Friday, February 29, 2008

The Foreign Corrupt Practices Act Overview (Part II), the Antibribery Provisions

The Foreign Corrupt Practices Act (15 U.S.C. §§ 78dd-1, et seq.) is a U.S. federal law that is comprised of two primary provisions: (1) the accounting record keeping and internal control provision, and (2) the antibribery provision. This overview discusses the antibribery provision.

Generally, the antibribery provision makes it unlawful for (1) U.S. firms and persons, and certain foreign issuers of securities, to make a corrupt payment (e.g., a bribe) to a foreign official for the purpose of obtaining or retaining business, and (2) foreign firms and persons to act in furtherance of a corrupt payment while in the United States.

The Department of Justice is responsible for criminal and civil enforcement with respect to domestic concerns, foreign companies and nationals. The SEC is responsible for civil enforcement of the antibribery provisions with respect to issuers.

Basic Elements to Establish a Violation of the Antibribery Provision:

Establishing a violation of the antibribery provision involves five basic elements.

1. To Whom the Act Applies.

The Act applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm. Individuals and firms may also be penalized if they order, authorize, or assist someone else to violate the antibribery provisions, or if they conspire to violate those provisions.

United States jurisdiction over improper payments to foreign officials depends on whether the violator is an "issuer," a "domestic concern," or a foreign national or business.

An "issuer" is a corporation that has issued securities that have been registered on a U.S. exchange, or that is required to file periodic reports with the SEC.

A "domestic concern" is any person who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State, territory, possession or commonwealth of the United States.

For acts that occur within the territory of the United States, issuers and domestic concerns are liable if they perform an act in furtherance of a corrupt payment to a foreign official using the U.S. mails or other means of interstate commerce, including, for example, telephone calls, faxes, wire transfers, and interstate or international travel.

Issuers and domestic concerns may also be liable for acts performed in furtherance of a corrupt payment made outside the United States. Thus, a U.S. company or national may be held liable for a payment authorized by employees or agents operating outside the United States, using money from foreign bank accounts, and without any involvement by a person located in the United States.

The FCPA was expanded in 1998 to include jurisdiction over foreign companies and people who cause, directly or through agents, an act in furtherance of the corrupt payment to take place in the territory of the United States, whether or not the act makes use of the U.S. mails for other means of interstate commerce.

U.S. parent companies also may be held liable for the acts of foreign subsidiaries, the activities of which they authorize, direct, or control, as can U.S. citizens or residents ("domestic concerns) who were employed by or acting on behalf of the foreign subsidiary.

2. Wrongful Intent or Purpose.

The person making or authorizing the payment, offer, promise or inducement must have a wrongful or corrupt intent or purpose, and the payment must be intended to induce or influence the foreign official who is receiving the payment to misuse his or her official position, to breach his or her lawful duty, to make a decision, or to otherwise act to direct business wrongfully to the payer or to any other person, or to obtain any improper advantage, or to induce the foreign official to use his or her influence improperly to affect or influence any act, event or decision.
However, the intended corrupt act does not have to actually succeed in purpose for a violation to occur. Thus, an offer or promise alone can be a violation.

3. Payment.

The Act prohibits paying, offering, promising to pay (or authorizing to pay or offer) money, or anything of value.

The Act also prohibits corrupt payments made through an “intermediary,” also referred to as third party payments. The “intermediary” is the recipient who is making the payment to the foreign official. It is unlawful to make a payment to a third party, while “knowing” that all or a portion of the payment will go directly or indirectly to a foreign official. The term "knowing" includes conscious disregard and deliberate ignorance. In other words, it is not necessary to show actual knowledge for there to be a violation. Thus, U.S. companies should exercise due diligence, investigate other entities and persons with whom they interact, react to and investigate “red flags,” and establish proper and prudent compliance staffing, procedures and processes. See also the overview of the FCPA accounting record keeping and internal control provision.

4. The Recipient.

The Act applies only with respect to corrupt payments to a foreign official, a foreign political party or party official, or any candidate for foreign political office.

