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

Good to Great Governance.Audit Trends in Municipal GovernmentGFOA 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?


A Failing Scorecard

XEROXXEROXALLIED IRISHALLIED IRISH

ENRONENRON

WASTE MANAGEMENTWASTE MANAGEMENT

WORLDCOMWORLDCOM

YBM MAGNEXYBM MAGNEX

LIVENTLIVENT

TYCOTYCOADELPHIAADELPHIA

NORTELNORTEL


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


Overwhelming Pressure to Reform the Culprits

Media

Professional Organizations

Public

Investors

Politicians

Bill-198

Sarbanes-Oxley

OSC

Regulators

Stock ExchangesThe Board

The Audit CommitteeThe CFO

The Auditor

Lobby Groups


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


The New Role of the External Auditor

Shareholders/Stakeholders

The Board ofDirectors/Council

Audit Committee

Chairman

ExternalAuditor

Management- CEO- CFO

Shareholders/Stakeholders

The Board ofDirectors/Council

Audit Committee

Chairman

ExternalAuditor

Management- CEO- CFO


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…


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.


Key Relationships Between the Auditor, Management, the Board and the Audit Committee

The Right PeopleThe Right PeopleAccountability,Reporting and

Evaluation

Accountability,Reporting and

Evaluation

Mandate And Charter

Mandate And Charter

InformationAnd Processes


ManagingRelationships

ManagingRelationships The Right PeopleThe Right PeopleAccountability,

Reporting andEvaluation

Accountability,Reporting and

Evaluation

Mandate And Charter

Mandate And Charter






Building Blocks

•There are three areas that represent the building blocks for the role of the audit committee:– Independence

– Communication

– Accountability


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


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


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



• 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



• 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


Doing the right things right

Clear Expectations

High QualityAccurate, Complete

TimelyInformation

(Charter and Work Plan)

Meetings• Agenda• Time• Presentations• In-camera

What Information(Priorities and

Level of Detail)

Preparation• Who (management,Auditors)• When (advance ofMeeting; at meeting)

Reporting• Minutes• Council/Board• External

Feedback(Role of Chair)

Action•Decisions•Follow-up


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

19 GFOA 2004 – Good to Great Governance ©2003 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Member ofDeloitte Touche Tohmatsu

Deloitte, Canada's leading professional services firm, provides audit, tax, financial advisory services and consulting through more than 6,100 people in more than 47 offices. Deloitte & Touche LLP, operates in Québec as Samson Bélair/Deloitte & Touche s.e.n.c.r.l. The firm is dedicated to helping its clients and its people excel. Deloitte is the only professional services firm to be named to the Globe and Mail's Report on Business magazine annual ranking of Canada's top employers for two consecutive years: 35 Best Companies to Work for in Canada in 2001 and 50 Best Companies to Work for in Canada in 2002. "Deloitte" refers to Deloitte & Touche LLP and affiliated entities. Deloitte is the Canadian member firm of Deloitte Touche Tohmatsu. Deloitte Touche Tohmatsu is a Swiss Verein (association), and, as such, neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other's acts or omissions. Each of the member firms is a separate and independent legal entity operating under the name "Deloitte", "Deloitte & Touche", "Deloitte Touche Tohmatsu" or other related names. The services described herein are provided by the Canadian member firm and not by the Deloitte Touche Tohmatsu Verein.

© 2004 Deloitte & Touche LLP and related entities.

Documents

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