Corporate Counsels' Role In Internal Controls - The Auditors' Perspective

Saturday, January 1, 2005 - 00:00

Editor: As one of your firm's leaders, you play a major role in the way in which your firm addresses issues arising under Sarbanes-Oxley. Your firm has demonstrated an extraordinary commitment to helping corporate counsel understand the role of the accounting profession in the post-Sarbanes-Oxley world and how they can work with auditors to assure compliance with the new requirements.

Goldenberg: The responsibilities of a company's management for corporate governance have never been greater. The requirements prescribed by Sarbanes-Oxley need to be interpreted and implemented within the context of each organization. Every company is striving to assure a goal of compliance without foregoing flexibility and initiative. This requires close monitoring and advice from the company's internal and external professional advisors.

We've seen the Sarbanes-Oxley expectations evolve since companies started assessments over two years ago. Since Sarbanes-Oxley is generally considered a responsibility of the financial reporting executive, the company's auditors became involved early in the process. It quickly became apparent to most companies that they needed knowledgeable and timely advice to meet the challenges of the new and ever changing compliance landscape. Since the external auditors are precluded under independence rules from providing much advice, if any, on compliance to their audit clients, management has turned to other accounting and audit professionals to provide that assistance. Eisner has developed an entire practice area dedicated to providing such assistance.

But everyone also recognized that Sarbanes-Oxley compliance is not just part of routine accounting processes. The foundation of good compliance is strong corporate governance and internal financial controls, which need to be supported by management in an environment wherein people do the right thing. This means creating the appropriate tone at the top, communicating the responsibilities for proper reporting throughout the organization, and creating effective monitoring processes. Corporate counsel is expertly poised to address these needs with the financial reporting executives, advising on matters such as codes of conduct, legal risk assessment, internal reviews and representations, communication channels, etc. So we've found it makes perfect sense to encourage close participation by corporate counsel as management goes through the Sarbanes-Oxley assessment process.

We've had some excellent results demonstrating to management, including corporate counsel, what a good internal control structure is - and corporate counsel helps educate us on legal compliance issues.

Editor: Describe your responsibilities.

Goldenberg: My primary responsibility is to drive our Sarbanes-Oxley support practice. Since Eisner already audits over 75 public companies, we have the skill sets necessary to assist non-audit companies in their Sarbanes-Oxley internal control assessments. We have been very successful in building relationships with a number of companies, as well as with several other accounting firms in assisting their audit clients. Another responsibility of mine is to work closely with my partners in developing our audit standards under Sarbanes-Oxley for our audit clients. So I sit on both sides of the table, which I think is a great advantage in delivering an appropriate and comprehensive Sarbanes-Oxley product. To support both of these roles, I also represent our firm to the public through Sarbanes-Oxley related seminars, articles and the like.

Editor: Please set the stage by describing the changes that have taken place in the role of your firm as a result of the post Sarbanes-Oxley environment. Which of your services are of particular interest to corporate counsel?

Goldenberg: Our involvement with corporate counsel has become much greater in the post-Sarbanes-Oxley environment. In the past, we would typically meet corporate counsel over limited matters of litigation exposure or, of course, when important transactions occurred. Now we regularly provide seminars and have workshops for corporate counsel to demonstrate internal control concepts, work together with corporate counsel to develop control environment structures, and consider the overall compliance frameworks. Corporate counsel has also become an important contributor for monitoring the company's internal control over financial reporting (such as under whistle blowing programs).

Editor: Probably the issue of greatest immediate importance to most corporations is compliance with Section 404 of Sarbanes-Oxley. Describe how you can help a corporation get ready to meet the requirements of Section 404.

Goldenberg: As auditors, we are experts in the relationship of internal controls to financial reporting. We also have the experience of auditing SEC reporting companies, and understand the requirements of Sarbanes-Oxley Section 404. Management must assess the effectiveness of their internal controls over financial reporting and provide their assessment in the annual report. Those assessments must include identifying where a misstatement could occur in the accounts and disclosures in the financial statements, documenting financial reporting processes, considering the appropriate internal controls, developing remediation plans when needed, and testing those internal controls when remediation is complete.

