Audit Committee, CEO, CFO, Internal Audit, Outside Auditor Hypothetical

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By Dave Tate, CPA, Esq. - The following is a hypothetical based at least in part on a real occurrence. How do you believe the various parties should handle the situation? Dave Tate, CPA, Esq.

1. The internal auditor and the CEO disagree about whether an item should be booked currently, or left as an unadjusted error and booked over time.

2. If the item is not currently booked, the current unadjusted amount would be a material.

3. One option is to book the unadjusted error amount now.

4. Is it relevant that it is believed that competing companies will not be booking their amounts for similar items?

5. Another option is to not currently book the amount, but to leave the current amount as an unadjusted error--although the unadjusted item is currently material, the unadjusted error will be booked over time such that by the time that a financial report is to be issued to the shareholders the remaining unadjusted error will have been reduced to an amount that is not material. This this additional information influence your belief as to how the situation should be handled?

6. What if the CEO believes that the unadjusted error should be currently booked, and internal audit believes otherwise? What if the CEO believes that the unadjusted error should not be currently booked, and the internal auditor believes otherwise?

7. What if in the hypothetical it is not internal audit, but the CFO (i.e., you exchange the CFO for internal audit)?

8. What if the outside auditor believes that the amount should be currently booked? What if the outside auditor does not believe that the amount should be currently booked? Does that change the discussion?

9. What if whether or not the amount is booked, no financial report is currently due to the shareholders but a financial report still must be currently filed with the regulators?

10. The issue is brought to the attention of the audit committee. What does the audit committee do?

11. What if internal audit or the CFO had contacted the outside auditor to discuss the issue of the adjustment, and now management is also working on adding structure including protocols for when internal audit or the CFO can access outside resources such as the outside auditor? How should protocols be determined? What if protocols are suggested for contact with the audit committee?

12. How do you handle friction that may have developed between the CEO, internal audit, the CFO, the audit committee, and the outside auditor?

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