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DEFINITION OF CORPORATE GOVERNANCE CODE OF PRACTICE BY WHICH A FIRMS MANAGEMENT IS HELD ACCOUNTABLE TO STAKEHOLDERS FOR THE EFFICIENT AND HONEST USE OF ASSETS GOVERNANCE REFERS TO THE SYSTEM OF DIRECTING AND CONTROLLING AN ORG. GOVERNANCE ASSUMES GREATER SIGNIFICANCE FOR PUBLICLY TRADED COMPANIES BEACAUSE OF THE SEPARATION OF MANAGEMENT FROM OWNERSHIP WHICH IS MEANT TO AVOID CONFLICTS OF INTERESTS ARISING OUT OF OWNER ALSO MANAGING THE SHOW Slide 2 DEFINITION OF CORPORATE GOVERNANCE Set of processes, customs, policies, laws and institutions affecting the way in which a corporation is directed, administered or controlled Corporate governance covers the entire gamut of activities having direct or indirect influence on financial health Social legal and economic process by which company functions and is held responsible Slide 3 DEFINITION OF CORPORATE GOVERNANCE Means doing everything better to improve relationship between company and stakeholders Includes the relationships among the various players involved and the goals for which the corporation is governed Defined as a field in economics, which studies the many issues arising from the separation of ownership and control Refers to the system of directing and controlling an organization Slide 4 DEFINITION OF CORPORATE GOVERNANCE PREREQUISITES FOR GOOD GOVERNANCE ARE EDUCATION,TECHNICAL SKILLS, CORE COMPETENCY AND A SYSTEM OF EFFECTIVE COMMUNICATION BOTH INTERNAL AND EXTERNAL PRIMARY OBJECTIVE OF THE MANAGEMENT OF A PUBLICLY TRADED COMPANY IS TO ENHANCE THE VALUE OF THE ENTERPRISE Slide 5 DEFINITION OF CORPORATE GOVERNANCE Corporate Governance is typically perceived as dealing with problems that result from the separation of ownership and control Corporate Governance is not new It is as old as the division of ownership and management. Separation has advantages. Allows share ownership to change without interfering with operation. Allows to hire professional managers. Slide 6 DEFINITION OF CORPORATE GOVERNANCE Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment Corporate governance also includes the relationships among the many players involved (the stakeholders). The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large. Slide 7 FUNDAMENTAL ISSUES IN CORPORATE GOVERNANCE TRANSPARENCY IN RESPECT TO COMPANY AFFAIRS AND COMPLETE DISCLOSURE OF ALL ADVERSE FACTORS AFFECTING A COMPANY ACCOUNTABILITY OF DIRECTORS IN COMPLIANCE OF LAWS AND REGULATIONS FAIRNESS IN REPORTING OF ALL DEALINGS RESPONSIBILITY ON PART OF DIRECTORS FOR BUSINESS DEALINGS Slide 8 NEED FOR CORPORATE GOVERNANCE Government and regulatory bodies are defining standards of corporate governance to mitigate the challenges of emerging corporate dynamism In India SEBI is actively involved in evolving, setting, and enforcing standards of good corporate governance Has instituted