complying with environmental laws. In some
industries with significant environmental exposure, board committees may be

Wal-Mart Stores, Inc., 2003 Annual Report, pp. 22“23.
See Jerry E. Serlin, “Shopping Around: A Closer Look at Opinion Shopping,” Journal of Account-
ing, Auditing & Finance 9, No. 1 (Fall 1985), pp. 74“80.
Statement on Auditing Standards, No. 50, “Reports on the Application of Accounting Principles”
(New York: AICPA, 1986), par 1.
A National Priority List of potentially responsible parties (PRPs) is issued by the U.S. Environmen-
tal Protection Agency on an annual basis. See also the SEC™s SAB No. 92, “Accounting and Disclosures
Relating to Loss Contingencies,” and the AICPA™s Accounting Standard Executive Committee, State-
ment of Position (SOP) No. 96-1, “Environmental Remediation Liabilities” (New York: AICPA, 1996).
Regulatory Agencies 127

appointed to deal with the issue. Whether the full board or a committee is as-
signed this responsibility, the audit committee should determine that environ-
mental costs and liabilities are properly reflected in the financial statements and
related disclosure.
The committee may recommend to the board the establishment and monitor-
ing of an environmental auditing program. See Chapter 10 for further discussion
of this subject.

On October 15, 1992, the SEC adopted
Executive Compensation Disclosure
amendments to the executive officer and director compensation disclosure re-
quirements applicable to proxy statements, registration statements, and periodic
reports (e.g., 10-Qs and 10-K) under the Securities Act of 1933 and the Securities
Exchange Act of 1934 (Release Nos. 33-6962, 34-31327, and IC-19032 applica-
ble to Regulation S-K).58 In sum, executive compensation disclosures for the chief
executive officer and the four other highest-paid executives are now required.
Although the compensation committee of the board of directors has oversight
responsibility for executive compensation plans, the audit committee should be as-
sured that management has complied with the SEC™s new disclosure requirements.
The National Association of Corporate Directors has issued the Report of the
NACD Blue Ribbon Commission on Executive Compensation: Guidelines for Cor-
porate Directors. The disclosure requirements are summarized as follows:

A summary table containing detailed information on the total compensation for the
last three years of the CEO and the four other most highly paid executives (whose an-
nual compensation exceeds $100,000”up from the $60,000 in effect since 1983).
A compensation committee report describing the factors affecting the committee™s de-
cisions regarding executive compensation, and the rationale for CEO compensation.
A performance graph comparing the company™s five-year shareholder returns with
those of other companies.
Option/SAR tables disclosing various information regarding stock options and stock
appreciation rights (SARs) including potential appreciation rates and the unrealized
gains on outstanding options.
Other revisions require expanded disclosure of beneficial ownership of a registrant™s
securities by its executives, incentive stock option repricing, potential lack of inde-
pendence of compensation committee members, and details of new compensation
plans subject to shareholder approval. Required tables and graphs are included in the
Appendices of this report.59

Securities and Exchange Commission, “Executive Compensation Disclosure,” Title 17, Code of Fed-
eral Regulations, Parts 228, 299, 240, and 249 (October 1992). In November 1993, the SEC amended
its executive compensation disclosure rules to address such matters as executives covered, restricted
stock holdings, option valuations, and peer group index. See the Federal Register 58, No. 227 (No-
vember 29, 1993), pp. 63010 and 63017, for further details.
National Association of Corporate Directors, Report of the NACD Blue Ribbon Commission on Ex-
ecutive Compensation: Guidelines for Corporate Directors (Washington, DC: NACD, 1993), p. 21.
See also Report of the NACD Blue Ribbon Commission Executive Compensation: Guidelines for
Corporate Directors (Washington DC: NACD, 2000); the NASD™s Compensation Committee Manual
(Washington DC: NACD, 2002); and James Redda, The Compensation Committee Handbook (New
York: John Wiley & Sons, 2000).
128 The External Users of Accounting Information

The major objective of the FTC is to police the
Federal Trade Commission
business community to eliminate unfair methods of competition. Essentially, the
FTC is involved with the enforcement of the antitrust laws, such as the Sherman and
Clayton acts. Furthermore, the FTC administers the laws concerning the Robinson-
Patman Act. The Robinson-Patman Act prohibits big businesses from exploiting
their small competitors through price discrimination and quantity discounts. Thus
the FTC needs accounting information regarding distribution costs and related prices
to ensure that the corporation is not engaged in unlawful pricing practices.

