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corporate contributions, 364 Improvement Act (FDICIA), 55, 189,
financial expert disclosures, 79, 80 235, 237, 239, 401
“reasonably likely” standard, 123, 124 Federal statutes
remuneration, 360, 361 Conspiracy Act, 151
Dougherty, William H., 114 Federal Deposit Insurance Corporation
Duty of care, 144, 145, 180 Improvement Act, 55, 189, 235, 237,
Duty of loyalty, 145 239, 401
Foreign Corrupt Practices Act. See Foreign
Eccles, Robert G., 8 Corrupt Practices Act
Education and professional development Fraud and False Statements Act, 150
audit committee members, 220, 222“224 Internal Revenue Code, 151, 152
internal auditing staff, 276, 279 Mail Fraud Act, 151
Ellingsen, John E., 124 Private Securities Litigation Reform Act of
Elliott Committee. See Special Committee on 1995, 150, 399
Assurance Services (Elliott Committee) Sarbanes-Oxley Act. See Sarbanes-Oxley Act
Employees of 2002
communication with, 129, 130 Securities Act of 1933, 146“148
and responsibility for internal control, 243 Securities Exchange Act of 1934. See
as users of accounting information, 128, 129 Securities Exchange Act of 1934
Enron, 3, 114, 137, 366, 367, 402 Federal Trade Commission (FTC), 120, 121, 128
Environmental liabilities, 126, 127 Fees
Estimates audit fees, 209, 229, 273
accounting estimates, change in, 310 nonaudit fees, 230
Ethics Fiduciary duties, 144
AICPA Code of Professional Ethics Field work standards, 179“181, 199
Rules of Conduct, 184, 185 Financial Accounting Standards Board (FASB),
conflicts of interest 414
audit committee members, 44 external users of accounting information, 97
auditors™ disclaimer, 377 interpretations, summary of references,
and corporate contributions, 364, 365 406“410
financial reporting, unethical practices, Opinions of the Accounting Principles Board
166“168 No. 20, “Accounting Changes,” 309“311
Executive compensation, 127 Statement No. 3, interim financial reports, 386
perquisites. See Perquisites (perks) statements, summary of references, 406“410
External auditing. See Independent auditors Statements of Financial Accounting
External users of accounting information Concepts. See Statements of Financial
accountability Accounting Concepts (SFAC)
audit committee, 97 Statements of Financial Accounting
board of directors, 6 Standards. See Statements of Financial
classification of, 99 Accounting Standards (SFAS)
422 Index

Financial Analysts Federation, 106 Form 8-K, 121, 122, 126
Financial audits, 210, 215 Form 10-K, 121, 122, 126, 128
government audits, 211, 212 Form 10-Q, 121, 122
Financial Executives International, 182, 414 Fraud
Financial experts, 57, 58, 79, 80 ACFE report on, 322, 323
Financial reporting audit committee liability, 160“163
change in reporting entity, 310“312 communication of fraud to audit committee,
evaluation, 104“109 331, 332
Financial Analysts Federation, 106 computer fraud, 328“329
financial condition and operating cost of, 322
performance, 104, 105 defined, 320, 321
financial statements. See Financial statements financial reporting, 321, 322
fraudulent reporting, 160“163, 321, 322, 329. financial statements, 202, 326“328
See also Fraud Fraud and False Statements Act, 150
goals of, 104“106, 137“139 identification of, 321
quality control standards, 109, 110 illegal acts, 332“335
Wal-Mart example, 110“112 independent auditor™s responsibility, 329“337
misstatements, risk factors relating to, 204“206 Internal Revenue Code liability, 151, 152
SFAC. See Statements of Financial investigating known fraud, 337“339
Accounting Concepts (SFAC) Mail Fraud Act, liability under, 151
Special Committee on Financial Reporting. management, 322, 326“328, 335
See Special Committee on Financial and misappropriation of assets, 322
Reporting (Jenkins Committee) misstatements, types of, 320, 321
unethical practices, 166“168 preventing, 325, 326, 338
usefulness of financial statements, 104 Private Securities Reform Act, 150
Financial statements risk assessment, 339“344
and accounting information, 103, 104 risk factors, 202, 203, 330
auditors™ report. See Auditors™ report SAS No. 79, fraud in financial statement
disclosures. See Disclosures audit, 202
fairness, 335 SEC financial fraud and disclosure cases,
fraud. See Fraud 344“346
generally accepted accounting principles. See Securities Act of 1933, 146“148
Generally accepted accounting Securities Exchange Act of 1934, 148“150
principles (GAAP) statistics, 322, 323
independent accountant™s report, 386 warning signs, 164, 165, 334“337
interim statements, 381“386 Fraud and False Statements Act, 150
responsibility for, 80 Fraud Investigative Group, 322, 323, 325
special reports, 386, 387 Functions of audit committee. See also Role of
usefulness of, 104 audit committee
Fogarty, Timothy J., 30 basic functions, 60
Foreign Corrupt Practices Act, 220, 349 definitions, 58, 59
Alcoa Aluminum Company compliance monitoring function, 66“70, 77“80
guidelines, 356 National Commission on Fraudulent
cases and alleged violations, 352 Financial Reporting recommendations,
compliance with and role of independent 59, 60
auditors, 242, 357, 358 planning function, 60“66
gifts and contributions, 363 reporting function, 70“77
and internal auditing, 252
and internal control, 235, 236 General Accounting Office (GAO), 416
management Financial Statement Restatements report, 136,
fraud, protection against, 322 137
statement, example, 355 Generally accepted accounting principles
questionable foreign payments, 349“357 (GAAP)
and standard auditors™ report, 374 auditor™s report, 182, 374
Triton Energy Corporation disclosures, consistent application of, 185, 186
350“352 defined, 184
Index 423

