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Ac’sense 2013 Board MattersQuarterly Update – Q4 2013

January 2014

Reminders

In order to receive participation credit, you must:

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Q&A Feature

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Learning Objectives

This course is designed to provide insight into various issues concerning board members in their oversight roles and perceived opportunities and risks. Specifically, participants will have gained insight into the thoughts expressed public company board members in response to questions about:

• Where boards should spend critical time

• Risk management, including fraud, cybersecurity, and foreign market risk

• Financial reporting & disclosure

• Executive compensation and proxy advisory firms

• Other recent governance developments

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ModeratorEXPERIENCE

Amy has spent the past 9+ years within BDO’s National Assurance Department directing various training series as well as the Ac’senseSM and Board Reflections client outreach program. Amy oversees the development of certain technical trainings that provide a venue to keep BDO’s Assurance Professionals up-to-date on current and evolving accounting, auditing and financial reporting matters. Ac’senseSM is BDO’s external program designed for executive management and those charged with governance of both public and private companies to keep them informed on technical matters of importance. Amy also serves on the firm’s International Financial Reporting Standards (IFRS) Task Force as well as BDO’s Board Reflections initiative, which is a developing umbrella program dedicated to all matters of corporate governance that are of interest to BDO’s clients and contacts. In collaboration with various leaders within BDO, Amy published BDO’s Effective Audit Committees in the Ever Changing Marketplace and related practice aids.

Prior to joining BDO, Amy spent a combined 11 years with two “big 6” accounting firms. During that time, she served larger public clients in the high technology and commercial and residential building products arenas as well as smaller private companies primarily in the wholesale distribution and biotechnology markets. Her experience includes assisting clients with several public debt offerings and acquisition transactions Additionally, she provided technical consultation on audit, accounting, and independence issues and developed internal/external technical trainings geared toward public and private companies.

PROFESSIONAL AFFILIATIONS•American Institute of Certified Public Accountants•Massachusetts Society of Certified Public Accountants•National Association of Corporate Directors

EDUCATION•M.B.A./M.S. in Accounting – Northeastern University•B.A. in Economics and Psychology – Union College

Amy E. RojikDirector, National Assurance BDO USA, LLParojik@bdo.com617-239-7005

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EXPERIENCEPartner and National Director of BDO’s SEC Practice, Wendy Hambleton was recently appointed to the Financial Accounting Standards Advisory Council (FASAC), which advises the FASB on strategic issues, project priorities and other matters that affect accounting standards setting. She is also a member of BDO’s Board of Directors.

Wendy works extensively with the Firm’s clients and engagement teams to prepare SEC filings, communicate with the SEC staff and resolve related accounting and reporting issues. Additionally, she co-authors a number of internal and external publications, including the AICPA’s Guide to SEC Reporting and Warren Gorham & Lamont’s Controller’s Handbook chapter on Public Offering Requirements.

Wendy currently heads BDO’s Board Reflections Initiative, which is a developing umbrella program dedicated to all matters of corporate governance that are of interest to BDO’s clients and contacts. She also heads the firm’s International Financial Reporting Standards (IFRS) Task Force

Prior to joining the SEC Department, Wendy worked in the Washington, DC office where she specialized in working with both public and private manufacturing and multi-national corporations.

PROFESSIONAL AFFILIATIONS•Financial Accounting Standards Advisory Council•Accounting Advisory Board, Mason School of Business, The College of William and Mary•American Institute of Certified Public Accountants •BDO Assurance Committee and IFRS Task Force

EDUCATION•B.B.A., Accounting, The College of William and Mary

Wendy HambletonPartner and National Director SEC PracticeBDO USA, LLPwhambleton@bdo.com312-856-9100

Presenter

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EXPERIENCEThe Accounting &Audit Professional Practice Leader for BDO USA, LLP and member of BDO’s Board of Directors, Chris has over 27 years experience in public accounting working both with private and public companies He has significant experience working with clients in the consumer product, retail, distribution, manufacturing, and technology industries. Chris has assisted clients in several public and private securities offerings.

Chris also functions as a technical partner within BDO’s National SEC Consulting Group. In this role, Chris is responsible for performing final technical reviews of registration statements and annual reports for clients in a broad range of industries. Chris is also member of BDO’s National Auditing and Accounting Committee, through which the Firm’s internal policies are established.

Chris has authored comprehensive review courses on The Sarbanes-Oxley Act of 2002 and Section 404 of the Act. Chris is an instructor for BDO and is a frequent guest lecturer for various organizations.