A "foreign official" means any officer or employee of a foreign government, a public international organization, or any department or agency thereof, or any person acting in an official capacity, regardless of rank or position. The Act focuses on the purpose of the payment, not the duties of the recipient (see however, the “facilitating” payment exception discussed below). Whether or not a person is a “foreign official” can be difficult to determine. Consider, for example, royal family members, an official of a state-owned business, or members of a legislative body.

5. The Business Purpose Test.

The Act prohibits payments made in order to assist the firm in obtaining or retaining business for or with, or directing business to, any person. You should be aware that the term "obtaining or retaining business" is broadly interpreted for enforcement purposes. Additionally, the business to be obtained or retained does not need to be with a foreign government or foreign government instrumentality.

The Facilitation Payments for Routine Governmental Actions Exception:

The Act provides that there is no violation of the antibribery provision for payments made to facilitate or expedite performance of a "routine governmental action." The Act lists the following examples: obtaining permits, licenses, or other official documents; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery; providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products; and scheduling inspections associated with contract performance or transit of goods across country. Other similar actions might also be excluded. However, the “routine governmental action" exclusion does not include or apply to any decision made by a foreign official to award new business or to continue business with a particular party.

Possible Affirmative Defenses Available to a Person Charged with a Violation:

In addition to being able to prevail on one or more of the five basic elements discussed above, there are a couple of affirmative defenses that an accused defendant may be able to argue and establish for the payment or action:

-The payment was lawful under the written laws of the foreign country. Obviously, prior to making a potentially improper payment you should seek the advice of counsel regarding the “legality” of the payment under the laws of the foreign country; and

-The money was spent as part of demonstrating a product or performing a contractual obligation.

Criminal Sanctions, Penalties and Jail Time:

Criminal punishment for violation of the FCPA antibribery provisions are as follows: corporations and other business entities may be fined up to $2,000,000; and officers, directors, stockholders, employees, and agents may be fined up to $100,000 and imprisonment for up to five years. Additionally, under the Alternative Fines Act the fine may increased up to twice the benefit that the defendant sought to obtain by making the corrupt payment. Fines imposed on individuals cannot be paid by the individual’s employer or principal.

Civil Fines and Injunctive Remedies:

The Attorney General or the SEC may bring a civil action seeking a fine up to $10,000 against any firm, officer, director, employee, or agent of a firm, or any stockholder acting on behalf of the firm, for violation of the antibribery provisions. Additionally, in an action brought by the SEC, the court may impose an additional fine not to exceed the greater of the gross amount of the monetary gain to the defendant as a result of the violation, or a specified dollar limitation based on the egregiousness of the violation, ranging from $5,000 to $100,000 for a natural person and $50,000 to $500,000 for any other person.

The Attorney General or the SEC may also bring a civil action to enjoin (i.e., stop or prevent) any act or practice of a firm whenever it appears that the firm, or an officer, director, employee, agent, or stockholder acting on behalf of the firm, is in violation, or about to be, in violation of the antibribery provisions.

Private Cause of Action:

A private cause of action may also be brought against the wrongful firm or person, such as by an aggrieved business competitor, for treble damages under the Racketeer Influenced and Corrupt Organizations Act (RICO), and under various other federal or state laws.

Additional Possible Penalties and Sanctions:

A person or firm found in violation of the FCPA may be barred from doing business with the Federal government. An indictment can lead to the suspension of the right to do business with the government.

A person or firm that is guilty of violating the FCPA can be held ineligible to receive export licenses.

The SEC may suspend or bar a person or firm from the securities business and impose civil penalties on firms or persons in the securities business for violation of the FCPA.

The Commodity Futures Trading Commission and the Overseas Private Investment Corporation may suspension or debarment a person or firm from agency programs for violation of the FCPA.

And, a payment made to a foreign government official that is unlawful under the FCPA cannot be deducted for tax purposes.