financial statements, 98, 291 Independence Standards Board, 137
organizations influencing, 182, 184 Independent auditors
selection of accounting methods, 184 appointment of, 228
sources of, 182, 183 and audit committee, 83, 84, 384, 385, 392
unqualified opinion of auditors, 184, 185 and audit planning, 226
Generally accepted auditing standards (GAAS), auditors™ report. See Auditors™ report
80 change in auditors, 126
and accounting standards, 181“189. See also duty of care, 180
Generally accepted accounting external auditing, nature of, 80“84
principles (GAAP) fraud
and auditing procedures, 179 communication to audit committee,
auditors™ reports, 373 331“333
field work standards, 179“181 detection of, 333“335
and audit planning, 199 effect of on auditor™s report, 330, 331
materiality, 199 and fairness of presentation in financial
general standards, 179, 180 statements, 335
reporting standards, 179 illegal acts by client companies, 332, 333
conformance with GAAP, 182“185 investigation, 338
consistency, 185, 186 standards and responsibilities, 329“330
disclosures, 186 illegal acts, responsibilities concerning, 332,
fairness, 188, 189 333, 357, 358
materiality, 186“188 integrity and objectivity, 293
scope of report, 178 and internal controls, 241, 242
Gerson, James S., 293, 356 management compliance with disclosure
Global Crossing, 137 requirements, 296
Going concern evaluation, 124 reporting to audit committee, 306“309
Government Accounting Standards Board, 414 examples, 378, 379
Government audits, 211“215 Institute of Corporate Directors, 415
“Grease payments,” 350 Institute of Internal Auditors (IIA), 182, 414
Groves, Ray, 84 fraud defined, 321
Grusd, Neville, 114 independence of internal auditors, 263
Gulf Canada Resources, Ltd., 7 internal auditing defined, 84, 249
Guttman v. Nvidia Corporation, 159, 169 Practice Advisories. See Practice Advisories
Standards for the Professional Practice of
Hanson, Walter E., 354 Internal Auditing, 252“259
Harris, James F., 362 Institute of Management Accountants, 182, 415
Harriss, C. Lowell, 362 Institutional investors, 100
Heidrick and Struggles, 414 Insurance
Heyler, Grover R., 358 directors and officers liability insurance, 143
Hickman, Kent, 55 insurance companies as credit grantors. See
Hills, Roderick M., 363 Credit grantors
H.J. Heinz, 157, 158 Internal audit group, 249
Hoffman, Ralph, 44 assessments, 284“288
Horn, Karen N., 251 and audit committee, 33, 85, 94, 249“252,
263, 264
Illegal acts, 399 audit committee event matrix, 275
board of directors, responsibilities regarding, and audit planning, 226
357, 358 corporate philosophy, 261“263
communication with audit committee, 333 and external auditors, 261
defined, 332 focus-group approach, 261
detection of, 332, 333 future trends, 400
external auditor™s responsibilities, 357, 358 importance of, 289, 290
reporting recommendations, 333“335 independence, 263, 264
warning signs, 334 Practice Advisories, 264“272
Independence standard, 43“45, 48, 54“55, internal auditing defined, 84, 249
77“79 internal control. See Internal control
424 Index