PROFESSIONAL AFFILIATIONS

• American Institute of Certified Public Accountants• Auditing Standards Board International Auditing Task Force• Extended Firm Lead to the Center for Audit Quality • California Society of Certified Public Accountants• Colorado State Society of Certified Public Accountants• Montana State University Accounting Advisory Board

EDUCATION

• M.B.A. in Management, University of San Francisco• B.S. in Accounting, Montana State University

Chris SmithPartner and National Accounting & Assurance Practice LeaderBDO USA, LLPchsmith@bdo.com310-557-8549

Presenter

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Agenda

• BDO 2013 Board Survey:• Risk & Time Management • Financial Reporting & Disclosure• Executive Compensation & Proxy Advisory Firms

• Other Recent Governance Developments

• Resources

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BDO 2013 Board Survey

Reflects opinions of corporate directors of public company boards with revenues ranging from $250M to $750M as of September 2013:

“The responsibilities of corporate directors at publicly traded companies have never been greater. Dealing with regulatory changes to financial reporting requirements, addressing risk across the enterprise –whether it be in domestic operations, foreign markets or cyber space – and vigilantly managing executive compensation practices are a just a few of the issues that boards are wrestling with in 2013.”

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Risk & Time Management

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Would you like your board to spend more or less time on the following topics?

Topic More Less Same

Succession planning 47% 6% 47%

Industry competitors 45% 5% 50%

Risk management 38% 1% 61%

Evaluating management performance

32% -% 68%

Compliance and regulatory issues

16% 20% 64%

Executive compensation 8% 8% 84%

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Risk Management

69%

13%

9%

6%

3%

0%

Regulations/Compliance overload

Cyber breach

Fraud/Corruption

Privacy breaches/violations

Intellectual property misappropriation

Anti-trust violations

Which ONE of the following represents the greatest risk for yourcompany?

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Fraud Risks

42%

20%

18%

12%8%

Which ONE of the following issues represents the greatest risk for FRAUD at your company?

Embezzlement or similar crimesagainst the company

Corruption/bribery

Earnings management

Insider trading

Revenue recognition

12%

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Focus on Anti-Corruption and Anti-Fraud Resources

45%

35%

14%

6%

In which ONE of the following areas have you devoted the greatest increase in resources to

reduce corruption and fraud?

Training

Personnel

Technology

Use of external consultants/counsel/other

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Foreign Operations – Risk of Bribery and Corrupt Practices

32%4%

64%

38%

10%

52%

0%10%20%30%40%50%60%70%

Increased Decreased Stayed about thesame

Over the past two years, do you believe your company's compliance risks related to bribery of

foreign government officials have…

2012

2013

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Foreign Operations – Mitigating Corruption Risk

65%

16%

8%

5%

5%

0% 10% 20% 30% 40% 50% 60% 70%

Improved training & education

Increased testing of transactions

Increased board oversight

Revamped policies & procedures

Change in business model/strategy

Which ONE of the following measures do you feel is the most effective in mitigating corruption risk in

foreign markets?

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Financial Reporting & Disclosure

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SEC & PCAOB Activity

• SEC Regulation FD Permits Disclosure Via Social Media

• PCAOB Proposals/Reproposals:• Auditor Reporting and Other Information -

http://pcaobus.org/Rules/Rulemaking/Pages/Docket034.aspx

• Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits http://pcaobus.org/Rules/Rulemaking/Pages/Docket029.aspx

• PCAOB Concept Release:• Mandatory Auditor Rotation

• PCAOB Staff Audit Practice Alert No. 11 http://pcaobus.org/Standards/QandA/10-24-2013_SAPA_11.pdf

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SEC Regulation FD Permits Disclosure of Material Information Via Social Media

11%

55%

34%

Do you anticipate utilizing social media for material disclosures in the future?