Dave Tate, Esq. (and CPA)

CalCPA Financial Leadership Forum Advisory Panel member,
AICPA CPA Ambassador,
AccountingWeb Blogger,

One-hour presentations available on the following topics:

-Satisfying the Employer’s FEHA / ADA Reasonable Accommodation Interactive Process for Employees with Physical or Mental Limitations (Disabilities).

-Audit Committee Responsibilities, Functions, Evaluation Process, and Interacting with Others.

-Trustee Responsibilities and Beneficiary Rights.

-The Legal Process for Officers, Management, Directors and Accountants.

-Preventing, Spotting and Responding to Financial and/or Physical Elder Abuse.

* * * * * * *

Sunday, February 24, 2008

The Foreign Corrupt Practices Act Overview (Part 1), Record Keeping Provision

The Foreign Corrupt Practices Act (15 U.S.C. §§ 78dd-1, et seq.) is a U.S. federal law that is comprised of two primary provisions: (1) the accounting record keeping and internal control provision, and (2) the antibribery provision.

The accounting record keeping and internal control provision ( 15 U.S.C. § 78m) was intended to compliment or work in tandem with the antibribery provision, but in fact is perhaps more broad in application because it applies to all companies whose securities are listed on a U.S. stock exchange, and is enforced by the Securities and Exchange Commission. Generally, the accounting provision was intended to require covered companies to keep accounting records that accurately reflect the transactions of the company, and to devise and maintain an adequate system of internal accounting control. The accounting provision is intended to address three areas of concern: (1) situations where transactions are not recorded; (2) situations where transactions are falsely recorded; and (3) situations where transactions are recorded correctly but are also misrepresented in substance (e.g., where a payment is correctly recorded is being made to the appropriate person but with substantial certainty that person then will transfer the payment to another person for an unlawful purpose.

The FCPA does not mandate the specific elements or form of internal control system. The Act requires reasonable detail and assurances. "Materiality" is not a minimum threshold safe harbor, not is lack of knowledge or substantial certainty.

The accounting and internal control provision requires covered companies to:

1. Keep books, records and accounts that, in reasonable detail, accurately and fairly reflect the company's transactions; and

2. Devise and maintain a system of internal control sufficient to provide reasonable assurance that:

-Transactions are authorized by management;

-Transactions are recorded to permit preparation of financial statements in conformity with Generally Accepted Accounting Principles and other applicable standards, and to maintain accountability over assets;

-Access to assets is permitted only with management authorization; and

-Recorded accountability for assets is periodically reconciled with existing assets.

The Act also requires that a covered company that holds sufficient voting power over another company, including a foreign corporation, comply with the Act's provisions with respect to the other company. Sufficient voting power is present when a covered company controls 50 percent or more of the voting securities of a subsidiary. However, depending on the facts and circumstances, sufficient voting power also can be present when a covered company controls between 20 and 50 percent of a subsidiary--subject to contrary proof by the covered company that its ownership does not constitute control.


Wednesday, February 20, 2008

Organizational compliance programs, and the Federal Sentencing Guidelines

Organizations, such as corporations, can be guilty of criminal conduct, just like individuals. The measure of an organization's punishment for felonies and certain misdemeanors is governed by Chapter Eight of the U.S. Federal Sentencing Guidelines. Organizations cannot be imprisoned, but they can be fined, sentenced to probation, ordered to make restitution and issue public notices of conviction, and exposed to forfeiture statutes.

Some of the common offenses committee by organizations are fraud, environmental waste, tax offenses, antitrust offenses, and food and drug violations.

An organization can be found criminally liable whenever an employee of the organization commits an act within the apparent scope of his or her employment, even if the employee acted contrary to company policy or instructions. An organization also can be held criminally liable for any of its employees’ illegal actions even if it made reasonable efforts to prevent the wrongdoing. Recognizing this fact, in enacting the sentencing guidelines, the U.S. Sentencing Commission has attempted to lessen some of the harshest aspects of potential liability for organizations that can demonstrate that they have enacted appropriate and effective preventative, deterrent and reporting compliance programs.

