2-49      LO 6  The following factors describe a potential audit client.  For each factor, indicate whether it is indicative of poor corporate gov- ernance. Explain the reasoning for your assessment. Finally, identify the risks associated with each factor.

a.       The company is in the financial services sector and has a large number of consumer loans, including mortgages, outstanding.

b.       The CEO’s and CFO’s compensation is based on three compo- nents: (a) base salary, (b) bonus based on growth in assets and profits, and (c) significant stock options.

c.       The audit committee meets semiannually. It is chaired by a retired CFO who knows the company well because she had served as the CFO of a division of the firm. The other two members are local community members—one is the president of the Chamber of Commerce and the other is a retired executive from a successful local manufacturing firm.

 

 

 

 

 

d.       The company has an internal auditor who reports directly to the CFO and makes an annual report to the audit committee.

e.       The CEO is a dominating personality—not unusual in this environment. He has been on the job for six months and has decreed that he is streamlining the organization to reduce costs and centralize authority (most of it in him).

f.        The company has a loan committee. It meets quarterly to approve, on an ex-post basis, all loans over $300 million (top 5% for this institution).

g.       The previous auditor has resigned because of a dispute regard- ing the accounting treatment and fair value assessment of some of the loans.