Yes

No

Not sure

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http://www.sec.gov/litigation/investreport/34-69279.pdf

PCAOB Proposals: Auditor’s Report and Auditor’s Responsibilities Regarding Other Information and Related Amendments• Proposed two new auditing standards issued August 2013;

comments were due December 11, 2013

• Little change in auditor’s report since 1940’s

• Current “pass/fail” model does not take into account increased complexity with ultimate goal of providing users of F/S more relevant information with respect to knowledge gained by the auditor and judgment applied

• Globally – IAASB and FRC are working on similar projects with respect to changes to the auditor’s report

• Would be effective, subject to SEC approval, for audits of F/S for fiscal years beginning on or after December 15, 2015

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PCAOB Proposals: Auditor’s Report

• Pass/Fail model will remain

• Enhanced auditor communication of “critical audit matters” (CAM):Matters addressed during the audit that (1) involved the most difficult, subjective, or complex auditor judgments; (2) posed the most difficulty to the auditor in obtaining sufficient appropriate evidence; or (3) posed the most difficulty to the auditor in forming the opinion on the financial statements.

• Refer to Appendix for examples of CAM language to be included in auditor’s report

• Other new elements:• Audit independence

• Auditor tenure

• Other information (auditor’s responsibilities for/evaluation of)

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PCAOB Proposals: Auditor’s Responsibility for Other Information

Proposed standard would:• Enhance the auditor's responsibility by adding procedures for the

auditor to perform in reading and evaluating the other information (vs. current reading and considering)

• Require the auditor to evaluate the other information for material misstatements of fact as well as for material inconsistency with amounts or information or presentation in the audited F/S

• Require communication in the auditor’s report regarding the auditor’s responsibilities for and the results of the auditor’s evaluation of the other information

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Resisting Change

28%

27%

45%

Overall, do you believe the PCAOB’s proposal will improve the usefulness of the annual auditor’s

report?

Not Sure

Yes

No

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Evaluating PCAOB Changes to the Auditor’s Report

48%

33%

78%

52%

67%

22%

0% 20% 40% 60% 80% 100%

Discuss "critical audit matters"

Evaluate other information

Disclose audit tenure

Not in Favor

In Favor

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PCAOB Reproposal: Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits

• PCAOB Release No. 2013-009 issued in December 2013

• Proposed amendments to improve transparency of public company audits.

• Would require disclosure in the auditor’s report of the following:1. The name of the engagement partner and

2. Names, locations, and extent of participation of both other independent public accounting firms as well as other persons not employed by the auditor that took part in the audit

• http://pcaobus.org/Rules/Rulemaking/Pages/Docket029.aspx

• Comment period ends February 3, 2014

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Mandatory Auditor Rotation – Current StatusUSJuly 2013 – The House of Representatives passes Audit Integrity and Job Protection Act (H.R. 1564)

• Prohibits mandatory auditor rotation

• Selecting a company’s external auditor should be a decision made by a public company’s board and ratified by its shareholders, not a decision made by a regulator

• Amends SOX to allow public companies to maintain their auditing practices and avoid additional costs that ultimately are passed on to investors and consumers

December 2013 – AICPA SEC Conference

• PCAOB’s Jay Hanson indicated that no current activity after failed concept release

Is the story over - Senate vote?

InternationalDecember 2013 Preliminary Agreement – EU Auditor Rotation Reforms

• Rotation requirement of 10 years - could extend up to 10 additional years if companies put engagement out for bid; and up to 14 additional years when company appoints more than one audit firm as a “joint audit.”

• Calibrated transitional period that considers the duration of current audit engagements is anticipated to prevent a “cliff effect” once the new rules take effect.

• Prohibition of certain nonaudit services -would include limits on tax advice and services linked to the financial and investment strategy of a firm’s audit client.

• Ban on Big Four-only clauses – 3rd parties will not be able to impose requirements.

• Requirements for more detailed and informative audit reports - Focus on information relative to investors.

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PCAOB Staff Audit Practice Alert No. 11:CONSIDERATIONS FOR AUDITS** OF INTERNAL CONTROL OVER FINANCIAL REPORTING

The following summarizes the more significant topics discussed in the Practice Alert:

Risk Assessment and the Audit of Internal Control

Selecting Controls to Test

Testing Management Review Controls

Information Technology (“IT”) Considerations, Including System-Generated Data and Reports

Roll-forward of Controls Tested at an Interim Date

Using the Work of Others

Evaluating Identified Control Deficiencies** Contains reminders and considerations that may be applicable in the

conduct of any audit, not just those of issuers.

Additional Financial Reporting Considerations“Big 3” Convergence Projects

• Revenue

• Leases

• Financial Instruments

Other FASB, EITF, PCC and AICPA matters

2013 Accounting Year In Review Newsletter: http://www.bdo.com/download/3014

Refer to recent Ac’sense Technical Update – Q4 2013 for more information: http://www.bdo.com/acsense/events/technicalupdateq42013.aspx

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Executive Compensation & Proxy Advisory Firms

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Current Update: Executive Compensation

SEC Proposed Pay Ratio Disclosure Rule -http://www.sec.gov/rules/proposed/2013/33-9452.pdf

• As required by Dodd-Frank Act, companies would be required to disclose:

• The median of the annual total compensation of all its employees except the CEO.