The Federal Sentencing Guideline Manual at Chapter 8, Part B, §8B2.1, Effective Compliance and Ethics Program, specifies that to have an effective compliance and ethics program, an organization shall—

(1) Exercise due diligence to prevent and detect criminal conduct; and

(2) Promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.

Compliance and ethics programs should be designed, implemented, and enforced so that they are generally effective in preventing and detecting criminal conduct.

Due diligence and the promotion of an organizational culture that encourages ethical conduct and a commitment to compliance with the law minimally require that:

(1) The organization establishes standards and procedures to prevent and detect criminal conduct.

(2) The organization effectively communicates and promotes its standards, expected manner of conduct, procedures and other aspects of its compliance and ethics program throughout the organization including, but not necessarily limited to, all levels of employees, officers, managers, supervisors and directors.

(3) The organization’s governing authority is knowledgeable about the content and operation of the compliance and ethics program and exercises reasonable oversight with respect to the implementation and effectiveness of the program.

(4) High-level personnel of the organization ensure that the organization has an effective compliance and ethics program, and are assigned overall responsibility for the program.

(5) Within the organization a specific person is, or specific people are, delegated day-to day operational responsibility for the compliance and ethics program, with adequate resources, appropriate authority and direct access to the governing authority, and shall report periodically to high-level personnel and, as appropriate, to the governing authority, or an appropriate subgroup of the governing authority, on the effectiveness of the compliance and ethics program.

(6) The organization takes reasonable steps—

(A) To ensure that the compliance and ethics program is followed, including monitoring and auditing to detect criminal conduct;

(B) To evaluate periodically the effectiveness of the compliance and ethics program; and

(C) To have and publicize a system, which may include mechanisms that allow for anonymity and confidentiality, whereby the organization’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation.

(7) The organization’s compliance and ethics program is promoted and enforced consistently throughout the organization through (A) appropriate incentives to perform in accordance with the compliance and ethics program; and (B) appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.

(8) After criminal conduct has been detected, the organization takes reasonable steps to respond appropriately to the criminal conduct and to prevent further similar criminal conduct, including making any necessary modifications to the organization’s compliance and ethics program.

(9) In implementing the program, the organization periodically assesses the risk of criminal conduct and takes appropriate steps to design, implement, or modify each requirement to reduce the risk of criminal conduct identified through the process.

The term "governing authority" means the (1) the board of directors; or (2) if the organization does not have a board of directors, the highest-level governing body of the organization.

The term "high-level personnel of the organization" means individuals who have substantial control over the organization or who have a substantial role in the making of policy within the organization. The term includes: a director; an executive officer; an individual in charge of a major business or functional unit of the organization, such as sales, administration, or finance; and an individual with a substantial ownership interest.

The term "substantial authority personnel" means individuals who within the scope of their authority exercise a substantial measure of discretion in acting on behalf of an organization. The term includes high-level personnel of the organization, individuals who exercise substantial supervisory authority (e.g., a plant manager, a sales manager), and any other individuals who, although not a part of an organization’s management, nevertheless exercise substantial discretion when acting within the scope of their authority (e.g., an individual with authority in an organization to negotiate or set price levels or an individual authorized to negotiate or approve significant contracts). Whether an individual falls within this category is determined on a case-by-case basis.


Saturday, February 16, 2008

Subprime Liability, Accountants (Part 1)

Subprime Liability, Accountants (Part 1)

The subprime crisis is generating an increasing number of lawsuits, many of which allege huge liability exposure. However, it is difficult to estimate true defendant liability exposure. To do so you have to understand the involvement that the defendant had in the transaction, and the legal claims that are being made, including the degree of culpable (wrongful) conduct that must be established for liability to apply, the burden of proof, the evidence both in support of and contrary to the allegations, and whether or not the plaintiff has standing to even bring his or her claims.

The following are two excellent papers by NERA Economic Consulting discussing the elements of a subprime transaction and potential parties and issues relating to liability exposure.

