Candela Solutions: Newsletter – Governance Issues

The Vantage Point of Risk and Governance

By Walter Smiechewicz, Chief Consultant for Audit Integrity

The purpose of effective risk assessment and governance protocols is to allow an entity to prepare for potential hazards. Over one year before the recent headlines: “Huron Shares Plummet Amid Accounting Scandal” Reuters (Mon, Aug 3) and concomitant class action lawsuits, Audit Integrity’s proprietary AGR (Accounting and Governance Risk) score for Huron Consulting began to show significant stress followed by two periods of precipitous decline. Huron’s AGR, as tracked by Audit Integrity, was in the 83rd percentile in June 2006; 37th in June 2007; 27th in June 2008; and in the 3rd percentile by January 2009. This article points out a few of the early indicators unearthed by Audit Integrity’s AGR.

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Little GAAP Has Arrived

By Ron Kral, Managing Partner, Candela Solutions LLC

With little fan fair over the summer, private companies now have an alternative set of generally accepted accounting principles (GAAP) to US GAAP. It is called IFRS for SMEs and was published by the IASB (International Accounting Standards Board) on July 9, 2009. According to IASB’s website; “The IFRS for SMEs is a self-contained standard of less than 230 pages, designed to meet the needs and capabilities of small and medium-sized entities (SMEs), which are estimated to account for over 95 percent of all companies around the world.” Don’t let the term “SMEs” fool you as any entity, of any size, without public accountability can adopt this set of accounting principles assuming it is permitted by local jurisdictions.

This is a bigger deal then you might initially think since it essentially has forced a resolution to the age-old debate of “big-GAAP” versus “little-GAAP”. While the term GAAP simply refers to a standard framework of guidelines for financial accounting, US GAAP has essentially been written for public companies, that is those companies granted permission by the SEC to offer its registered securities for sale to the general public. This occurs since US GAAP is written by the Financial Accounting Standards Board (FASB) who is designated by the SEC as the standards author of financial accounting. Those standards govern the preparation of financial statements of public companies and many non-public companies that opt to adhere to US GAAP. The FASB is funded by public companies and their resulting standards are fundamentally written for bigger US companies in the public spotlight. The resulting product of US GAAP stands at around 17,000 pages as opposed to the mere 230 pages of IFRS for SMEs. The rest of this article identifies who can use this new streamlined set of rules in recording transactions and in preparing financial statements, as well as some of the big differences and challenges.

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COSO Thought Paper

COSO has released a new thought paper, Effective Enterprise Risk Oversight: The Role of the Board of Directors. It is aimed at helping boards of directors strengthen their oversight of enterprise risks. Specifically, it identifies four critical areas that contribute to effective board oversight of

enterprise risk management:

* Understand the entity’s risk philosophy and concur with the entity’s risk appetite.

* Know the extent to which management has established effective enterprise risk management of the organization.

* Review the entity’s portfolio of risk and consider it against the entity’s risk appetite.

* Be apprised of the most significant risks and whether management is responding appropriately.

Read the Full Thought Paper Here