• The annual total compensation of its CEO.

• The ratio of the two amounts.

• Would not specify any required calculation methodologies; however there are other considerations that may make such calculations complex depending upon the composition of the workforce, etc.

• Would not apply to emerging growth companies, smaller reporting companies or foreign private issuers

Stay tuned!

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Executive Compensation – Survey Findings

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Proxy Advisory Firms

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82%

18%

Do you believe proxy advisory firms should be subject to SEC oversight given the potential for a conflict of interest in providing services to both

corporations and institutional investors?

Yes

No

Other Recent Governance Developments

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AICPA SEC Conference Themes – Back to Basics

Focus on quality of financial reporting and the importance of clear and transparent disclosures.

• Conflict Minerals• Disclosure of Payments by Resource Extraction Issuers

• SEC Staff Guidance: Conflict Minerals Reporting FAQs

• Internal Controls• Proper identification of material weaknesses

• Updated COSO Integrated Internal Control Framework

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COSO Updated Integrated Internal Control Framework

Internal Control-Integrated Framework• http://www.coso.org

• Effective December 15, 2014

BDO Resources:• Ac’sense Board Q3 Update self study course -

http://www.bdo.com/acsense/events/BoardMattersQ32013.aspx

• BDO 2013 COSO Integrated Framework FAQs http://www.bdo.com/download/2744

• http://www.bdo.com/download/2812

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Audit Committee and Governance Resources• CAQ’s “Enhancing the Audit Committee Report: A Call to Action”

• PCAOB’s Audit Committee Resource page

• CAQ’s Audit Quality Reporting Brief

These and other resources are accessible via the BDO Board Reflections Audit Committee page:

http://www.bdo.com/library/boardreflections.aspx

Other BDO Ac’sense Webinars/Archives:• Ac’sense 2013 Managing Risk in Cyberspace - January 22, 2014

• Ac’sense Q4 Technical Update – held January 9, 10, or 13, 2014 –Archive available

http://www.bdo.com/acsense/

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BDO 2013 Year End Publications

• BDO 2013 SEC Year in Review

• BDO Knows: 2013 AICPA Conference on Current SEC and PCAOB Developments

• Significant Accounting and Reporting Matters Q4 2013

Available at: http://www.bdo.com/publications/assurance/

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CPE CertificatesCertificates will be processed and will be accessible by participants for printing as follows:

1. Individuals –

1. Under the Participation tab below before exiting the webcast, OR

2. By logging onto the http://university.learnlive.com/BDOonlineafter the session is completed and clicking on My Learning -Completed Items. Under the Certificate column, click the Printbutton beside the completed webcast.

2. Group participants - After receipt and processing of submitted group sign-in sheets to cpe@bdo.com, group participants will be proctored into LearnLive and will be notified via e-mail when they can retrieve their certificates, following the steps above.

3. Sign-in sheets may be downloaded from the following: https://university.learnlive.com/content/public/1029/accessinstructions/CPE%20Attendance%20Sheet.doc

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Evaluation

We continually try and improve upon our programming and appreciate constructive feedback

Following the program, we will be sending out a thank you e-mail that contains a link to a brief evaluation

Thank you in advance for your consideration!

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Thank you for attending!

That concludes today’s program.

APPENDIX

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Proposed Auditor’s ReportReport of Independent Registered Public Accounting Firm

To the shareholders and board of directors of X Company

[Introduction]

We have audited the accompanying balance sheets of X Company (the "Company") as of December 31, 20X2 and 20X1, the related statements of operations, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 20X2, and the related notes (collectively referred to as the "financial statements"). These financial statements are the responsibility of the Company's management.

We are a public accounting firm registered with the Public Company Accounting Oversight Board ("PCAOB") (United States) and are required to be independent with respect to the Company in accordance with the United States federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission ("SEC") and the PCAOB. We or our predecessor firms have served as the Company’s auditor since [year].

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Proposed Auditor’s Report[Basis of Opinion]

Our responsibility is to express an opinion on the Company's financial statements based on our audits. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, appropriate evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

[Opinion on the Financial Statements]

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of [at] December 31, 20X2 and 20X1, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20X2, in conformity with [the applicable financial reporting framework].