clause 49 of the listings agreement on the basis of SOX sections Slide 9 Corporate Governance Process Monitoring executive performance Ensuring accountability of management to shareholders Motivating management towards creating value for shareholders Protecting interests of stakeholders Slide 10 ROLE OF CORPORATE GOVERNANCE` o STRONG VS WEAK PERFORMANCE o PUBLICLY OWNED BUSINESS VS PRIVATELY OWNED BUSINESS o PROSPECT OF ATTRACTING LONG TERM, STABLE CAPITAL o INCLUDES QUESTIONS OF STRATEGY,VISION OF TOP MANAGEMENT,TRANSPARENCY,CODE OF CONDUCT, STDS OF PERFORMANCE, ACCOUNTABILITY ETC o DIRECTION OF BUSINESS PERFORMANCE o MEETING STAKEHOLDER INTEREST o RECONCILIATION OF CONFLICTING INTERESTS o SYSTEMS FOR ACCOUNTING, AUDITING AND FISCAL DISCIPLINE o MANAGER DISCIPLINE Slide 11 OBJECTIVES OF CORPORATE GOVERNANCE Creating a framework for the fiscal control of companies Ensuring that companies are answerable to stakeholders and protecting the rights of shareholders and investors Company is run according to the laws and regulations and its accounting policies are in conformity with the laid down accounting principles Ensuring that the company behaves in a socially responsible way Slide 12 Objectives of corporate governance 1. Strengthen management oversight functions and accountability 2. Balance skills, experience and independence on the board appropriate to the nature and extent of company operations 3. Establish a code to ensure integrity 4. Safeguard the integrity of company reporting 5. Risk management and internal control 6. Disclosure of all relevant and material matters 7. Recognition and preservation of needs of shareholders 12 Slide 13 Parties to corporate governance 1. Board of directors 2. Managers 3. Workers 4. Shareholders or owners 5. Regulators 6. Customers 7. Suppliers 8. Community (people affected by the actions of the organization) 13 Slide 14 IMPORTANCE OF CORPORATE GOVERNANCE IT LAYS DOWN THE FRAMEWORK FOR CREATING LONG TERM TRUST BETWEEN COMPANIES AND THE EXTERNAL PROVIDERS OF CAPITAL IMPROVES STRATEGIC THINKING AT THE TOP BY INDUCTING INDEPENDENT DIRECTORS WHO BRING IN EXPERIENCE ENABLES BETTER MONITORING OF RISKS LIMITS LIABILITY OF TOP MANAGEMENT BY MODULATING DECISION MAKING PROCESS ENSURES INTEGRITY OF REPORTING OF FINANCIAL FIGURES HELPS PROVIDE A DEGREE OF CONFIDENCE Slide 15 FOCUS OF CORPORATE GOVERNANCE ELECTION OF DIRECTORS BY SHAREHOLDERS(STATEMENT BY SWRAJ PAUL ON DCM AND ESCORTS) ACCOUNTABILITY OF DIRECTORS FOR DECISIONS TAKEN(PASSING THE BUCK GAME AT SATYAM-ONLY RAJU KNEW) ADOPTING ACCOUNTING STANDARDS AND INFO GIVEN TO BOARD (CLAUSE 49 ACCURACY,TRUTHFULNESS, TRACEABILITY AUTHORIZATION ) ADHERENCE TO LAWS AND REGULATIONS Slide 16 CORPORATE GOVERNANCE CONSTITUENTS RISKS-MANAGEMENT SHOULD BE PREPARED TO TAKE RISKS AND SHOW ENTREPRENEURSHIP PROTECTION-SHAREHOLDER INTEREST SHOULD BE PROTECTED FAIRLY INSIDE