Page 314 - COSO Guidance Book

Another option to mitigate management override includes the establishment of an effective
whistleblower program that enables company personnel to feel comfortable reporting any irregularities.
These programs should provide anonymity to the complainant and assurances that each reported
infraction will be investigated.

The effectiveness of whistleblower programs as a control over management override has been
questioned ever since its earliest iterations. For example, the first landmark case concerning the
whistleblower portion of SOX concerned the Bank of Floyd (a unit of Cardinal Bankshares, Corp.), located
in the small farming community of Floyd, Virginia. This case lasted more than seven years and was
initiated after David Welch, the bank’s CFO, was fired following his allegation of accounting improprieties
by Leon Moore, the chairman and a bank director. The case was appealed several times, ultimately to the
U.S. Supreme Court, which refused to hear the case. Mr. Welch lost the case and, regardless of the
outcome, the length of time it took to bring the case to conclusion — not to mention the several
confounding court rulings, legal fees, and stress — might cause even the most ardent employee to think
twice before becoming a whistleblower.

Board of directors

The framework states that an effective board of directors has the following characteristics and
relevant skills: (1) independent directors, (2) internal control mindset, (3) market and entity knowledge,
(4) financial expertise (including financial reporting), (5) legal and regulatory expertise, (6) social and
environmental expertise, (7) incentives and compensation knowledge, and (8) relevant systems and
technology knowledge. Smaller businesses often have problems attracting directors with the requisite
skills and experience. To comply with standards and regulations, however, smaller public companies
must actively seek out independent directors with financial, accounting, and other expertise to serve on
the company’s board, providing both a monitoring function of management and counsel.

Small public companies should consider using the AICPA’s audit committee matching system as a
source for both board members and audit committee members. CPAs who are interested in serving
on these boards or committees can obtain additional information at:
https://www.aicpa.org/content/aicpa/volunteer.html.

Knowledge check

1. The framework states that characteristics of an effective board of directors include which of these?

a. Having a member with financial reporting expertise.
b. Having only individuals who are also members of management.
c. Having only outside directors.
d. Having monthly meetings.

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