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Proposed Auditor’s ReportCritical Audit Matters

The standards of the PCAOB require that we communicate in our report critical audit matters relating to the audit of the current period's financial statements or state that we determined that there are no critical audit matters. Critical audit matters are those matters addressed during the audit that (1) involved our most difficult, subjective, or complex judgments; (2) posed the most difficulty to us in obtaining sufficient appropriate evidence; or (3) posed the most difficulty to us in forming our opinion on the financial statements. The critical audit matters communicated below do not alter in any way our opinion on the financial statements, taken as a whole.

[Include critical audit matters]

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Proposed Auditor’s Report

The Auditor's Responsibilities Regarding Other Information

In addition to auditing the Company's financial statements in accordance with the standards of the PCAOB, we evaluated whether the other information, included in the annual report on [SEC Exchange Act form type] filed with the SEC that contains both the December 31, 20X2 financial statements and our audit report on those financial statements, contains a material inconsistency with the financial statements, a material misstatement of fact, or both. Our evaluation was based on relevant audit evidence obtained and conclusions reached during the audit. We did not audit the other information and do not express an opinion on the other information. Based on our evaluation, we have not identified a material inconsistency or a material misstatement of fact in the other information.

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Proposed Auditor’s ReportCAM – DTA

We determined that our assessment of the Company's evaluation of the realizability of deferred tax assets was a critical audit matter in the audit of the Company's financial statements for the fiscal year ended June 30, 2013. Considerations that led to our determination, included the following:

• The Company exercised significant judgment in weighing positive and negative evidence regarding the realizability of the company's deferred tax assets, including in developing forecasts of projected future taxable income.

• The Company continues to experience increased competition with its "first generation" products which reduced revenue growth, sales prices and profitability. Further, the Company experienced an unexpected cost increase in a critical product component and does not anticipate that cost returning to historical levels;

• A return to profitability by the Company is dependent upon launching "next generation" products in the future; and

• The Company is experiencing increases in product development and marketing costs in preparation for its "next generation" products.

The Company's accounting policy for deferred taxes and its evaluation of the realizability of deferred tax assets are discussed in Notes 2 and 12 to the financial statements.

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Proposed Auditor’s ReportCAM – DTA

Because of these considerations, our assessment of the Company's evaluation of the realizability of deferred tax assets: (1) involved subjective auditor judgments in evaluating whether management's judgments regarding the weight given to positive and negative evidence is appropriate; (2) involved difficult auditor judgments in designing audit procedures to test the data underlying management's forecasts of its future taxable income; (3) posed difficulty in obtaining sufficient appropriate evidence to support management's forecasts of the timing and amount of future taxable income due to the lack of objective evidence; and (4) posed difficulty in forming an opinion on the financial statements because of the significance to the financial statements, taken as a whole, of the Company's determination regarding the recognition of a valuation allowance for its deferred tax assets.

We consulted with others outside the engagement team regarding: (1) compliance with U.S. GAAP; (2) the design and performance of audit procedures to test management's forecasts; and (3) our evaluation of the results of those procedures, including our assessment of the reasonableness of management's judgments and forecasts in light of independent assessments of future trends in the industry, analyst reports and publicly available information regarding relevant trends by key competitors.

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Proposed Auditor’s ReportCAM - Investment

Approximately 35% of the Company's investment portfolio is comprised of private label mortgage-backed securities and collateralized loan obligations. Our audit of the Company's fair value of these securities in the audit of the Company's financial statements as of and for the fiscal year ended December 31, 2012 involved difficult and complex auditor judgments because these securities (1) trade less frequently and (2) were valued using in-house valuation models based on unobservable inputs, which are subject to a wide range of measurement uncertainty. Our audit of these securities required an extensive amount of audit work, including significant involvement of senior members of the engagement team and the involvement of a third party valuation specialist. Further, it was necessary to expand the planned audit procedures due to a control deficiency less severe than a material weakness noted in the Company's internal control system regarding fair value estimates, valued using in-house valuation models. Specifically, a control deficiency was determined relating to the controls employed by the pricing and valuation committee. Our audit procedures resulted in our identification of several misstatements that were corrected by the Company. The Company's disclosures related to nature and fair values of these securities and the methods the Company used to determine those fair values are in Note 6 to the financial statements.

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