It's a process that covers all aspects of the financial reporting process, from the routine day-to-day transactions, to the drafting of the financial statements. The overall assessment is impacted by considerations relating to the accounting systems, as well as to the people performing the internal controls. It's really a self-audit by management of the company's internal controls. We're ready to provide an assessment process and the necessary audit professionals and services (IT, employee benefits and others) necessary to complete what is obviously a very extensive review.

Editor: How does your firm interface with corporate counsel in connection with Section 404 and any possible frauds or other irregularities uncovered in the course of your review?

Goldenberg: Management needs to be aware of deficiencies in internal control, so that they can develop remediation plans and communicate with their external auditors. Fraud or irregularities, especially if they occur in the management of the company, are of course indicators of internal control deficiencies. We work with corporate counsel to determine the root cause of any possible frauds, consider appropriate remediation in the light of the available rights of the company, and develop appropriate internal controls and monitoring to reduce the risk of further occurrences.

Editor: Do you feel that corporate counsel should be sufficiently versed in the legal and accounting principles related to disclosure to be able to identify possible violations and to head off potential violations?

Goldenberg: It is a company's responsibility to maintain adequate internal controls to reasonably assure complete and accurate financial information reporting. An integral aspect in good internal controls, particularly under an accepted internal control framework (i.e. COSO), is appropriate review of the financial information by informed management and advisors. Well versed corporate counsel can perform an important role in interpreting the legal exposures of a company in connection with the reporting requirements under the applicable accounting principles.

Editor: There is a heavy emphasis in Section 404 on assurance that financial controls are adequate. To what extent is it important from the standpoint of satisfying the requirements of Section 404 for a company to have a state of the art legal compliance system that will assure that legal issues that could have a material financial impact on the company are identified and disclosed or otherwise properly dealt with? How can your firm assist a corporation to adapt its legal compliance system so that information needed to meet the requirements of Section 404 is made available?

Goldenberg: All organizations must consider the completeness and timeliness of their legal disclosures and accounting for those contingencies. Legal matters can of course have a material effect on the financial statements and disclosures, and the potential impact is subject to unexpected developments. Therefore, it is paramount that any company, under Sarbanes-Oxley, have an adequate legal compliance system to interpret and communicate these matters to the financial reporting management. We can assist companies in addressing the risks relating to legal issues by providing the guidelines for financial reporting of legal issues and adapting them to the individual organization's environment.

Editor: Most corporations have corporate counsel assigned to work with levels of management (including middle management) most likely to need the services of those lawyers for drafting documents or providing ongoing legal advice. To what extent should these lawyers also be responsible for identifying and reporting legal contingencies that should be referenced in a company's financial disclosures as well as be alert to developing problems that may become disclosable unless remedial action is taken? Should companies that lack such corporate counsel coverage review their need for it?

Goldenberg: In order to assure that their financial reports are complete, management must consider all components of disclosure and compliance, including, and maybe especially, in the legal area. Communications of all disclosure matters has been a prime focus of Sarbanes-Oxley, and is integral to management's certifications. It is necessary to have appropriate competencies at all levels of the company to support the reporting requirements. Lacking such coverage would be a consideration in determining whether the internal controls over financial reporting are defective.

Editor: As a result of Section 404 reviews and other requirements of Sarbanes-Oxley, it can be anticipated that the number of internal investigations involving allegations of financial wrongdoing will increase. What services does your firm offer to assist corporate counsel and outside counsel in investigations, litigation or ADR proceedings where financial or accounting expertise is required?

Goldenberg: Eisner has a litigation support group to assist corporate counsel and audit committees in their evaluation and investigation of accounting matters, such as when there is a suspicion of fraud, weaknesses in internal controls, and to determine the root cause of financial reporting errors. Our staff includes a number of highly qualified forensic accountants. Further, Eisner can provide support to management as expert witnesses in shareholder lawsuits involving financial reporting matters. Additionally, Eisner has extensive experience acting as an appointed monitor over corporate governance at companies subject to external oversight, which of course includes consideration of internal controls. Separately, Eisner provides Report it, a reporting and anonymous hotline service that facilitates a company's whistle blowing program.