Should Every Board have a Financial Expert? Wayne H. Shaw, Ph.D.

Issues to be Discussed Tone at the Top The Board’s Role in the Audit Process The Importance of Financial Literacy Questions Directors Should Ask About the Audit Choosing an Auditor

Corporate “Bobbleheads”

This Might Not Be Ethical. Is that a problem for anybody?

Tone at the Top Do you have a code of conduct? Who implements it? How? How do you decide on what is acceptable business practice? How do you deal with conflicts of interest? What are the expected standards of ethical and moral behavior?

Tone at the Top Who is in charge of the "tone at the top?“ Is there explicit moral guidance about what is right and wrong? How is it communicated throughout the organization? Are remedial actions taken in response to departures from approved policies and procedures or violations of the code of conduct? Are responses commensurate with the deviation? How are remedial actions communicated or otherwise becomes known throughout the entity.

Tone at the Top What is Management's attitude towards intervention or overriding established controls? Is there pressure to meet unrealistic performance targets-particularly for short-term results? Is compensation based on achieving those performance targets?

The Board’s Role in the Audit Process Normal Set-Up Audit Committee oversees all financial risks Contains at least one financial expert Reports to the Board

The Importance of Financial Literacy Understand what drives the financial health of the firm Being able to spot trends before they become problems Being able to talk to and understand the accountants inside and outside the organization

Questions Directors Should Ask About the Audit Estimates –Sales, Bad Debts Adjustments to assets Amortization Capitalization policy Recognition of other gains (losses) Transactions that lack independence

Questions Directors Should Ask About the Audit Anything you do not understand Answers to your question – you don’t understand is unacceptable

Questions Directors Should Ask About the Audit Disclosure in In general, the preferred method of accounting for inventory valuation is the last-in, first-out method ("LIFO") because, in most circumstances, it results in a better matching of costs and revenues. During the fourth quarter of fiscal 1999, the Company changed its method of determining the cost of inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The primary reasons for the change in accounting method are: management's belief that the FIFO method of accounting better matches revenues and expenses of the Company. As a result of customer acceptance and support of the financial community which became specifically apparent in the fourth quarter of 1997, we increased the amortization period from 20 years to 40 years for all of our domestic FCC licenses and the goodwill.

Questions Directors Should Ask About the Audit Who should you talk to Management CFO Internal auditors External Auditors

Does the auditing firm have expertise in your business? Is the expertise local? How important are we to the auditor? How will people be assigned and rotated off the engagement? How often will you see the person(s) with expertise? What happens if we have problems with the people assigned? What is expected of our team? What will the audit cost? When should I consider changing the auditor or the audit firm? Choosing an Auditor

Questions?