TRADING-CORPORATE GOVERNANCE SHOULD NOT PERMIT INSIDER TRADING TRANSPARENCY-FULL DISCLOSURE OF INFORMATION TO ENABLE SHAREHOLDERS TO EVALUATE MANAGERS Slide 17 TRENDS IN CORPORATE GOVERNANCE DEMAND FOR GREATER TRANSPARENCY AND ACCOUNTABILITY DEVELOPMENT OF PERFORMANCE CRITERIA AND ANNUAL EVALUATION OF THE BOARD SUCCESSION PLANNING Slide 18 CHALLENGES FACED BY CORPORATE GOVERNANCE INEFFECTIVE LEADERSHIP OF CHAIRMAN AND LACK OF COMPETENCE AND FOCUS BY BOARD MEMBERS LACK OF TRUST AMONG BOARD MEMBERS AND DOWN THE LINE STAFF LACK OF INTEREST AND TIME SHOWN IN ADDRESSING COMPANY ISSUES FUNCTIONS ROLES AND RESPNSIBILITIES NOT WELL DEFINED LEADING TO LACK OF CLARITY BETWEEN BOARD AND MGT AND EVENTUALLY WRONG, INEFFECTIVE DECISIONS TAKEN RECRUITMENT OF BOARD MEMBERS WITH EFFECTIVE SUCCESSION PLANNING IN PLACE Slide 19 CHALLENGES FACED BY CORPORATE GOVERNANCE FULFILING OBLIGATIONS TO STAKEHOLDERS OPTIMAL UTILIZATION OF RESOURCES FOR VALUE ENHANCEMENT OF ENTERPRISE ETHICAL CORPORATE BEHAVIOUR PROTECTING INTERESTS OF STAKEHOLDERS MONITORING EXECUTIVE PERFORMANCE ENSURING ACCOUNTABILITY OF MANAGEMENT TO SHAREHOLDERS ADOPTION OF GOOD CORPORATE PRACTICES REDUCED ENTERPRISE RISKS THUS REDUCING COST OF CAPITAL EFFECTIVE COMMUNICATION WITH STAKEHOLDERS Slide 20 CHALLENGES FACED BY CORPORATE GOVERNANCE DISTINGUISHING THE ROLES OF THE BOARD AND MANAGEMENT INCL SELECTION, REMUNERATION AND PERFORMANCE MONITORING COMPOSITION OF THE BOARD SEPARATION OF THE ROLE OF CEO AND CHAIR PERSON RE ELECTION OF DIRECTORS DISCLOSURES AND AUDITS PROTECTION OF SHARE HOLDER RIGHTS AND THEIR EXPECTATIONS DIALOG WITH INSTITUTIONAL SHAREHOLDERS Slide 21 FACTORS AFFECTING CORPORATE GOVERNANCE INTEGRITY OF MANAGEMENT - HOLD THE TRUST REPOSED ONTO BOARD BY SHAREHOLDERS ABILITY OF BOARD IN TERMS OF KNOWLEDGE AND SKILL AND NOT BASED ON RELATIONSHIP (IS ASIAN PAINTS AN EXCEPTION THOUGH MANY FAMILY MEMBERS ON BOARD). NEED TO EFFECTIVELY SUPERVISE THE EXECUTIVE MANAGEMENT ADEQUACY OF THE PROCESS TO PROVIDE ADEQUATE AND TIMELY INFO TO BOARD COMMITMENT LEVELS OF INDIVIDUAL BOARD MEMBERS (MOVE TO RESTRICT NUMBER OF COMPANIES PERSON IS ON BOARD OF DIRECTORS) RELATES TO HIS CONTRIBUTIOON WHLE ON THE BOARD OF DIRECTORS AND HIS ATTENDANCE AT MEETINGS QUALITY OF CORPORATE REPORTING DEPENDS ON THE TRANSPARANCY AND TIMELINESS OF CORPORATE COMMUNICATIONS WITH SHAREHOLDERS PARTICIPATION OF STAKEHOLDERS IN MANAGEMENT Slide 22 COMMON PRINCIPLES OF CORPORATE GOVERNANCE Rights of equitable treatment of shareholders Role of responsibilities of the board Integrity and ethical behaviour Disclosure and transparency ISSUES INVOLVING CORPORATE GOVERNANCE INCLUDE: -Internal controls and independence of auditors -Review of directors and senior management compensation -Risk management practices 22 Slide 23 MEASURES TO PREVENT CREATIVE ACCOUNTING CREATIVE ACCOUNTING IS AN ASSORTMENT OF TECHNIQUES USED TO FUDGE