Role of the Audit Committee
Since the corporate annual report and the SEC annual 10-K report must be exam-
ined by the independent public accountants, the audit committee should review
these reports with the accountants from a compliance perspective. For example,
the audit committee should be concerned with the protection of the corporation™s
interest against penalties or fines regarding any noncompliance with the laws,
such as environmental protection laws. Such penalties can be very costly and re-
duce the earnings performance of the enterprise. Indeed, there are a myriad of
complex laws and regulations affecting the corporation. The members of the com-
mittee may not have the necessary legal expertise to determine if the firm is com-
plying with the laws. Accordingly, it may be advisable for the committee to retain
the corporation™s in-house counsel or outside legal counsel to gain assurance re-
garding management™s compliance. Such assistance will enable the committee to
be aware of the effect of certain laws on the corporation and thus avoid expensive
or embarrassing fines or penalties. More specifically, the audit committee must
make an informed judgment on management™s efforts to comply with the laws
through a review of the corporation™s history of compliance and the necessary
managerial corrective actions. Thus the committee can minimize the firm™s non-
compliance liability based on the above procedures.

Importance of Other Outside Constituencies
With respect to the significance of the other external users of accounting informa-
tion, the American Assembly concluded that:

[e]mployees should be regarded as a crucial part of the constituency of the corpora-
tion. Employee interests will be better served by various means, such as collective
bargaining, direct communications, and participative management approaches rather
than by direct employee representation on boards of directors
Consumers have large roles to play. They act as advance guideposts to the needs and
expectations of the marketplace. Corporations which enhance their long-term prof-
itability should build relationships with future customers.60

The American Assembly, Corporate Governance in America, Pamphlet 54 (New York: The Ameri-
can Assembly, 1978), p. 6.
Other Outside Constituencies 129

Thus it may be appropriate for corporate management to share the accounting
information with the above groups, since such groups not only provide services
but also receive the goods and services from the enterprise. Because such groups
are vital to the successful operation of the corporation, management should con-
sider sharing its accounting information concerning the economic performance of
the enterprise. Although there is no uniform pattern in communicating financial
accounting information to employees, it may be desirable to consider a special an-
nual report for employees. Similarly, some managements may consider making
available a copy of the annual report to special consumer interest groups.
Through an overview of the importance and the need for accounting informa-
tion, the audit directors can contribute to improving the effectiveness of the audit
function in society. Moreover, the Business Roundtable noted that:

The central corporate governance point to be made about a corporation™s stakehold-
ers beyond the shareholder is that they are vital to the long-term successful economic
performance of the corporation. Some argue that only the interests of the sharehold-
ers should be considered by directors. The thrust of history and law strongly supports
the broader view of the directors™ responsibility to carefully weigh the interests of all
stakeholders as part of their responsibility to the corporation or to the long-term in-
terests of its shareholders.
Resolving the potentially differing interests of various stakeholders and the best
long-term interest of the corporation and its shareholders involves compromises and
tradeoffs which often must be made rapidly. It is important that all stakeholder in-
terests be considered, but impossible to assure that all will be satisfied because com-
peting claims may be mutually exclusive.61

The Need for Accounting Information
A corporation™s stakeholders need accounting information in order to judge man-
agement™s economic decisions and performance. For example, employees are in-
terested in the solvency position of the corporation since they expect to receive
wages in return for their services. Moreover, they are interested in the enterprise™s
image as a corporate citizen of society. Similarly, consumers need accounting in-
formation regarding the present and future economic status of the corporation be-
cause they rely on the enterprise to provide the necessary goods and services to the

