BDO in the Boardroom

Key Takeaways:

• The SEC and DOJ are imposing record-breaking financial penalties to hold wrongdoers accountable for misconduct, while also offering credit to those who proactively self-monitor, self-report, and remediate misconduct.
• As highlighted by recent cases, internal investigation procedures and remedial actions are commonly cited as key factors related to the regulator’s view of cooperation and the determination of reduced penalties.
• Boards must ensure the company has established protocols and resources to identify, investigate, discipline, and remediate violations of laws, regulations, or company policy.
• Conducting a timely and thorough internal investigation can demonstrate to regulators the Board’s commitment to compliance, potentially helping to avoid or reduce penalties and support a healthy compliance culture.
• Where misconduct is identified, the board must determine suitable corrective measures and establish an action plan.

Related Resources:

• Podcast: Audit Committee: Alleged Fraud, Now What?
• Archived Webinars: The Board’s Oversight of Fraud

Key Takeaways and Tax Planning Points:

To prepare for changes in tax regulations, boards should:

• Confer with management to review financial models – e.g., changes in tax rates, deductions, credits, and exclusions.
• Stay informed on tax policy changes and reviewing with management to understand realistic scenarios.
• Consider the possibility of a divided government scenario, which may result in sluggish legislative activity and short-term extenders for expiring provisions.
• Understand the organization's tax risk management policies, focusing on compliance, reporting, and consulting to assess how changes in tax law or procedure could affect the risk profile.
• Get regular updates on tax policy changes, especially after the election, to anticipate potential impacts on international and global tax strategies.
• Ensure that tax policy aligns with the firm's social policies, particularly in relation to ESG policies and tax credits promoting certain behaviors or investments.
• Consult with external tax advisors to stay abreast of tax policy changes and ensure coordination with the organization's internal tax team.

Resources:

• 2024 BDO Tax Strategist Survey

Key Takeaways:

• GenAI can be used to enhance the efficiency and effectiveness in financial reporting and internal controls over financial reporting. Currently, GenAI can help with tasks such as drafting financial statement disclosures, summarizing key contract terms, categorizing expense transactions, and preparing travel and expense reports.
• However, GenAI is predictive technology that provides users with a probable response, so it’s not going to be 100% accurate and requires human oversight, review, and judgment.
• Boards should consider the rigor of their GenAI-related governance policies for:
• - Responsible, ethical use
• - Expertise and training requirements
• - Data privacy and security requirements
• - Deployment, technology testing, and monitoring
• - Mitigating fraud, legal, regulatory and associated compliance risks
• Boards should engage in critical conversation with management about their decisions to use GenAI and how they are assessing related risks, including risk introduced by third parties, and the need for new/enhanced controls.
• Boards should also apply an appropriate risk framework. Asking the auditor how audit procedures are being adjusted to evaluate significant risks associated with use of data and the GenAI models in developing estimates, judgments and other information that has an impact financial reporting and disclosure. This would further include understanding technologies that the auditor may be using to perform their audits.

Additional Resources:

• CAQ Publication: Auditing in the Age of AI

• CAQ Audit in Action: The Age of Generative AI: How the Profession Can Respond

Key Takeaways:

• Audit Committees should have a playbook when allegations of fraud arise.
• The Audit Committee’s response level to a particular allegation will depend on the scope of the allegation and the corporate environment.
• Determining when an independent investigation is necessary and how independent it needs to be is determined by the context of fraud allegations.
• Timeliness is critical.
• Care should be taken in communicating with stakeholders.

Key Takeaways:

• One of the roles of a board of directors is to continually assess the company and make decisions in the best interest of sustaining value for the long-term.

• Decisions to change business models should be weighed against the core purpose of the organization.

• Significant strategic changes necessitate the board to broadly evaluate the impacts on significant internal and external stakeholders.

References:

• SEC Chief Accountant Statement: Audit Independence and Ethical Responsibilities: Critical Points to Consider when Contemplating and Audit Firm Restructuring

• BDO as an ESOP Company

Key Takeaways:

• Culture is a team sport that requires the right data for the right stakeholder (including the Board).

• Protecting culture is just as important as strengthening your culture.

• There is a measurable ROI to culture.

• A proxy for culture is measuring organization effectiveness.

Resources:    

• Nominating & Governance Committee Priorities for 2024: Excelling in Board Leadership

• CalPERS, Schroders Launch Framework Tying Human Capital Management and Value

Key Takeaways:

• While simple in structure, these new requirements have complex implications for companies, many of which may not be already gathering and reporting this level of climate data.

• The laws were years in the making but have now pre-empted the country-level SEC climate rules that many have been anticipating.
• Scope 3 reporting will be required for some companies, which includes the full value chain. Third-party assurance will be required in some cases.
• Even though the full extent of the requirements won’t come into force until 2030, the first requirements will be in 2026 covering the year 2025, so companies should get started now.

Resources:

• Prepare Now: California Climate Laws Impact Thousands of Businesses
• Sustainability and ESG Regulations Are Growing
• The Greenhouse Gas Protocol: Measuring Scope 1, 2 and 3 Emissions
• Preparing for the Proposed SEC Climate Disclosure Rule
• BDO Sustainability and ESG Services

Key Takeaways:

Establishing a “safe” environment for AI isn’t just a protective stance, it is itself a strategy that accelerates innovation, builds trust, and ensures long-term success.

In making the decisions to address entity- readiness to greenlight AI initiatives, boards’ due diligence includes:

• understanding how competitors, customers, employees as well as supply chains are using or would like to use/leverage AI;
• establishing a robust management risk management and oversight governance framework that provide appropriate mechanisms to protect proprietary data; and
• ensuring internal organizational parameters of AI use consider ethics, explainability, data reliance/privacy/security, talent/expertise, and strategic fit; and
• applying standardization for consistent and ethical development and deployment.

Key Takeaways:

• Using AI and predictive capability is not new but generative AI brings AI to the mainstream due to its human-like communication and ease of accessibility to companies of all sizes.
• For boards to properly oversee AI risk, they need to require management to establish a model risk management process along with a model risk governance framework around AI implementation that includes standardization of algorithms, governance and ethical considerations as well as validation of data inputs and outputs.
• Moving to AI changes the human role and underscores the need for a strong risk culture and exercising of healthy skepticism to contend with potential bias, complexity and lack of integrity within both data sets and AI algorithms.
• Underlying data sets must be of high quality and representative of population they are intending to serve – free from bias, properly labeled and annotated.
• Boards, management and auditors will need to continue to stay apprised of what is sure to be a continually evolving standard setting and rule-making environment as technologies continue to evolve.

Key Takeaways:

• Leveraging data analytics for strategic decision-making: Use of data analytics in the boardroom to is becoming increasingly important to help directors make informed, evidence-based decisions that drive growth and efficiency. By incorporating data-driven insights, businesses can better understand their customers, optimize operations, and identify new opportunities.
• Overcoming challenges in implementing data analytics: Organizations need to be prepared to face significant challenges when adopting data analytics, such as data quality, integration, and fostering a data-driven culture. Listen to best practices and practical advice for overcoming these obstacles and ensuring a successful analytics implementation.
• Board’s role in promoting data-driven culture: The board can play a critical role in promoting a data-driven culture within the organization. By asking the right questions, setting expectations, and ensuring alignment with business objectives, boards can support management teams in harnessing the full potential of data analytics for the organization’s success.