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Bank Audit Committees: Building on a Strong Foundation

Itu00e2u20acu2122s no secret that audit committee members put in longer hours than ever before and have taken on greater risks and responsibilities. Recently, Bank Director and Grant Thornton joined forces to get a closer look at the role of public bank audit committee chairs and to assess which tools and resources are most critical to their jobs and responsibilities. The study asked audit committee chairs at about 400 public financial institutions about the information they use to accomplish their duties and the valuable human and technical resources they use to work with bank internal audit staff, choose their external auditor, select committee members, and assess personal risk.

Respondents reported relying on a number of people to help them do their jobs, including such tasks as oversight of their banksu00e2u20acu2122 financial statements and reporting, legal and regulatory compliance efforts, and internal and external audit functions. Eighty-eight percent of respondents said they make use of the services of the banku00e2u20acu2122s chief financial officer. Another 83% said the external auditor assists them. Respondents also said they rely on their banku00e2u20acu2122s regulatory compliance staff (79%), the internal auditor (77%), the in-house legal adviser (67%), the information technology staff (66%), the outside legal adviser (56%), and the external regulatory compliance staff (52%). Fewer audit committee chairs use investigative and forensic personnel (30%) or consultants for nonbank entities (i.e., insurance brokers and dealers or trust services) (23%). Nearly one-third (31%) of all respondents said they use an advisory accounting firm (Figure 1).

The study also delved into the practice of hiring an advisory accounting firm to assuage criticism about audit objectivity. u00e2u20acu0153To assure the independence of their external auditors and to gain assistance in understanding the complexities of accounting standards and financial pronouncements, many banks hire other accounting firms to provide advice and counsel related to accounting methodology and practices. This is not a bad idea, but it may not be as necessary as some perhaps thought earlier,u00e2u20ac says Todd Sprang, Grant Thorntonu00e2u20acu2122s Midwest regional financial institutions practice leader. Furthermore, the number who have turned to an advisory accounting firm is not necessarily indicative of a trend, he notes.

u00e2u20acu0153Many in the accounting profession might have overreacted and drawn their lines of independence too far from their clients,u00e2u20ac Sprang continues. u00e2u20acu0153External audit firms are finding that independence does not mean isolation. The SEC has clarified that audit firms are permitted to advise their clients and find appropriate ways to help them understand accounting matters, pronouncements, and methodologyu00e2u20ac”without sacrificing independence,u00e2u20ac he says.

Other summary findings of the study include:

u00e2u20acu00a2 Audit committee chairs have enormous responsibilities, but most feel they are adequately compensated and have plenty of resources to do their jobs. Still, some feel specialized training is lacking.

u00e2u20acu00a2 When it comes to the internal audit function, audit committee chairs believe independence is important, but many have not completely severed the tie between the internal audit staff and senior management.

u00e2u20acu00a2 The Sarbanes-Oxley Act has resulted in improved communication between the audit committee and the external auditor.

u00e2u20acu00a2 Audit committees are empowered to challenge management when necessary. They are also prepared to handle whistle-blower reports in an appropriate fashion.

u00e2u20acu00a2 Audit committee chairs believe their risk has increased in the past several years, and that perception has them reviewing their D&O insurance policies.

The entire report findings are available by visiting the websites of Bank Director (www.bankdirector.com, click on u00e2u20acu0153Resourcesu00e2u20ac) or Grant Thornton LLP at www.grantthornton.com. u00e2u20ac” Sarah Kirkell

Top 10 Financial Reporting Challenges

As companies absorb all of the financial reporting changes for 2006 financial reportingu00e2u20ac”and look aheadu00e2u20ac”Financial Executives International has compiled the following list of the top 10 financial reporting challenges for 2007:

1. Internal controlsu00e2u20ac”The SEC and PCAOB are working on revised guidance for implementing Section 404 of the Sarbanes-Oxley Act. It is expected that this new guidance will more clearly articulate how companies and auditors might take a more risk-based approach to its implementation.

2. Uncertain tax positionsu00e2u20ac”FIN 48 u00e2u20acu0153Accounting for Uncertainty in Income Taxesu00e2u20ac will be effective for 2007 reporting. Many companies have experienced implementation issues associated with this interpretation, so its provisions must be applied carefully.

3. XBRLu00e2u20ac”The SEC has made eXtensible Business Reporting Language (XBRL) a priority. Expect more momentum in 2007 as more companies voluntarily adopt it and the SEC continues to prioritize XBRL.

4. Fair Valueu00e2u20ac”FAS 157, u00e2u20acu0153Fair Value Measurement,u00e2u20ac must be adopted for financial statements for fiscal years beginning after Nov. 15, 2007 and interim periods within those fiscal years. This standard establishes a framework for measuring fair value and expands disclosures. Fair value is determined to be a market-based measurement, and the standard sets up the hierarchy for determining the fair value based on u00e2u20acu0153observableu00e2u20ac inputs (ready markets, etc.) and u00e2u20acu0153unobservableu00e2u20ac inputs. The devil is in the details in determining u00e2u20acu0153unobservableu00e2u20ac inputs and will need to be carefully implemented.

5. Servicing assets and liabilitiesu00e2u20ac”FAS 156, an amendment of FAS 140, effective for the first fiscal year that begins after Sept. 15, 2006, requires an entity to recognize a servicing asset or a servicing liability each time it undertakes an obligation to service.

6. Complexity in financial reportingu00e2u20ac”The level of restatements (over 10% of registrants) implies a level of complexity in the existing reporting model that requires subject matter experts on staff for every accounting area. This is not always practicalu00e2u20ac”particularly for smaller companiesu00e2u20ac”and more restatements due to simple errors in applying standards are expected.

7. Derivativesu00e2u20ac”u00e2u20acu0153Offsetting Receivables or Liabilities Recognized upon Payment or Receipt of Cash Collateral in Master Netting Arrangementsu00e2u20ac would permit offsetting of receivables and liabilities associated with cash collateral against the recorded amount of a net derivative position that is subject to a master netting arrangement. The proposed FSP would apply for fiscal years beginning after Dec. 15, 2006.

8. Pensions. FAS 158, u00e2u20acu0153Employersu00e2u20acu2122 Accounting for Defined Benefit Pension and other Postretirement Plans,u00e2u20ac was issued in 2006 and requires employers to recognize overfunded and underfunded status of a defined-benefit postretirement plan as an asset or liability. While the effective date for public entities was the end of fiscal years ending after Dec. 15, 2006, non-public entities are required to adopt in the fiscal year ending after June 15, 2006.

9. Earnings per shareu00e2u20ac” The FASB and International Accounting Standards Board (IASB) have reached differing conclusions on certain issues. FASB staff has analyzed those issues and expects to bring them to FASBu00e2u20acu2122s board in January 2007, enabling each board to issue due exposure drafts or final statements (FASB-only) later this year.

10. Business combinationsu00e2u20ac”IASB and FASB are jointly working on a project regarding major changes to business combination accounting. The exposure draft on applying the acquisition method indicated a move more towards a u00e2u20acu0153fair valueu00e2u20ac model. Among the expected proposed major changes: contingent assets and liabilities associated with an acquisition will be recognized at the date of the acquisition at fair value, with any subsequent changes reflected in earnings (not as an adjustment to goodwill); intellectual property R&D would be capitalized at the date of acquisition; acquired accounts receivable would be recognized at fair value; and all acquisition-related costs paid to third parties would be expensed as incurred. A final standard is on the FASBu00e2u20acu2122s agenda for the second quarter of 2007. While this standard may not have reporting implications for 2007, it may set a tone for future reporting and measurement.

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