How to Manage Crisis Situations Effectively

From PLI’s Course Handbook Audit Committee Workshop 2008: What Audit Committee Members and Those Who Advise Them Need to Know Now #14433

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HOW TO MANAGE CRISIS SITUATIONS EFFECTIVELY

Norma Provencio Provencio Advisory Services, Inc. Norma Provencio

Norma is the founder of Provencio Advisory Services, Inc. Norma has over 25 years of financial consulting experience. Norma was with Arthur Andersen for 23 years and was the Partner-in-Charge of its Pacific Southwest Healthcare Practice from 1996 to 2002. Norma joined KPMG in May 2002 and was the Partner-in-Charge of its Pacific Southwest Healthcare Practice until she resigned her partnership in September 2003 and formed Provencio Advisory Services. Norma was responsible for the audit, business consulting, and tax practices at Andersen and KPMG.

Since 1983 Norma has worked extensively with healthcare organizations including serving the business advisory needs of hospitals, long-term care facilities, home health agencies, physician groups, and managed care organizations. Norma has directed and performed numerous consulting engagements related to feasibility studies, financial forecasts and projections, and corporate investigations. She also has extensive experience in performing operational reviews, due diligence for acquisition purposes and designing and implementing plans.

Norma is on the board of directors of Valeant Pharmaceuticals and is a member of Valeant’s audit committee and chair of its compensation committee. Norma previously served on the board of directors and chair of the audit committee and was a member of the compensation committee of International Aluminum until it was sold in March 2007. Norma is an audit committee financial expert as defined by the SEC regulations.

Norma received her Bachelor of Science in Accounting from Loyola Marymount University. She is a Certified Public Accountant licensed in California and is a member of HFMA, AICPA, and the California State Society of CPAs. Norma is on the board of regents of Loyola Marymount University.

How to Manage Crisis Situations Effectively

Presented To: Audit Committee Workshop – July 2008 Practising Law Institute by: Norma Provencio

Overview

. Section 10A of the 1934 Act

. Crisis Triggers that Lead to Investigations

. Why do an Internal Investigation?

. Benefits/Disadvantages of an Internal Investigation

. Internal Investigations – Immediate Steps

. Internal Investigations – Checklist

. Self Reporting

Section 10A of the 1934 Act | What it means for Auditors & Audit Committees

. Each audit of financial statements, in accordance with generally accepted auditing standards, shall include:

. Procedures designed to provide reasonable assurance of detecting illegal acts that would have a direct and material effect on the determination of financial statement amounts;

. Procedures designed to identify related party transactions that are material to the financial statements or otherwise require disclosure therein;

. An evaluation of whether there is substantial doubt about the ability of the issuer to continue as a going concern during the ensuing fiscal year.

. Section 10A also provides for: . Required Response to Audit Discoveries . Investigation and Report to Management . Response to Failure to Take Relevant Action . Notice to Commission: Response to Failure to Notify . Report after Resignation . Civil Penalties in Cease-and-desist Proceedings . Prohibited Activities . Pre-approval Required for Non-Audit Services . Audit Partner Rotation . Reports to Audit Committee . Conflicts of Interest

Crisis Triggers

. Auditor inquiry

. Analyst review

. Trading activity/swings

. Industry changes

. Financial restatements

. Other scrutiny

Foreign Corrupt Practices Act (FCPA) Red Flags

. Request for payment in cash or deposit to numbered account or bank in third-world country

. Request for payment to agent, third party or other intermediaries

. Request for unreasonable compensation in light of services promised or rendered

. Request for reimbursement of expenses with incomplete documentation

. Consider the context and environment

. Business in a country known for corruption

. Emphasis on “connections”

Internal Investigations . Why Do an Internal Investigation? . Meets expectations and establishes cooperation with the government . Provides information to fulfill management, oversight responsibilities . Permits Company/Board to retain control . Protects privileges . Demonstrates effective compliance program and good corporate citizenship . Audit (Special Committee) has an obligation to answer at least three critical questions: . Did wrongful conduct occur (and, if so, to what extent and effect)? . Have all reasonable steps been taken to address the effects of the company’s wrongful conduct? . What assurances does the Board have that similar misconduct will not recur?

Benefits/Disadvantages of an Internal Investigation

. Benefits

. Reduces exposure to government action

. Provides information to fulfil management, oversight responsibilities

. Presents opportunity to correct problems before they lead to litigation

. Permits Company/Board to retain control

. Disadvantages

. Costly and time consuming

May create evidence for private plaintiffs or regulators

. SEC or DOJ may find investigation insufficient

. Government may require privilege waiver

. Leak may prompt interest from private plaintiffs or regulators where none existed previously

Internal Investigations – Immediate Steps

. What Are the Immediate Steps?

. Retain outside counsel, investigative team

. Define the scope of the investigation

. Define reporting group/audit/special committee

. Preserve evidence

. Consider insurance coverage issues

. Establish timetable for completion and response

. Identify witnesses

. Identify documents/electronic/other evidence

. Prepare investigative plan

Investigation Checklist

 Engage audit committee

 Retain external counsel and forensic accountants

 Retain local counsel (if necessary)

 Issue documentation retention guidance

 Capture e-mails and other electronic data

 Gather and review hard copy documents

 Review documents and electronic data

 Perform interviews

Arguments in Favor of Self-reporting

. Criminal case against company less likely

. Reputational harm

. Possible debarment from federal contracting

. Lowers or eliminates SEC penalty

. Risk of detection is significant

. Whistleblowers

. Leaks

. Press

. Competitors

. Benefits of self-reporting diminished by delay?

How to Manage Crisis Situations Effectively

Questions?