Although accountants definitely will be sued for alleged wrongful conduct relating to the subprime crisis, such as with respect to auditing services, I tend to believe that accountant liability will be difficult to show unless, perhaps, the accountant was in some manner in privity of contract with or had a direct, as opposed to third party, relationship with the plaintiff claiming the loss. The typical third party claim that might be made against an accountant would be for securities liability. However, most securities causes of action require the plaintiff to show intentional or reckless wrongdoing (even on a claim of recklessness the degree of culpability must approach at least gross recklessness or conduct so reckless that it approaches intentional wrongdoing).

On the other hand, if a plaintiff can state a claim against the accountant arising from a direct relationship or a relationship where the plaintiff and the accountant were in privity of contract, and if as a result of that relationship the plaintiff can make a claim of negligence against the accountant, then the plaintiff will stand in a less difficult position. However, even in that circumstance, the plaintiff would have to show that the accountant was negligence (i.e., did not follow the standard in the industry). The accountant also would still have defenses available, such as wrongful conduct by other persons or entities, or perhaps even by the plaintiff.

In any event, in light of the complicated and sometimes ambiguous nature of a subprime transaction and the related accounting rules (including, for example, how and when to calculate and record the loan loss reserve , or a loss in value of the asset), it is perhaps speculative to evaluate whether it would be more difficult or less difficult for a plaintiff to prove that an accountant’s conduct was below the standard in the industry. How is an accountant’s conduct below the standard in the industry when deciding loan loss reserve or loss in asset value is to a certain extent an art that is by nature imprecise and at least partially based on estimates?

Your thoughts?

Dave Tate, CPA, Esq.

AccountingWEB Bloggers Crew:

CalCPA Financial Leadership Forum:
CalCPA Education Foundation:

AICPA Ambassador Program:

Wednesday, February 13, 2008

COSO Guidance on Monitoring Internal Control Systems, for Audit Committees (2.13.08)

Dated 2.13.08. I have changed the format of this blog. The following are a few of the most recent entries that were posted on the original Yahoo blog. For earlier entries you can still click on the original blog. Dave Tate

COSO Guidance on Monitoring Internal Control Systems, for Audit Committees (2.13.08)

For those of you who are familiar with some of my writings, you know that I have some concern about the further expansion of audit committee duties, and also believe that the duties that exist need to be fairly specifically defined so that all of the stakeholders involved have an understanding about the duties that exist, and that do not exist.

The COSO draft document (the comment period is closed, but the final document has not been released), Guidance on Monitoring Internal Control Systems, briefly discusses the role of the board/audit committee. The discussion paper can be found at
In pertinent part, the discussion paper states:

“Controls performed below the senior-management level can be monitored by management personnel or their objective designees. However, controls performed directly by senior management, and controls designed to prevent or detect senior-management override of other controls, cannot be monitored objectively by senior management or its direct reports. In these limited circumstances, monitoring should be performed by the board — often through the audit committee — and its resources (e.g., internal audit).

The board is also in the best position to evaluate whether management has implemented effective monitoring procedures elsewhere in the organization. It makes this assessment by gaining an understanding of how senior management has met its responsibilities.

In most organizations, it is neither feasible nor necessary for the board to understand all of the details of every monitoring procedure, but the board should have a reasonable basis for concluding that management has implemented an effective monitoring system. Boards obtain persuasive information in support of their conclusions through inquiry, observation and oversight of management; the internal audit function (if present); hired specialists (when necessary); and external auditors. They might also consider the output from ratings agencies and financial analysts. Finally, in some circumstances, boards might make inquiries of nonmanagement personnel, customers, and/or vendors.”

I do like the fact that the COSO position does not expand the duties of the audit committee (or board) with respect to monitoring controls. I also like the references to reliance on internal audit and other sources of evaluation and input. To a significant extent the audit committee has to rely on other people to help the committee satisfy its due diligence. I might even suggest that in some circumstances the COSO position understates the audit committee’s responsibilities with respect to monitoring internal controls. As in most circumstances, it would be helpful for the COSO discussion to be more detailed and specific, as long as that detail does not overly expand the audit committee’s responsibilities.