NUMBERS WHICH INCLUDE SHANGING BASIS OF ACCOUNTING TO UNDER OR OVER VALUE ASSETS, SHOW FICTICIOUS OR LEGALLY DISALLOWABLE EXPENSES, ALTERING TIMING OF EXPENSES eg POST DATING VOUCHERS, UNDER INVOICING etc MANIPULATIONS DONE FOR VARIOUS REASONS SUCH AS -EXECUTIVE BONUSES AND PERQUISITES LINKED TO REPORTED EARNINGS eg GETTING LETTER OF INTENT FROM PROSPECT TO REGISTER CREDIT FOR SALES THOUGH AS PER ACCOUNTING STANDARDS A LEGAL ORDER IS RECORDABLE ONLY WITH A PO -MANIPULATION OF TAXES AND DUTIES PAYABLE -HIGHER EARNINGS MANIPULATED TO AVOID SHOWING LESSER NET WORTH Slide 24 MEASURES TO PREVENT CREATIVE ACCOUNTING PROVIDING GUIDELINES FOR RECORDING TRANSACTIONS PROVIDING LEGAL PUNITIVE ACTION FOR DELIBERATE FUDGING AND MORE POWERS TO SEBI MAKING MANAGEMENT ACCOUNTABLE FOR ACCOUNTING POLICIES AND PRACTICES FOLLOWED STRENGTHENING STATUTORY AUDIT AND MAKING EXTERNAL AUDITORS LEGALLY LIABLE FOR THE ACCURACY AND CORRECTNESS OF AUDIT Slide 25 FACTORS AFFECTING CORPORATE GOVERNANCE INTEGRITY OF MANAGEMENT - HOLD THE TRUST REPOSED ONTO BOARD BY SHAREHOLDERS ABILITY OF BOARD IN TERMS OF KNOWLEDGE AND SKILL AND NOT BASED ON RELATIONSHIP (IS ASIAN PAINTS AN EXCEPTION THOUGH MANY FAMILY MEMBERS ON BOARD). NEED TO EFFECTIVELY SUPERVISE THE EXECUTIVE MANAGEMENT ADEQUACY OF THE PROCESS TO PROVIDE ADEQUATE AND TIMELY INFO TO BOARD COMMITMENT LEVELS OF INDIVIDUAL BOARD MEMBERS (MOVE TO RESTRICT NUMBER OF COMPANIES PERSON IS ON BOARD OF DIRECTORS) RELATES TO HIS CONTRIBUTIOON WHLE ON THE BOARD OF DIRECTORS AND HIS ATTENDANCE AT MEETINGS QUALITY OF CORPORATE REPORTING DEPENDS ON THE TRANSPARANCY AND TIMELINESS OF CORPORATE COMMUNICATIONS WITH SHAREHOLDERS PARTICIPATION OF STAKEHOLDERS IN MANAGEMENT Slide 26 SALIENT FEATURES OF SOX ESTABLISHMENT OF AUDIT COMMITTEE TO OVERSEE INTERNAL CONTROLS AUDIT PARTNER ROTATION EVERY 5 YEARS IMPROPER INFLUENCE ON CONDUCT OF AUDIT PROHIBITION OF NON AUDIT SERVICES TO COMPANY WHERE AUDIT SERVICES ARE RENDERED CERTIFICATION OF INTERNAL CONTROLS BY CEO/CFO SOX 303 SOX 404 PUBLICATION OF LOANS TO DIRECTORS ROLE OF CREDIT RATING AGENCIES Slide 27 INTERNAL CONTROLS Importance of Cadbury recommendation that directors should report on effectiveness of internal controls is that in effect it defines internal controls as exercised by the board of the company Internal control is defined by the auditing practices committee as the whole system of controls financial or otherwise established by the management in order to carry out the business in an orderly and efficient manner, ensure adherence to management policies safeguard the assets and secure the completeness and accuracy of records 3 types of internal controls -general system control -computer control systems -statutory system controls Controls for prevention of creative accounting Slide 28 REVIEW Controls designed to deter undesirable events from occurring are a.Preventive