Development Finance Limited Investment Seminar

1
Development Finance Limited Investment Seminar

• March 12, 2004
• Balancing the value/cost equation in auditing
• Presenter William Lucie-Smith

2
DFL Investment Seminar

• Balancing the value/cost equation in auditing
• Corporate Failures
• Expectations Gap
• Issues Facing Auditors
• The way forward

3
Corporate Failures

• ENRON
• 7th largest company in US by market cap
• off balance sheet losses and debt
• reliance on rules not principles
• auditors independence
• governance issues
• WORLDCOM
• largest telecommunications company
• misclassification of expenses as assets
• non disclosure of losses

4
Corporate Failures (continued)

• TYCO
• SEC Investigation no change to financials
• governance failures/corporate greed
• PARMALAT
• long term fraud and embezzlement
• split role of auditors
• audit rotation
• COMMON THEMES
• management collusion
• no effective audit committee
• governance and audit failure

5
Expectations Gap

• Reports suggest a public guarantee.
• Limitations over fraud.
• Limitations over management collusion
• Pressures of market over auditors fees and scope.
• Pressures caused by market over company profits.
• Pressures caused by management expectations and
  stock based payments.
• Reality is much less clear than expectation.

6
Issues for Auditors

• Sarbannes Oxley Act
• independence issues
• scope issues
• Litigation and unlimited liability
• impact on the supply of services
• impact on recruitment
• Fees v Risk

7
Issues for Auditors (continued)

• Governance
• role of independent directors
• audit committee
• Accounting Standards
• globalisation
• complexity
• rules v principles

8
The Way Forward in TT

• Improved Corporate Governance
• need for TTSE SEC rules
• audit committee role needs greater independence
• Auditor Liability
• incorporation 1995
• liability caps
• Independence of auditors
• requires strong audit committees
• examination of scope services

9
The Way Forward in TT (continued)

• Costs
• not just fees
• cost of failures
• NCB
• Value
• scope re internal controls
• not a stock recommendation
• provision of useful data