Dave Tate, CPA, Esq.,,
AccountingWEB Bloggers Crew,
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Why People Settle Disputes—Why People Don't Settle Disputes (2.10.08)

Dave Tate, CPA, Esq.,,

The following discussion can also be found in PDF format at

After 20 years of experience in disputes, litigation, settlement and mediation, I can conclude that people settle their differences for reasons that in fact are quite limited in number. Basically, the answer isn't technical or complicated, until you get into the details of the dispute or case. Similarly, the reasons why people do not settle their differences also tend to be limited in number. When working toward resolution of a dispute it is important to consider both why people do settle and why people do not settle.

People settle disputes because they decide that they prefer the terms of settlement to the alternative current options available and the perceived future circumstances and events that may exist or occur if a resolution is not achieved. That does not mean that the parties necessarily like the terms of settlement. In many and perhaps the majority of settlements the parties might very well tell you that they do not like the terms of the agreement, or that they believe the terms are unfair or just not "right." They might say or suggest that they intensely dislike the agreement, or that they are more likely than not to obtain a better final result by fighting longer or by having the dispute determined by a judge, jury or other tribunal. However, by far in a super majority of disputes the parties "voluntarily" decide to reach resolution before the dispute reaches a stage where resolution will be determined by an outside person or panel.

Each dispute or case is different, involving different people with different life experiences, personalities and emotions, different facts and circumstances, different laws, and different needs, interests and motivating factors. Nevertheless, the reasons why people decide to settle tend to include the following:

-Consideration of the future additional costs, disruption, stress and other possible or negative consequences if the dispute continues;

-Current and future reputation, publicity and control or dominance risks (as those risks pertain to the parties, and also as they pertain personally to the settlement decision makers with respect to their individual reputations, employment, stature or status, control, dominance or command);

-Uncertainty about the likelihood of ultimately prevailing;

-The eventual remedy that an uninvolved judge, jury or other tribunal might award, or even be authorized to award;

-The actual or perceived strengths, weaknesses and resources of the various parties;

-The unpredictability of the discovery, admissibility and interpretation of favorable and unfavorable evidence;

-The possible impact of the burden of proof at trail, etc.; and

-The opportunities that exist through mediation to fashion a resolution that avoids possible future negative consequences, or that maintains the status quo, or that creates a better environment for the parties and/or the settlement decision makers now, and perhaps also in future events, relationships and dealings.

Similarly, the reasons why people do not achieve resolution also tend to be limited in number. Consider the following challenges to settlement:

-Unreasonable expectations;

-A hidden or different agenda or objective;

-A belief that a benefit will be maintained or gained by the party or by the settlement decision maker by not settling;

-Mistaken or different beliefs about the law or evidence;

-Wanting to have his or her day in court (“justice“);


-Teaching or demonstrating the other party, or other outside people, a lesson;

-A perceived strength of one party over the other party (not a level playing field);

-A perception that there is a lack of risk to the party or to the settlement decision maker if the dispute is not settled;

-A lack of a sufficient understanding about the needs, objectives and driving forces of the parties and the settlement decision makers;

-A need for greater evaluation of or creativity in the range of possible terms or options that are available for settlement;

-A party needs additional information or discovery, or case evaluation before resolution;

-A lack of involvement of the settlement decision makers, or not sure who the decision makers are (or, in some cases, a person with decision making authority or power may in fact be lacking or missing); and

-“Just not yet ready to settle“--need more time or other motivating factors--keep working on it, or try again later.

During the dispute resolution process it can be beneficial to temporarily step back from the fray, and to review or consider human nature and both the general reasons why people do resolve their disputes, and the correspondingly alternative challenges to resolution. In dispute resolution it is helpful to see the trees and the forest; the stick and the carrot.

