The New Focus on Audit Committees Washington Metropolitan Area Corporate Counsel Association February 26, 2014
Panelists Dan Groman, Deputy General Counsel, Walker & Dunlop Kate Scavello, Associate General Counsel, Millennial Media Barbara Berlin, Director, Center for Corporate Goverance, PricewaterhouseCoopers LLP Thomas White, Partner, WilmerHale
Dan Groman Walker & Dunlop Dan Groman is Senior Vice President, Deputy General Counsel and Assistant Secretary at Walker & Dunlop (NYSE: WD), a commercial real estate finance company. Dan advises Walker & Dunlop s Board of Directors and senior executives on a broad range of corporate matters, including securities regulation, M&A, corporate contracts, executive compensation, corporate governance, compliance and corporate insurance matters. Prior to joining Walker & Dunlop, Dan was Associate General Counsel and Assistant Secretary at Freddie Mac and the Deputy General Counsel & Assistant Secretary of The Freddie Mac Foundation, Inc. Dan also was an Associate in Arnold & Porter LLP s Corporate & Securities Group from 2001 to 2005.
Kate Scavello Millennial Media Kate Scavello is Associate General Counsel at Millennial Media, Inc. (NYSE: MM), a mobile advertising and data company. Kate advises Millennial s Board of Directors and management team on a broad range of corporate matters, including securities regulation, corporate governance, transactions, corporate finance, executive compensation, and compliance matters. Prior to joining Millennial, Kate was Assistant General Counsel at Blackboard Inc. Kate was an Associate in Bryan Cave LLP s Corporate Finance and Securities Group from 2005 to 2008.
Barbara Berlin PricewaterhouseCoopers LLP Barbara Berlin is a director in PwC's Center for Board Governance. She conducts research on significant governance topics and board issues and provides perspectives to help directors effectively meet the challenges of their critical roles. Barbara also meets with boards of directors and audit committees to share insights on critical governance challenges and helps them understand the complex regulatory and business environment and leading practices. Barbara co-authored Directors and IT- What Works Best, and Audit Committee Effectiveness--What Works Best, 3rd edition. She also has developed various thought leadership reports including the annual publication, Key Questions for Audit Committees. Barbara is a Certified Public Accountant in the states of New York and New Jersey.
Thomas White WilmerHale Tom White is a partner in the Corporate Practice Group of WilmerHale. Tom also serves as General Counsel of WilmerHale. Tom is one of the firm s leading practitioners in the area of corporate governance, and also has extensive experience representing corporate and institutional clients in complex business transactions. He counsels clients and their boards and management on difficult corporate law, securities and accounting issues, and in conducting internal investigations. Tom has a particular focus on accounting and auditing issues. He is chair of the ABA Business Law Section Committee on Audit Responses and Co-Chair of the National Conference of Lawyers and CPAs.
Agenda Role and Importance of the Audit Committee Current Concerns of Audit Committee Members Impact of Current Governance and Regulatory Initiatives Practice Advice
Audit Committee Role and Responsibilities Thomas White February 26, 2014
Audit Committee Composition Independence Independent director under applicable exchange listing standards Additional SEC requirements No consulting, advisory or other compensatory fee Not an affiliated person of issuer or subsidieary Only applies to listed companies At least one audit committee financial expert Exchanges require financial literacy in all members WilmerHale 9
Audit Committee Responsibilities Sources of Responsibility and Powers Sarbanes-Oxley Act/SEC rules Appointment, compensation, retention and oversight of independent registered public accounting firm Pre-approval of all auditing services and non-audit services Whistleblower procedures for accounting, control or auditing matters Authority to engage advisers and company funding of fees Annual audit committee report in proxy statement Auditor reporting to committee WilmerHale 10
Audit Committee Responsibilities Audit Committee Charter Required by NYSE and NASDAQ; NYSE more detailed Purpose (NYSE) assist Board oversight of Integrity of financial statements Compliance with legal and regulatory requirements Independent auditor s qualifications and independence Performance of internal audit function Report from independent auditors Responsibilities regarding financial statements and earnings releases WilmerHale 11
Risk Oversight NYSE requires audit committee to discuss policies with respect to risk assessment and risk management Rule somewhat unclear about scope of responsibility Management is responsible for assessing and managing exposure to risks, but audit committee must discuss guidelines and policies to govern the process by which this is handled Audit committee not required to be sole body responsible for risk assessment and management These processes should be reviewed in a general manner by the audit committee WilmerHale 12
www.pwc.com/us/centerforboardgovernance WMACCA Recent developments affecting audit committees Feb 26, 2014
Today s agenda Focus on financial reporting What we hear from audit committee members Regulatory outlook PwC January 2014 14
