AUDIT Seminar in Accounting & Society SOX – Section 404 & Enterprise Risk Management March 30, 2010

AUDIT

Seminar in Accounting & SocietySOX – Section 404 &Enterprise Risk ManagementMarch 30, 2010

©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

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Seminar in Accounting & SocietySOX Section 404 – March 30, 2010

Rick AndrewsPartner KPMG

Karen VangyiaPartner KPMG


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Agenda

Introductions/BackgroundOverview – What is Sarbanes-Oxley?Impact of SOX Impact of AS5The Economy & Risk – What Happened?What’s Next?Enterprise Risk ManagementQuestions


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About KPMG

KPMG LLP is a provider of audit, tax and advisory servicesKPMG LLP is #1 in the St. Louis market auditing 42% of St. Louis’ Top 50 Public CompaniesKPMG LLP is the U.S. member firm of the KPMG international network with a presence in ~ 150 countriesKPMG has been recognized as a great place to work by Fortune, Working Mother, the Human Rights Campaign, Business Week, The Women’s Alliance, the Black Collegian, Diversity Inc and others KPMG LLP consists of 21,000 partners and staff across the U.S. The St. Louis office is supported by approximately 250 employees serving in the capacity of client support delivery or client service support functions


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What is Sarbanes-

Oxley? What is SOX 302?

What is SOX 404?

What is AS5?


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Management’s Certifications

The CEO and CFO must personally certify to the:Accuracy of financial statements

Adequacy & effectiveness of disclosure controls and procedures (SOX 302)

Adequacy & effectiveness of internal controls over financial reporting (SOX 404)

Completeness of all disclosures that materially impact the financial statements or relate to frauds involving management with a significant role in internal controls over financial reporting


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Impact of SOX on Stakeholders

SOX 404 & 302 had a significant impact on:Board of Directors’ responsibilities Management’s responsibilitiesInternal Audit Department resources and responsibilitiesCosts of compliance


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Impact on Board of Directors

Increased liability & responsibility for Audit Committee membersQualifications for Audit Committee members more stringent (“financial expert” requirement)Director, Internal Audit reports directly to the Chairman of the Audit CommitteeWhistleblower Policy implemented with reports to the Audit Committee Chair


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Impact on Board of Directors

As a result, the Audit Committee has:Increased focus on internal controls & audit results

Demanded swift remediation of internal control weaknesses

Supported the addition of Internal Audit resources to support compliance efforts

Initiated discussion over business risk management strategies across the organization


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Impact on Management

Certifying officers (CEO & CFO) are personally liable for undisclosed issues and significant financial misstatements

Potential for large $$ penalties and prison sentences

Increased accountability to Board with respect to maintaining internal controls and SOX compliance processes


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Impact on Management

As a result, Management has:Increased focus on internal controls & audit results

Demanded swift remediation of internal control weaknesses

Placed reliance on transparency of quarterly disclosure certification process

Continued to set a strong “Tone at the Top” with respect to establishment and adherence to policies & controls


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Impact on the Audit Profession

“The Good”Stature of audit profession raisedBubble of demand for auditorsIncreased salaries

“The Bad”Balance of work shifted to routine detail testsMore challenging to find ways to provide value due to independence rules (external audit) & resource limitations (internal audit)


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Benefits of SOX 404 & 302

Increased knowledge of internal controls throughout the organization

Ownership of internal controls embedded within the organization

More rapid remediation of significant control deficiencies

Increased transparency over events that may impact the financial statements and disclosures (SOX 302)


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Impact of AS5

External audit no longer opines on management’s approach to forming their opinion on internal controls over financial reporting

Scales are balancing with more focus on a risk-based approach

Management has increased flexibility in developing its compliance plan


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Global disruption of

economyMassive stock market decline

Bernie Madoff

Mortgage backed Securities

AIG bailout

Lehman

Bankruptcy

Bank

foreclosures

What Happened???