Role of the Audit Committee
To enhance the communication process between the enterprise and stakeholder
groups, the committee should consult with the executive in charge of the public re-
lations program. For example, the audit directors should satisfy themselves that
the information in any special annual reports to employees is consistent with the
financial information in the annual or quarterly reports. In addition, the audit com-
mittee should review management™s commentary in the special reports in view of

The Business Roundtable, Corporate Governance and American Competitiveness, p. 4.
130 The External Users of Accounting Information

the quantitative characteristics of financial reporting. As a participative manage-
ment approach, the committee may suggest an employee report whereby the fi-
nancial information is related to each employee. Such reports enhance not only the
employee™s perception of the organization but also his or her work attitude since
both corporate management and the employees are contributing to the organiza-
tional goals.
Furthermore, the audit directors should determine that adequate management
controls exist with respect to the release of special financial reports to the general
public, such as newspaper and other releases, to ensure that such releases are ap-
propriate and consistent with the company™s policies and plans. In some instances,
it may be desirable to clear such distribution of financial information with the
audit committee.

AICPA Position
The board of directors of the American Institute of Certified Public Accountants
reported a strategy for making financial reports more useful:

Financial decision-makers confront change on a daily basis. The integration of finan-
cial markets, the impact of technology, the entry of new competitors, the introduction
of new and more complex financial products”all of these have made investing a dif-
ferent business than it was just a few years ago. These innovations automatically
bring with them changes in the kind of financial information needed. If the account-
ing profession is to fulfill its obligation to the public, it must not remain static.
The AICPA has launched an effort to ensure that financial reporting moves with the
times. Our Special Committee on Financial Reporting is looking at far-reaching ways
to make financial reports more relevant to the realities of today™s marketplace by an-
ticipating the financial information needs of the 21st century. This is a wide-ranging
and intensive effort. We are ruling out no possibilities as we examine what changes to
the existing accounting model should be made to meet user needs in the short and
long term. We expect the Special Committee to complete its work within a year.
In the interim, we are taking more immediate steps to improve the utility of financial
reports. In this fast-changing economic environment, investors can™t afford to look
only backwards. They need to anticipate. To serve this need, the AICPA™s Account-
ing Standards Executive Committee, consistent with a recommendation by the POB
[Public Oversight Board], has issued a proposal to require management to disclose
risks and uncertainties that could significantly affect the company™s operations or fi-
nancial condition. We urge AcSEC [Accounting Standards Executive Committee] to
complete its work with all deliberate speed.
To provide further assurance to the investing public, we join the POB in calling for
a statement by management, to be included in the annual report, on the effectiveness
of the company™s internal controls over financial reporting, accompanied by an au-
ditor™s report on management™s assertions. An assessment by the independent audi-
tor will provide greater assurance to investors as to management™s statement. The
internal control system is the main line of defense against fraudulent financial re-
porting. The investing public deserves an independent assessment of that line of de-
fense, and management should benefit from the auditor™s perspective and insights.
We urge the SEC to establish this requirement.
Developments in Business Reporting and Assurance Services 131

Finally, the SEC should require audit committees to include a statement in the annual
report describing their responsibilities and how these responsibilities were dis-
charged. This will increase the attention that audit committee members give their
crucial responsibilities. It will also increase the attention paid to their views by man-
agement and other directors.62

This section briefly highlights and discusses the findings and conclusions of two
major studies conducted by the AICPA Special Committee on Financial Reporting
(Jenkins Committee) and the AICPA Special Committee on Assurance Services
(Elliott Committee). The major objective of this review discussion is to provide an
understanding of the issues and emerging trends impacting the public accounting
profession that, in turn, are of particular concern to audit committees in the latter
half of the 1990s.
In 1991, a Special Committee on Financial Reporting (Jenkins Committee)
was established by the AICPA to study the need for a new financial reporting


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