Good to Great Governance. Audit Trends in Municipal Government GFOA November 4, 2004

2 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Overview Drivers for Change Rapid Changes Taking Place The New World The Buck Stops with the Audit Committee Local Government Immunity?

3 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. A Failing Scorecard XEROX ALLIED IRISH ENRON WASTE MANAGEMENT WORLDCOM YBM MAGNEX LIVENT TYCO ADELPHIA NORTEL

4 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Why? “Some of these transactions are like flying from Washington to New York by flying around the poles. You get to say you complied with the rules but let’s face it, you wouldn’t have done it except for the purpose of finding some other benefit.” Chief Accountant, SEC Enforcement Division

5 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Overwhelming Pressure to Reform the Culprits Media Professional Organizations Public Investors Politicians Bill-198 Sarbanes -Oxley OSC Regulators Stock Exchanges The Board The Audit Committee The CFO The Auditor Lobby Groups

6 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. The Reaction was Swift Impact on Audit Committees Responsibilities Independence Financial Literacy Audit Comm. Financial Expert Impact on Auditors Regulation of Audit Firms New Independence Standards Attestation Requirements Impact on Management Continuous Disclosure Obligations CEO/CFO Certification Internal Control Reporting Stricter Penalties Larger fines and jail terms Disgorgement Greater enforcement Civil liability for disclosures

7 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. The New Role of the External Auditor Shareholders/Stakeholders The Board of Directors/Council Audit Committee Chairman External Auditor Management - CEO - CFO Shareholders/Stakeholders The Board of Directors/Council Audit Committee Chairman External Auditor Management - CEO - CFO

8 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. A fundamental change in business Auditors accountable to the audit committee Pre-approval for any non-audit service Restriction of consultative services to audit clients Whistle-blowing process and protection Independent Audit Committee members Financially literate Audit Committee members Clearly documented Board and Committee Mandates Continuing Education Code of Business Conduct & Ethics New Committees (Nomination of Directors, Compensation, etc) Regular Board Assessments Clear segregation of duties Documented evidence of internal control Independent Internal Audit Implementing the COSO control framework Position Descriptions Well communicated policies and procedures etc etc etc…

9 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Governance Governance refers to the processes and structure used to guide and direct an organization’s operations and activities. It defines the division of power and establishes mechanisms to achieve accountability among constituents, the governing body, and management. The developing role of the audit committee is very much connected to the idea of promoting sound governance.

10 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Key Relationships Between the Auditor, Management, the Board and the Audit Committee The Right People Accountability, Reporting and Evaluation Accountability, Reporting and Evaluation Mandate And Charter Mandate And Charter Information And Processes Information And Processes Managing Relationships Managing Relationships The Right People Accountability, Reporting and Evaluation Accountability, Reporting and Evaluation Mandate And Charter Mandate And Charter Information And Processes Information And Processes Managing Relationships Managing Relationships

11 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Building Blocks There are three areas that represent the building blocks for the role of the audit committee: –Independence –Communication –Accountability

12 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Updating the Role of the Audit Committee Overall Responsibilities: –Approving the overall audit scope –Overseeing the Municipality’s financial systems & internal control –Understanding critical accounting policies & practices –Recommending to Council the approval of the financial statements –Appointment of the external auditor & approving the appropriate fee –Overseeing the Internal Audit mandate –Compliance with statutory & regulatory requirements

13 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Functions of the Audit Committee Audit Scope: –Audit process and timelines –Financial reporting requirements –Financial reporting responsibilities (management, auditor, audit committee) –Impact of new standards –Materiality –Risk identification –Extent of reliance on internal controls –Audit engagement letter & plan

14 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Functions of the Audit Committee (cont’d) Information & Internal Control Systems: –Changes in financial systems & internal control systems –Adequacy of resources committed to these areas –Major financial and information security risks –Internal control weaknesses and impact they could have on the accuracy and sufficiency of financial information used for management decision-making, safeguarding of assets, or compliance with laws and regulations

15 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Functions of the Audit Committee (cont’d) Annual Financial Statements & Audit Results: –Review and query financial statements –Significant accounting policies (in accordance with GAAP) –Management judgments and accounting estimates –Audit adjustments and unadjusted differences –Disagreements with management –Difficulties encountered in performing audit –Approval of financial statements –Review entire annual report for consistency –Review all internal & external auditors’ reports –Private sessions

16 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Functions of the Audit Committee (cont’d) Auditor’s Engagement: –Discuss management assessment of auditors –Enquire about experience & capabilities of individuals proposed –Evaluate independence & objectivity of auditors –Recommend appointment of external/internal auditor Other: –Oversight of internal audit –Directing special investigations –Risk management oversight –Oversight of compliance with laws and regulations

17 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Doing the right things right Clear Expectations High Quality Accurate, Complete Timely Information (Charter and Work Plan) Meetings Agenda Time Presentations In-camera What Information (Priorities and Level of Detail) Preparation Who (management, Auditors) When (advance of Meeting; at meeting) Reporting Minutes Council/Board External Feedback (Role of Chair) Action Decisions Follow-up

18 GFOA 2004 – Good to Great Governance©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Compelling Drivers for Government to be Great Sarbanes-Oxley, Bill-198 – a new “bar” Government always needs to be seen to be moving in the same direction as the marketplace Increased emphasis on accountability in all levels of government Demographics The role of the Audit Committee has changed – but the population of audit committee members is limited CICA Handbook Section 5751: Communications with those having Oversight Responsibility for the Financial Reporting Process It’s the right thing to do

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