Forces of Change

1. Forces of Change Don H. Hansen Health Care Services Partner Don.Hansen@mossadams.com 425.303.3013

2. Enron, WorldCom, Tyco, et al Financial restatements Corporate bankruptcies Confidence in US financial reporting system shaken A Period Of Challenges

3. Legislative action Increased regulation Federal State Financial reporting changes New audit standards The Response?

4. Applicable to “Issuers” (those filing with the SEC) Revises governance standards New responsibilities on executives and boards Adds new disclosure requirements Documentation and testing of controls (Sec. 404) Increases audit committee responsibility Creates new federal crimes related to fraud Significantly increases criminal penalties for violations of the securities laws Creates Public Company Accounting Oversight Board Sarbanes-Oxley Act of 2002

5. Over 20 accounting reform proposals in 13 states Another 10 proposals on corporate accountability Other activity ongoing outside of the state legislative / regulatory arena State Laws / Regulations

6. Board of Accountancy requesting comments on changes to auditor independence rules Essentially adopting parts of Sarbanes-Oxley CPA firm must rotate audit partner every 5 years Can’t audit a company where CEO/CFO/Chief Accountant was recently employed by CPA firm Prohibit certain non-audit services SAO will apply GAO independence standards Washington State

7. An ethics code cannot replace a backbone Jeffrey L. Seglin New York Times

8. Changes to Financial Reporting • Changes to governmental reporting as well • Not driven by financial reporting scandals • Focus on clarifying government financial information • Governmental Accounting Standards Board GASB #34 – Financial reporting by state and local governments • Significant impact on statements • Adds required supplemental information to the statements • management discussion and analysis much like SEC filings • Other information required • Will add complexity to your statements

9. Changes to Audit Standards • Public Company Accounting Oversight Board (PCAOB) • Will set standards for audits of publicly traded companies • Significant changes from the AICPA for all audits • New fraud auditing standard this year (SAS 99) • Significant increase in auditor’s investigation of fraud • Increase in audit time estimated from 10% to 25% over historical audit hours

10. Changes have primarily focused on publicly traded companies Personal gain was driving the fraud Some suggest Sarbanes-Oxley should apply to all companies Questions: What problem are we trying to fix? Is the cost worth the potential benefit? Do hospital’s need an audit committee? How Far Should It Go?

11. Hospitals are already heavily regulated Will now have increased cost from regulation of financial reporting GASB #34 - increases complexity Fraud auditing standard - increases audit time Independent auditors required to follow Generally Accepted Governmental Auditing Standards (GAGAS) – increased annual education for CPA Auditor rotation? – start up costs of new auditors Cost of Regulation

12. Definitely need to improve confidence in financial reporting Audit independence standards should be strict Mandatory rotation of auditors Will lead to increased cost Reduced understanding of client issues Likely result in more audit failures, not less Where should the focus lie? How Far Is Far Enough?

13. Financial reporting is about internal controls Control Environment - Risk Assessment Information and - Control Activities Communication Monitoring Audits happen after the fact Good financial reporting results from day to day activities and regular oversight Focus On The Process

14. When the big 3 auto makers had to improve quality, they didn’t just do more inspections once the car was built – they made quality the part of the entire process Accurate financial reporting has to be part of the everyday way of doing business How Do You Improve Process?

15. If you want to improve quality, you don’t put emphasis just on inspections done at the end. Integrity has to be a part of the entire organization. It changes how you deal with vendors, suppliers, and customers. It should impact how employees interact, the message administration sends, the message sent to middle managers and employees. It takes Board commitment. How Do You Improve Process?

16. Central to Sarbanes-Oxley is increased Board oversight via an audit committee Requires a financial expert who understands the financial and accounting issues Difficult to have with elected officials Can an audit committee be effective? They should be asking the right questions They need to be educated and informed Board Involvement

17. How Are CPA Firms Changing? • The CPA industry got a wakeup call • The profession was founded on ethics and integrity • We have a responsibility to the public • Many lost sight of that responsibility • The AICPA will enhance discipline of members who don’t follow standards • Increased use of termination from public practice

18. AICPA Efforts • Improved peer review process (audits of the auditors) • Center for Audit Committee Effectiveness • Developing and anti-fraud and corporate responsibility program • Rebuild investor confidence • Re-establish audited financial statements as a clear picture window into corporate America • Reduce the incidence of financial fraud