Tag Archive: skepticism

Key Insights From the Audit Committee Chair Advisory Council

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On June 19, NACD and partners KPMG’s Audit Committee Institute (ACI) and Sidley Austin LLP co-hosted the most recent meeting of the Audit Committee Chair Advisory Council, bringing together audit committee chairs from major U.S. corporations, key regulators and standard setters from the Securities and Exchange Commission (SEC), Public Company Accounting Oversight Board (PCAOB), and Financial Accounting Standards Board (FASB), and other audit experts for an open dialogue on the key issues and challenges impacting the audit committee agenda.

As detailed in the summary of proceedings, the forum provided timely insights into a number of issues that are top of mind for audit committees. Key insights from the dialogue include:

  • As the PCAOB continues to focus on enhancing auditor independence, skepticism, and objectivity, audit committees are wrestling with how to make the best use of PCAOB inspection reports, with some questioning the timeliness and relevance of the reports and the use of the term “audit failure.”
  • Audit committees continue to discuss the potential value of more robust reporting from the audit committee and external auditors to provide greater insight into their work. Most delegates agreed that the auditor’s statement is the right area of focus.
  • Companies should be preparing for the impact of FASB’s “big four” convergence projects—revenue recognition, leases, financial instruments, and insurance contracts—with a particular focus on the lead time IT departments will need to implement systems changes.
  • Under new leadership, the SEC is refocusing on corporate accounting fraud and the quality of financial disclosures, while moving ahead with its already heavy rule-making agenda resulting from Dodd-Frank mandates and the JOBS Act.
  • The allocation of risk oversight duties among the audit committee, full board, and other board committees is receiving increased attention, as the risk environment becomes more complex and audit committees reassess their risk oversight responsibilities.
  • In their oversight role, directors serve in a part-time capacity, while management is full time, resulting in executives having a much deeper knowledge of the operational aspects and risks of the company. To overcome this inherent imbalance, directors should apply a “healthy” level of skepticism to the information and assumptions management provides.
  • The audit committee’s effectiveness hinges not only on having the right mix of skills and backgrounds, but also having a robust onboarding process and commitment to continuing director education.

For the full day’s discussion and proposed council action items, click here to read the summary of proceedings.

NACD Efforts to Improve Skepticism in Oversight Roles

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On the list of director responsibilities, there are several that come to mind: monitor CEO succession, oversight of long-term strategic planning, and establish and review executive compensation packages. What does not usually make the short list but has received significant attention lately is being a skeptic. Particularly in the oversight of financial reporting, directors have a critical responsibility to assess audit evidence with a questioning mind.

In the last two weeks, NACD has announced several resources to assist directors, especially those serving the audit committee, on enhancing independence, objectivity and skepticism in overseeing the external auditor. This week, the third episode in our webinar series on skepticism—produced with the Anti-Fraud Coalition of NACD, the CAQ, The IIA, and FEI—was released, titled “Skepticism and the External Auditor.” In this episode, moderator Michele Hooper is joined by Cindy Fornelli, executive director of the CAQ, and Greg Weaver, chairman and CEO of Deloitte and Touche LLP, to discuss leading practices in exercising professional judgment.

Last Thursday, NACD President and CEO Ken Daly attended the PCAOB’s third public meeting on auditor independence and audit firm rotation. At the request of Chairman Jim Doty, Daly voiced the views of the director community with respect to mandatory audit firm rotation. In his remarks, which are available on NACD’s website, he agreed with the PCAOB’s goal for increased auditor independence, objectivity, and skepticism.

However, Daly noted that mandatory audit firm rotation is not an effective way to achieve this goal. Instead, a rigorous evaluation process, used in conjunction with the PCAOB’s recently released Auditing Standard No. 16: Communications With Audit Committees can provide a more effective solution. To this end, an evaluation tool was produced by a collaboration of organizations dedicated to strengthening audit committee performance and transparency. The Audit Committee Evaluation of the External Auditor contains sample questions to gauge the quality of services provided, communications, and interaction. It can also be scaled for use at a wide range of organizations.

Skepticism Lessons Learned

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I’ve always been a trusting soul. One of my earliest lessons involved me diligently removing debris from a stream for someone in exchange for the official deed to the stream. The problem was, he didn’t own it.

I did not possess the skill of skepticism—defined in Audit Standard (AU) 316 as “an attitude that includes a questioning mind and a critical assessment of … evidence.” If I had, I would have observed that the shiny gold seal I was given was the kind you can buy at Woolworth’s 5 &10, and that the stream ran not only behind the deedor’s property but contiguous ones as well.

Yet there’s hope for us all. On October 1, NACD launched a unique new webinar series on Skepticism as part of an ongoing Anti-Fraud Collaboration with the Center for Audit Quality (CAQ), Financial Executives International (FEI), and The Institute for Internal Auditors (IIA). Along with many at NACD, I was involved in this exciting project, and had a chance to review the upcoming episodes.

“Skepticism” relates to a search for the truth. The term comes from the Greek skeptikos used some 2,300 years ago by disciples of the philosopher Pyrrhos. The verb skeptesthai means “to reflect, look, view.” The earliest self-declared skeptics emphasized the importance of the senses in confirming reality. Over time, the word’s meaning expanded to include the notion of reasonable doubt. Today, the “skeptic” is perceived as a doubter—someone who may trust, but must always verify.

It’s an attitude we all need. And perhaps no one knows this better than series moderator Michele J. Hooper, president and CEO of The Directors’ Council, and board member of NACD and CAQ’s governing board. Through questions and comments based on her considerable experience on a variety of public company boards she brings out the best in the six-part series, outlined as follows:

  1. A brief introduction.
  2. The Etiquette and Ethics of Skepticism with Mary M. Mitchell, president, The Mitchell Group, and Bill White, professor at Northwestern University and experienced director.
  3. Professional Skepticism and the External Auditor with Cindy Fornelli, executive director, CAQ; and Greg Weaver, CEO and chairman, Deloitte & Touche.
  4. Skepticism and the Audit Committee with Marty Coyne, lead director and audit committee member, Akamai Technologies; and Ken Daly, president and CEO, NACD.
  5. Skepticism and the Financial Executive with Marie Hollein, president and CEO, FEI; and Greg Kabureck, chief accounting officer, Xerox Corporation.
  6. Skepticism and the Internal Auditor with Richard Chambers, president and CEO, The IIA; and Paul Sobel, vice president and chief audit executive, Georgia Pacific.

In addition to these webinars, NACD will release a white paper with in-depth background and additional resources on skepticism in December.

Why skepticism? It’s a great way to break the fraud triangle—composed of incentive, opportunity, and rationalization—which can cost businesses so dearly. Financial reporting fraud, the focus of this series, is responsible for a significant percentage of the $3.5 trillion that businesses lose to fraud every year, according to a recent study by the Association for Certified Fraud Examiners.

The value of the labor I devoted to cleaning out that stream for a fake deed may not be worth much in dollars, but whenever trust is violated the cost is too high.

Fraud is unfortunately a fact of life; therefore skepticism is a skill we all need.