Internal audit group (cont.) Investor Responsibility Research Center
monitoring approach, 288, 289 (IRRC), 102, 415
nature of internal auditing, 84, 85, 94 Investors. See also Shareholders
organizational structure, 252, 260“262 institutional, 100
logistical matters, 265, 273, 275 as users of accounting information, 99“112
organization chart, sample, 274
recommendations, 260 James, David L., 357
questions for audit committee, example, 282, Jenkins Committee. See Special Committee on
283 Financial Reporting (Jenkins
role of, 249“252 Committee)
as source of information for audit committee Jepsen, Edward G., 264, 273
report, 393 Joseph, James A., 364
staff
quality and training of, 276“290 Kalbers, Lawrence P., 30
size of, 273 Killearn Properties, Inc., 154“156, 296
Wal-Mart example of committee oversight, 289 Klepper, Anne, 362
Internal control, 235 Korn/Ferry International, 415
accounting system defined, 236 Krishnamoorthy, Ganesh, 110
audit committee
considerations, 246 Leadership styles, 56
role, 242“247 Legal responsibilities of audit committee
Committee of Sponsoring Organizations ABA Task Force on Corporate Responsibility
report, 237, 238 recommendations, 169“172
control environment defined, 236 business judgment rule, 143
control procedures defined, 236 case law. See Case law and agency action
defined, 236 federal statutes, 146“148, 150“152
elements of, 236 Foreign Corrupt Practices Act. See Foreign
external parties, 243 Corrupt Practices Act
reporting to, form of report, 238 Sarbanes-Oxley Act. See Sarbanes-Oxley
functions of, 237 Act of 2002
importance of, 235 Securities Exchange Act of 1934. See
improper payments, 355, 356 Securities Exchange Act of 1934
independent accountant™s report, example, 240 liability, minimizing, 172“176
independent auditors, 241, 242 state statutes, 144“146
management Levitt, Arthur, 10, 11, 102
certification, 238 letter to chairmen of audit committees, 21“23
report, 375 on materiality, 187
reporting, 239“241 “The Numbers Game” speech, 10“13
Public Oversight Board reporting Levy, Ferdinand K., 363
recommendations, 247 Liability, 9, 143, 172“176, 400, 401. See also
SEC requirements, 240, 241 Legal responsibilities of audit committee
Wal-Mart statements on internal control, 245, joint and several, 145
246 Liotta, Joseph P., 250
Internal Revenue Code (IRC), 151“152 Listing standards, 17, 43, 77“78, 80, 397, 398
International Accounting Standards Board, 415 proposed rule changes, 25“29
International Accounting Standards Committee Livent, Inc., 158
(IASC), 189 Loebbecke, James K., 200
International Auditing and Assurance Standards Lum™s, Inc., 153, 154
Board (IAASB), 189, 194, 195, 415 Lurie, Adolph G., 230
International auditing standards, 189, 194“196
International Federation of Accountants (IFAC), MacIver, Brian H., 109
189, 415 Mail Fraud Act, 151
International Organization of Securities Makosz, Paul G., 7
Commission (IOSCO), 189, 415 Management
International Standard on Auditing (ISA), 195 accounting principles, selection of, 184, 185
Index 425

compensation, 127 New York Stock Exchange (NYSE), 416
financial reporting goals, 137“138 audit committee™s report to board of directors,
financial statements, responsibility for, 80, commentary on, 391
373 Corporate Governance Standards, proposed
internal control, 242, 243 rule change on internal control, 244
perquisites. See Perquisites (perks) internal audit function, proposed amendment
reports, 80 to listing standard, 252
certification of, 238 listing standards. See Listing standards
Wal-Mart example, 81 Nonaudit services
as source of information for audit committee government audits, 214, 215
report, 392, 393
Management™s Discussion and Analysis O™Malley, Shaun F., 9
(MD&A) O™Malley Panel, 10, 20, 21
audit committee role, 124 Operating performance, 105
critical accounting policies, Wal-Mart Operational audits, 216, 217
example, 124“126 Operational objectives, 105, 106
independent auditors™ review, 123, 124 Opinion of auditors. See Auditors™ report
SEC Financial Reporting Release No. 36, Organization for Economic Cooperation and
123, 124 Development (OECD), 352, 353, 416
SSAE No. 8, 135 Organizations
Manzo v. Rite Aid Corporation, 158 business organizations, list of, 413“416
Marsh, Hugh L., 338, 356 Outside services to support internal audit group,
Materiality, 186“188, 199 276“279
Mattel, Inc., 154 Oxford Analytica, Ltd., 416
McCauley, Daniel J., 9
McCuaig, Bruce W., 7 Palmer, Russell E., 30, 313
MD&A. See Management™s Discussion and Pany, Kurt, 124
Analysis (MD&A) Penn Central, 153
Meetings Performance audits, 212“214
audit committee, 58, 392 Perquisites (perks), 358“361
board of directors, 6 Piturro, Marlene C., 350
Model Business Corporation Act, 145“146 Planning. See Audit planning
Model Business Corporation Act (Revised), 146 Playboy Enterprises, Inc., 157
Most, Kenneth S., 104 Powell, Thomas E., 338
Murphy, A. A., 326, 337 Practice Advisories
Mutchler, Jane F., 401, 402 assessments
PA 1310, Quality Program Assessments, 284
National Association of Corporate Directors, PA 1311, Internal Assessments, 284, 285
127, 415 PA 1312, External Assessments, 286“288
National Association of Securities Dealers, Inc., independence, 264
415 PA 1110-1, “Organizational
National Commission on Fraudulent Financial Independence,” 265
Reporting (NCFFR) PA 1110-2, “Chief Audit Executive (CAE)
computer fraud, 328, 329 Reporting Lines,” 266“268
fraudulent reporting PA 2060-1, “Reporting to the Board and
defined, 321, 322 Senior Management,” 269
opportunities for, 327, 328 PA 2060-2, “Relationship with the Audit
internal auditing, position on, 250 Committee,” 270“272
recommendations organizational structure
on frequency of reporting, 58 PA 1000-1, Internal Audit Charter, 262
on functions of audit committee, 59, 60 quality and training of office staff, 276
on independence, 44 selection of outside service providers, 276
National Investor Relations Institute, 102, 415 PA 1210.A-1, “Obtaining Services to
New York State Society of Certified Public Support or Complement the Internal
Accountants, 415 Audit Activity,” 277“279

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