controls. b.Directive controls. c.Detective controls. d.Output controls. Slide 29 ENTERPRISE RISK MANAGEMENT SECTION 409 OF SOX WHICH IS RISK DECLARATION TO SHAREHOLDERS EVERY LISTED COMPANY HAS TO DISCLOSE ITS RISKS IN THE ANNUAL REPORT IN INDIA THE EQUIVALENT OF SOX 404 IS CLAUSE 49 WHICH IS OVERSEEN BY SEBI MOREOVER ALL SUCCESSFUL COMPANIES HAVE A VERY STRONG ENTERPRISE RISK MANAGEMENT PRACTICE THROUGH WHICH POTENTIAL DAMAGING RISKS ARE IDENTIFIED PREVENTED CONTROLLED AND MANAGED NEED FOR COMPANIES TO ASSESS RISKS IN CRITICAL PROCESSES AND ADDRESS THEM THRU VARIOUS METHODS LISTED LATER COMPANIES ARE ALSO OBLIGED TO DISCLOSE THEIR RISKS TO THE SHAREHOLDERS IN SPECIFIC CHAPTERS IN THE ANNUAL REPORT IN INDIA IT IS DISCLOSED IN THE CHAPTER ON MANAGEMENT DISCUSSIONS AND AREAS OF CONCERN UNDER THE MANDATORY DISCLOSURES UNDER CLAUSE 49 OF THE LISTINGS AGREEMENT Slide 30 CATEGORIES OF RISKS BASED ON TIME SPAN STRATEGIC RISKS M&A, JV, DIVERSIFICATION eg RELIANCE INDUSTRY FORAY INTO GREEN GROCERY OR TATA MOTORS SMALL CAR PROJECT AT SINGUR TACTICAL RISKS PLANNING OF NEW PRODUCTS, NEW MARKETS, CORE COMPETENCE, BUSINESS CONTINUITY PLANNING Slide 31 CATEGORIES OF RISKS BASED ON TIME SPAN OPERATIONAL RISKS ARISE IN DAY TO DAY OPERATIONS EG TRANSPORTER STRIKE REGULATORY RISKS INADEQUATE INTERNAL CONTROLS LEADING TO FRAUD(MAYTAS), INSIDER TRADING, MONEY LAUNDERING, CONFLICT OF INTEREST (MD OF TATA COMPANY GIVING INTERIOR DECORATION CONTRACT TO COMPANY WHERE WIFE WAS DIRECTOR) Slide 32 CLASSIFICATION OF RISKS EXTERNAL INTERNAL Slide 33 EXTERNAL RISKS REPUTATIONAL ECONOMIC CUSTOMER REQUIREMENT CHANGES CREDIT WORTHINESS COMPETITION SUPPLY CHAIN RISKS DECREASED SPEND POWER REGULATORY RISKS Slide 34 INTERNAL RISKS REGULATORY (CLAUSE 49 ) STATUTORY (INCOME TAX) REPUTATIONAL(INTERNAL SCANDALS, CONTERFEITING, WEIGHTS AND MEASURES,SLE OF COUNTERFEIT AND EXPIRED PRODUCTS,etc) INDUSTRIAL ESPIONAGE FORCE MAJEURE DECREASING HUMAN CAPITAL SUCCESSION PLANNING BUSINESS CONTINUITY PLANNING Slide 35 INTERNAL RISKS FINANCIAL CRUNCH TECHNOLOGY OBSOLESCENCE NEW PRODUCT ACCEPTABILITY INADEQUATE INTERNALPROCESS AND AGENCY NETWORK CAPABILITY Slide 36 STEPS IN RISK MGT IDENTIFICATION OF RISKS EVALUATION OF CAUSE AND EFFECTS DETECTION OF RISK MEASUREMENT OF RISK HANDLING OF RISK Slide 37 RISK HANDLING PROCEDURES RISK AVOIDANCE RISK ACCEPTANCE (RETENTION) RISK CONTROL (REDUCTION) RISK TRANSFER RISK SHARING RISK PREVENTION (INTERNAL CONTROLS) Slide 38 AIRTEL UNLISTED RISKS HIGH CUSTOMER CHURN HIGH RATE OF DELINQUENCY ATTITUDE AND EFFECTIVENESS OF FRANCHISEES BREAKDOWN IN NETWORK SERVICES DUE TO TECHNICAL FAULT OR FORCE MAJEURE REPUTATIONAL RISKS ARISING OUT OF ACTS BY EMPLOYEES AND PARTNERS Slide 39 JET AIRWAYS UNLISTED RISKS INCREASED AIRPORT HANDLING CHARGES FLIGHT CANCELLATIONS OWING TO FORCE MAJEURE OR OPERATIONAL REASONS RESULTING IN LOSS OF REVENUE FORCED DOWNSIZING OF