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A Common Sense Look at Sarbanes-Oxley

A Common Sense Look at Sarbanes-Oxley. Presentation to the MIT Auditing Committee of the Corporation June 8, 2003. Overview. MIT is not governed by Sarbanes-Oxley As companies move to conform with requirements, standards for “best practices” in governance shift toward the S-ox model

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A Common Sense Look at Sarbanes-Oxley

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  1. A Common Sense Look at Sarbanes-Oxley Presentation to the MIT Auditing Committee of the Corporation June 8, 2003

  2. Overview • MIT is not governed by Sarbanes-Oxley • As companies move to conform with requirements, standards for “best practices” in governance shift toward the S-ox model • This affords us the opportunity to reflect upon certain governance processes • Our peers in the main remain on the sidelines

  3. MIT’s Governance Practices • MIT’s governance practices are mature: • Have served us well over time • Have been modified as other opportunities have arisen • Audit Committee Charter adopted in 2001 • We have no compelling need to change existing practices in post-Sarbanes-Oxley era – but may use this time to explore our business needs in terms of governance practices in the whole

  4. Key Requirements • Brief summary of the key sections of the Act, those with potential applicability to institutions of higher education, follows this presentation • Each section shows relevant MIT practices • (As requested by the Audit Committee) • The Act is broken into major sections, including: • Auditor Independence • Corporate Responsibility • Enhanced Financial Disclosures • Corporate and Criminal Fraud Accountability

  5. Topics for Discussion • Auditor Independence • Audit Committee structure, composition, independence, and oversight role • External Certifications • Processes for: • Setting expectations • Reporting of “problems”

  6. Auditor Independence • Rotation of auditing firms and audit partners will be a matter of audit firm policy, which MIT will follow • Use of our independent auditing firm for non- audit services is addressed by MIT policy: • Pre-approval of such services in excess of $500,000 • Annual review of all fees for services

  7. Audit Committee Structure, Composition, Independence, and Oversight Role • MIT’s Audit Committee’s structure, composition and independence and oversight role established by the Corporation’s By- Laws • Clarified and ratified by the Audit Committee’s Charter, and MIT’s Conflict of Interest policy for Corporation members • Charter provides for committee member independence and financial expertise – slightly broader definitions than Sarbanes-Oxley • Charter also addresses oversight of auditors

  8. External Certifications • MIT does not include external certifications in the annual financial statement report, • But desires financial and internal control accountability within the organization be clearly understood • Consequently, MIT is committed to study and strengthening if necessary the structural and control elements providing financial accountability • Subject of the PwC Management Letter in recent years • Conceptually, individuals with responsibility for aspects of financial reporting or internal control, should be equipped to “certify” through the normal course of their work • See next slide, “Setting Management’s Expectations”

  9. Setting Management’s Expectations • Sarbanes-Oxley requires a code of ethics for financial officers – MIT sees a different need • MIT plans to clarify expectations for standards of business conduct and performance in roles, and ensure training and oversight of staff at all levels accordingly • These plans arise from management’s and auditors’ observations regarding the risks found in a decentralized business processing environment • Addressing these risks will be a collaborative opportunity, initially administration-led, eventually engaging of all

  10. Reporting of Issues • Sarbanes-Oxley requires a process enabling anonymous reporting of accounting, auditing and internal control matters to the Audit Committee • Even absent formal protocols, MIT’s Office of Sponsored Programs, Senior Counsel and Audit Division currently receive and handle matters as appropriate • Management believes formalization of these practices may be beneficial to the control environment, and will explore a simple web-based means, via the Audit Division’s and other areas’ web-sites, to collect potential issues as reported

  11. Summary • Management believes good business practices should be under continual review • As standards for “best practices” change, MIT will remain attentive • MIT will consider the approaches of peer organizations as potential models, to evaluate and perhaps emulate • Absent a regulatory or legal directive, a common-sense approach to governance practices will be our best posture

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