Wall St VS. Main St


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What’s Next? The Economy, Risk & SOX 404

Companies are dealing with issues that are still evolving!As a result of the global economic disruption and the turmoil in the financial markets, companies are dealing with certain accounting and reporting issues for the first time in decades, and for some, the first time EVER


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What’s Next? The Economy, Risk & SOX 404

Anticipate increased focus on Enterprise Risk Management (ERM) and integration of related control structure into organizations

Boards and management are being asked why they did not foresee the potential impact of major risksDebt ratings agencies (Standard & Poor’s) are starting to ask about ERM


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ENTERPRISE RISK MANAGEMENT

JourneyERM


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The Meaning of Risk is Changing

Prior Thinking Current Thinking

A way of preserving value by avoiding risk

A way of creating sustainable value by embracing risk

Focus on what has happened

Focus on what could happen


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What is Risk Management?

What is Risk?“the chance of something that will have an impact on objectives. It is measured in terms of consequences and likelihood.”

What is Risk Management?“the culture, processes and

structures that are directed towards the effective

management of potential opportunities and adverse

effects”


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Source: COSO Enterprise Risk Management – Integrated Framework (September 2004)

Enterprise Risk Management Defined

“Enterprise risk management isa process, effected by an entity’s board of directors, management and other personnel,applied in strategy setting and across the enterprise,designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.”


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ERM Drivers?

External triggersShare shocker: Surprises that lead to a falling or poor-performing share priceBorn in the U.S.A.: Sarbanes-Oxley controls reporting is time-consuming and must deliver back more than just complianceCapital concerns: Credit-rating agencies taking an interest in governance and risk management capabilitiesRules and more rules: New trends in the regulatory environment at home and abroad (e.g., Euro-SOX)Listing pressure: Demerger or listing on a new exchange that requires additional governance and compliance processesLosing face: An event that could put the company’s reputation at significant risk of damage


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ERM Drivers? (continued)

Internal triggersMusical chairs A new CEO or Chair of the Board/Audit Committee who is open to fresh approachesFlex from the center Concerns at HQ about the level of control they have over a diverse businessExpansionists The company is growing quickly and struggling to maintain control over operationsA risky business Major changes in business direction or the dynamics of an industryTicking off Ongoing Audit Committee or major shareholder complaining about a lack of internal controlKeeping up with the TrendsExecutive management wants to maintain parity with the practices of their peers


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21%

20%

8%

4%

48%

76%

53%

50%

29%

24%

0% 20% 40% 60% 80% 100%

Other

No/little change

Improved equity value or reduced debt costs

Reduced earnings volatility due to hedging

Improved earnings or shareholder value

Reduced infrastructure, operating, or resource costs

Improved decision-making

Improved operations

Improved regulatory compliance

Improved risk awareness and collaboration

What value has Enterprise-wide risk management created?

Source: KPMG, LLP: ERM in the US – A 2006 Report Card 265 US Company Responses

Where Are Global Companies Heading with ERM? Expected Potential Benefits/Outcomes


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Accountability Pyramid

The BusinessHelp manage the risks

Risk Management OversightFacilitate the process

The Board Provide Governance

Helps enable direct objective comparison of risks

Risks can be

monitored and

reportedLimits/KRI’s and accountabilities are

setPolicies and procedures defined and implemented

Risk Policy and Appetite

Key Systems/Processes

Cle

ar a

nd

unam

bigu

ous

com

mun

icat

ion

of the

risk


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Creating Process

Building and maintaining a dynamic risk management framework and process to achieve sustainability

Creating Content

Identifying, evaluating and prioritizing enterprise risks

KPMG ERM Framework

Risk Governance

Risk Assessment

Risk Quantification & Aggregation

Risk Monitoring and Reporting

Risk & Control Optimization

FrameworkElement

Description

Establishment of approach for developing, supporting, and embedding the risk

strategy and accountabilities

Identifying, assessing, and categorizing risks across the enterprise

Measurement, analysis, and consolidation of enterprise risks

Reporting, monitoring, and assurance activities to provide insights into risk management

strengths and weaknesses

Using risk and control information to help improve performance

Likelihood

Co

nse

qu

ence

Insignificant

Minor

Moderate

Major

Catastrophic

Remote Unlikely Possible Likely Almost certain

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16

53

10 134

11

12

1

14

7

17

8

9

6 Top Risks (those that threaten)

1. Strategic Priorities

2. Business Model3. Corporate

Existence

Create Content

Create Process

ERM Content and Process


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Questions???

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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AUDIT Seminar in Accounting & Society SOX – Section 404 & Enterprise Risk Management March 30, 2010