STAFF RISKS FROM OUTSOURCED PARTNERS UNIONISM Slide 40 JET AIRWAYS UNLISTED RISKS OPERATIONAL AND DAMAGE CLAIMS BY PASSENGERS THEFTS OF CUSTOMER LUGGAGE AND ARTICLES COMPENSATION DUE AFTER ACCIDENTS MISBEHAVIOUR BY PASSENGERS IN MID AIR Slide 41 TATA CONSULTANCY UNLISTED RISKS INADEQUATE DUE DILIGENCE DURING ACQUISITIONS AND MERGERS BUSINESS PARTNERS, PRINCIPALS GOING OUT OF BUSINESS WITHDRAWAL OF SUPPORT OF SOFTWARE PRODUCTS BY PRINCIPALS DECREASING HUMAN ASSET WORTH CAUSED BY ATTRITION, SUPER ANNUATION OR DEATH Slide 42 TATA CONSULTANCY UNLISTED RISKS TECHNOLOGY OBSOLESCENCE INDUSTRIAL ESPIONAGE POLITICAL AND CURRENCY RISKS IN COUNTRIES WHERE BUSINESS IS DONE SUCCESSION PLANNING FOR SENIOR PEOPLE Slide 43 LISTING REQUIREMENT ACCORDING TO PROVISIONS OF CLAUSE 49 OF THE LISTING AGREEMENT COMPANIES ARE REQUIRED TO FURNISH THE STICK EXCHANGE WHERE THEIR SHARES ARE LISTED, HALF YEARLY UNAUDITED RESULTS WITHIN 2 MONTHS AND YEARLY REPORT WITHIN 48 HRS OF THE CONCLUSION OF THE AGM IN AT LEAST ONE NATIONAL DAILY ENGLISH NEWSPAPER AND IN A LANGUAGE NEWSPAPER OF THE REGION WHERE THE REGISTERED OFFICE IS LOCATED (SOX 404) DISCLOSURES IN DESCRIBED FORMATS COMPANIES TO FURNISH QUARTERLY COMPLIANCE REPORT (AS PER SOX 302) SIGNED BY COMPLIANCE OFFICER OR CEO TO STOCK EXCHANGE WITHIN 15 DAYS OF QUARTER END IN PRESCRIBED FORMATS Slide 44 PROVISIONS IN CLAUSE 49 CORPORATE GOVERNANCE I BOARD OF DIRECTORS IA COMPOSITION OF BOARD IB NON EXECUTIVE DIRECTORS COMPENSATION AND DISCLOSURES IC PROVISION FOR BOARD AND COMMITTEES ID CODE OF CONDUCT II AUDIT COMMITTEE IIA QUALIFIED AND INDEPENDENT AUDIT COMMITTEE IIB MEETING OF AUDIT COMMITTEE IIC POWERS OF AUDIT COMMITTEE IID ROLE OF AUDIT COMMITTEE IIE REVIEW OF INFORMATION BY AUDIT COMMITTEE III SUBSIDIARY COMMITTEES Slide 45 PROVISIONS IN CLAUSE 49 CORPORATE GOVERNANCE IV DISCLOSURES IVA BASIS OF RELATED PARTY TRANSACTIONS IVB DISCLOSURE OF ACCOUNTING TREATMENT IVC RISK MANAGEMENT DISCLOSURES IVD PROCEEDS FROM PUBLIC ISSUES RIGHTS ISSUES ETC IVE REMUNERATION OF DIRECTORS IVF MANAGEMENT IVG SHAREHOLDERS V CEO/CFO CERTIFICATION VI REPORT ON CORPORATE GOVERNANCE VII COMPLIANCE Slide 46 RESPONSIBILITIES OF EXTERNAL AUDITORS VERIFYING THAT THE STATEMENTS OF ACCOUNTS DRAWN UP ON THE BASIS OF BOOKS EXHIBIT TRUE AND FAIR STATE OF AFFAIRS OF THE BUSINESS ASSESSMENT OF RELIABILITY AND SUFFICIENCY OF INFO CONTAINED IN ACCOUNTING RECORDS INTERNAL CONTROLS ARE IN PLACE WITH RESPECT TO TRACEABILITY LEGALITY AUTHORITY RELEVANCE EXERCISE OF JUDGMENT WITH RESPECT TO ACCOUNTING PRINCIPLES eg R&D PRODUCT SHOWN UNDER COMMERCIAL SALES HEAD Slide 47 AUDIT FAILURES ARTHUR ANDERSEN AT SUNBEAM CORPORATION MAY 2001 ARTHUR ANDERSEN AT WASTE MGT INC JUNE 2001 ERNST AND YOUNG AT MCDONALDS IN MAY 1999 KPMG AT SHORT TERM INVESTMENT TRUST MAY 2000 PWC AT SATYAM DEC 2007 ARTHUR ANDERSEN AT ENRON CORPORATION DEC 2001 Slide 48 MATERIALITY AND