Financial reporting considerations Core responsibility of audit committee is to oversee financial reporting Audit committees, management, and auditors work together to meet the information needs of the capital markets Audit committee actions: - Invest the time to understand the business and its key processes - Understand critical accounting policies and key accounting estimates - Focus on complex/riskier areas of the business, unusual non-recurring transactions and significant changes period over period - Understand other financial and related information being reported - Discuss with management the consistency of special items reporting in ALL communications, including non-gaap disclosures - Consider nonfinancial measures (customer satisfaction, etc.) - Understand external expectations - Objective input from customers and employees may prove valuable PwC - 15
The current governance environment What we are hearing from audit committees: - Focus on risk management and crisis management - Concern over risk of cyberattacks - IT opportunities and risks - Compliance - Regulatory environment PwC 16
Risk management Is there currently a clear allocation of specific responsibilities for overseeing major risks among your entire board versus its individual committees? The number of directors who believe there is a clear allocation of risk oversight responsibilities among the board and its committees improved. Yet half of those who say that there is clarity say that it still could be improved. PwC 17
Crisis management In the last 12 months, has your board discussed management s plans to respond to a major crisis? PwC Source: PwC s 2012 Annual Corporate Director Survey 18
IT risks: Cybersecurity Cybercrime is now commonplace, and security incidents have increased 25% this year New technologies, wellfunded and determined adversaries, and interconnected business ecosystems have combined to increase exposure Companies should prioritize and allocate resources to effectively protect the crown jewels today and into the future PwC 19
IT oversight How engaged is your board or its committees with overseeing/understanding the following? PwC 20
Compliance: Additional measures to deter fraud Which of the following has your board done in the last 12 months to reduce fraud risk? Three-quarters of directors said their boards took additional action to oversee fraud risks. 60% had discussions on tone at the top. PwC 21
Regulatory outlook PwC
CAQ: Call to action In November 2013, the Center for Audit Quality (CAQ) in collaboration with five other organizations released a paper that calls for audit committees to consider whether enhancements can be made to their audit committee reports The disclosures are voluntary PwC 23
Regulatory outlook SEC - Active regulatory agenda - Division of Enforcement continues to be high profile - Focus on financial reporting PCAOB - Standard setting AS 16 Communications with Audit Committees Mandatory auditor rotation Proposed standards on the Auditor s Report and Other Information contained in the 10-K Reproposed standard to disclose names of engagement partner and others firms / persons that participated in the audit PwC 24
Advice for In-house Lawyers Understand the broad scope of audit committee responsibilities and help your committee carry them out Be the liaison with committee, external and internal auditors and management about matters to report to the committee Evaluate company-specific issues under new and proposed rules Ensure audit committee s members receive business and operational information necessary to fully assess risks Help facilitate relationships to keep committee focused on top risks Monitor and evaluate regulatory and standard-setting developments and their impact on your company Review and update your charter Think about audit committee disclosure Key considerations for audit committees PwC January 20121 Slide 25
To learn more about PwC s Center for Board Governance Visit: www.pwc.com/us/centerforboardgovernance Audit committee effectiveness What works best, 4 th edition. Demands and expectations on the audit committee keep increasing, and its role in the capital markets is vital. This 4 th edition helps audit committee members carry out their role effectively and efficiently. Board effectiveness What works best, 2 nd edition. This book shows directors how they can effectively carry out their various responsibilities from overseeing strategy to setting CEO compensation. It includes insights from their peers and PwC professionals. BoardroomDirect. Our monthly e- newsletter delivers PwC s latest board level insights directly to your inbox. Each edition features an in-depth perspective on one major issue, as well as information on other important governance topics. Download the latest edition at www.boardroomdirect.com. Board Center App. PwC's App delivers corporate governance insights directly to your ipad. The App is regularly updated with topics that spur discussion in board-rooms, including executive compensation, financial reporting, risk management and more. Download at www.pwc.com/us/boardcenterapp. PwC Directors and IT What works best. This two-part comprehensive guide was developed to help directors bridge the "IT confidence gap." Part 1 outlines a structured and efficient six-step oversight process to help directors determine and execute their approach to IT oversight. Part 2 provides background information, potential rewards and risks, and board considerations for selected IT topics. 2013 Annual corporate directors survey. In the summer of 2013, 934 public company directors responded to our survey. Given that 70% of the responding directors serve on the boards of companies with more than $1B in annual revenue, the survey s findings reflect the practices and perspectives of many of today s world-class companies. 26
For More Information Follow WilmerHale s Blog: Focus on Audit Committees, Accounting and the Law: www.wilmerhale.com/auditcommitteesaccountingandlawblog/ Thomas White Thomas.white@wilmerhale.com 202-663-6556 WilmerHale 27