Insurance policy not cancelled for failure to promptly notify insurer of claim (2.6.08)

Here is a handy insurance tip that may surprise you: you may still have coverage for a claim even if you breach the policy clause requiring that you promptly notify your insurance company of a claim. In the case of PAJ, Inc. v. Hanover Insurance Co., which is discussed at, the Texas Supreme Court recently held that an immaterial breach of the duty to provide notice does not deprive the insurer of the benefit of the bargain and thus also does not relieve the insurer of its contractual obligation to provide coverage. The policy language required the insured to notify the insurer of any claim or suit brought against the insured “as soon as practicable.” The insured was unaware that its CGL policy covered the dispute, and did not notify its insurer until four to six months after litigation commenced. The Court held that failure to timely notify the insurer of a claim or suit does not defeat coverage where the insurer is not prejudiced by the delay.

Dave Tate, CPA, Esq.,,

The Audit Committee Institute’s “Ten To-Do's for Audit Committees in 2008.”

The Audit Committee Institute (see link below for ACI, and my list of audit committee attributes) lists 10 “To-Do’s” for audit committees to consider when planning their 2008 agenda. I particularly like item numbers 5, 6, 8, 9, and 10 which are:

5. Ensure there is a shared vision for internal audit.

6. Encourage (expect) frequent informal communications with the audit engagement partner. I would say, “Plan, schedule and expect . . . .”

8. Make sure the full board is aware of the audit committee’s activities and needs.

9. Assess the tone at the top and throughout the organization. Tone at the top is important for account function and financial statement integrity, but I would not use the word “assess” in a manner that might imply that the audit committee is formally responsible for making an evaluation. Additionally, tone at the top in general is an issue that should be considered at the full board level and should not be delegated solely to the audit committee.

10. Take a hard look at the audit committee performance (see additional link below for my audit committee performance evaluation overview).

The remaining ACI “To-Do’s” are:

1. Be a catalyst for improving risk management and oversight. Risk management is an aspect of the audit committee function, but I did not list this item above because the topic as stated is too broad and general, whereas I suggest that the areas of audit committee risk management oversight should be specifically defined.

2. Closely monitor management’s disclosure committee. Perhaps this “To-Do” is appropriate, but this issue also could be a board level responsibility, and I would say that if the board delegates this oversight to the audit committee (1) it should still be subject to continuing board oversight, and (2) it should be delegated only if there is an understanding regarding what the audit committee is expected to do to “closely” monitor the disclosure committee.

3. Be up-to-speed on fair value, IFRS, and other key financial reporting issues and developments. Yes, perhaps, but I would not necessarily single out this issue for special mention.

4. Make sure the CFO and the finance organization have what they need to succeed. I would say, exercise oversight of the accounting and finance, CFO and internal audit functions. Of course you want them to “succeed,” but oversight of those functions is defined by more specific criteria than just making sure that the CFO and finance functions have the necessary resources.

7. Be prepared for a crisis. I believe that this is an issue for oversight and planning by the full board.

For more information:

-The ACI link is

-The link to my list of audit committee attributes is

-The link to my audit committee performance evaluation overview is

Best regards,
Dave Tate, CPA, Esq.,,

ISS vote against audit committee members for poor accounting practices (1.27.08)

ISS Governance Services (“ISS”) has issued it current proxy voting position for 2008 regarding corporate governance and accounting practices. ISS indicates that it will continue to focus on what it perceives to be “poor” accounting practices, fraud, and misapplication of GAAP. With respect to internal control, ISS policy will recommend that votes be withheld or made against members of audit committees where a material weakness identified under section 404 of the Sarbanes-Oxley Act rises to a level of serious concern, or where there is “an absence of effective internal control.” ISS also states that it recommends a vote against ratification of the independent auditor if “there is reason to believe” that the auditor has issued an opinion which is not accurate or representative of the company’s financial position. You can read more at

Of course, an occurrence of fraud, a “misapplication” of GAAP, an auditor opinion that is not accurate or representative of the company’s true financial position (e.g., in the case of a restatement), and even a material weakness in internal control do not necessarily indicate that an audit committee or that all of the audit committee members have failed to exercise diligent oversight.

Additionally, an inaccurate audit opinion also does not necessarily indicate that the auditor should be replaced. Deciding what to do and how to vote in circumstances in which these issues are present require a much more detailed investigation and evaluation process.

Dave Tate, CPA, Esq.,,