AUDIT RISK AUDITOR IS ENGAGED IN EXPRESSION OF OPINION THAT THE ACCOUNTS GIVE A TRUE AND FAIR VIEW AUDIT PROVIDES REASONABLE BUT NOT ABSOLUTE ASSURANCE THAT THE FINANCIAL STATEMENTS ARE NOT MATERIALLY MISSTATED MATERIAL REFERS TO AMOUNTS OR DISCLOSURES THAT ARE SIGNIFICANT ENOUGH TO INFLUENCE DECISIONS OF USERS OF THE STATEMENT AUDITORS MUST ESTABLISH AN AMOUNT OR RANGE OF AMOUNTS THEY BELIEVE WOULD BE MATERIAL IN THE PARTICULAR CIRCUMSTANCES OF EACH AUDIT AND PLAN THE AUDIT TO DETECT POSSIBLE MATERIAL ERRORS AND MISSTATEMENTS Slide 49 EVALUATION OF QUALITY OF OVERALL FINANCIAL REPORTING -IMPAIRMENT AND OTHER VALUATION ISSUES HAVE THESE ISSUES ESPECIALLY DEFERRED TAX ASSETS AND RELATED VALUATION ALLOWANCES COLLECTIBILITY OF RECEIVABLES AND MARKET VALUE OF ASSETS) -SUBJECTIVE REPORTING AREAS HOW DID MGT ARRIVE AT ITS ASSUMPTIONS AND ESTIMATES. HOW AGGRESSIVE CONSERVATIVE IS MGT IN ITS ASSUMPTIONS AND ESTIMATES. HAVE THE METHODS FOR DETERMINING ESTIMATES CHANGED DURING THE PERIOD AND IF SO WHY. WERE THOSE CHANGES APPROPRIATELY QUANTIFIED AND DISCLOSED IN THE FINANCIAL STATEMENTS -RISK EXPOSURE WHAT ARE THE RISK AREAS OF THE COMPANY. HAS THE COMPANY ADEQUATELY REPORTED OR DISCLOSED LITIGATION, TAX AND OTHER CONTINGENCIES -REVENUE RECOGNITION WHAT ARE THE COMPANIES POLICIES FOR REVENUE RECOGNITION. DO COMPLEX REVENUE RECOGNITION ISSUES EXIST (DOUBLE CREDIT,NOTIONAL CREDITS AND DEBIT OF SERVICE CHARGES-INTER DIVISIONAL SALES, INTER COMPANY BILLING PRICE,,PAYMENT FROM GOVT OFFICES TO GOVT SERVICE PROVIDERS eg ARMY HQ TO CMC FOR COMP MAINT SERVICES Slide 50 EVALUATION OF QUALITY OF OVERALL FINANCIAL REPORTING -CRITICAL ACCOUNTING POLICIES WHAT ARE CRITICAL ACCOUNTING POLICIES OF COMPANY. WHAT EFFECT DO THE POLICIES HAVE ON THE FINANCIAL STATEMENTS. ARE THEY ADEQUATELY DISCLOSED. WHAT ARE THE ALTENATIVES -CHANGES IN INTERNAL CONTROLS HAVE THERE BEEN ANY CHANGES IN INTERNAL CONTROLS AS THE RESULT OF BUSINESS EVENTS (LAYOFFS) THAT MAY AFFECT THE QUALITY OF FINANCIAL REPORTING PROCESS -TREND INFORMATION ARE THE COMPANY FINANCIAL TRENDS FAVORABLE IN RELATION TO PRIOR RESULTS AND INDUSTRY NORMS. DOES THE TREND INFORMATION MAKE SENSE IN LIGHT OF CURRENT ECONOMIC CIRCUMSTANCES. ARE THERE INDICATIONS OF LIQUIDITY ISSUES. ARE THERE UNUSUAL SEASONAL REVENUE TRENDS OR SPIKES IN REVENUE. IS THERE PRESSURE FOR MGT TO MEET CERTAIN EARNINGS ESTIMATES FROM ANALYSTS. -UNADJUSTED AUDIT DIFFERENCES WHAT AUDIT DIFFERENCES HAVE NOT BEEN RECORDED BY MGT AND WHY NOT. WHAT EFFECT WOULD THE AUDIT DIFFERENCES HAVE IN THE FINANCIAL STATEMENTS. Slide 51 EVALUATION OF QUALITY OF OVERALL FINANCIAL REPORTING -ADEQUACY OF DISCLOSURES DO THE DISCLOSURES HAVE A WATER TIGHT ADEQUACY OR ARE THERE ANY WEAKNESSES NOT HIGHLIGHTED IN THE ADEQUACY CONTROL TEST AUDIT -ADEQUACY AND COMPLETENESS OF OTHER INFORMATION ESPECIALLY IN THE AREAS OF INDUSTRY OUTLOOK AND AREAS OF RISKS / CONCERNS