USA Law and Practice Contributed by: Lisa Fontenot, Jennifer Broder, Per Chilstrom and Lothar Determann, Baker McKenzie
6. Audit, Risk and Internal Controls 6.1 External Auditors Public companies are required by federal securi - ties laws to have an independent auditor audit the financial statements included in their annual reports and provide an opinion as to whether such financial statements are fairly stated and comply in all mate - rial respects with US generally accepted account - ing principles. In addition, the independent auditor must perform limited reviews of the interim financial statements included in a public company’s quarterly reports. For most public companies, the independent auditor is also required to review annually and report on the effectiveness of the company’s internal control over financial reporting (although certain newly public and smaller public companies are exempt from this last requirement). In order to qualify as independent, an auditor must be capable of exercising objective and impartial judge - ment on all issues encompassed in the engagement with the public company, considering all relevant cir - cumstances. Furthermore, applicable SEC rules set forth restrictions on specified financial, employment and business relationships between the auditor and the public company, and restrictions on the auditor providing certain non-audit services to the public company. Under applicable stock exchange and SEC rules, the audit committee is responsible for the appointment, compensation and retention of the public company’s auditor, oversight of the auditor’s independence, and approval of all audit and permitted non-audit services. See 1.3 Companies With Publicly Traded Shares for further discussion of stock exchange audit committee requirements. 6.2 Risk Management and Internal Controls Geopolitical Risk Management and Internal Controls In the US, there is no dedicated federal regulator for geopolitical risk, although certain federal agencies regulate foreign investment (Committee of Foreign Investment in the United States), manage sanctions (Office of Foreign Assets Control) and control exports (Bureau of Industry and Security).
Public companies are required to disclose in their annual reports the material risks impacting their busi - ness (which often include discussion of geopolitical risk exposure such as trade wars, sanctions, supply chain disruption and armed conflicts), and to disclose in the proxy statements for their annual meetings the board of directors’ role in the risk oversight of the com - pany, how the board administers its oversight func - tion, and the effect that this has on the board’s leader - ship structure. Public companies are also required to disclose in their annual reports the board’s oversight of risk from cybersecurity threats, any board commit - tee responsible for oversight of these risks, and the processes by which the board or such committee is informed about these risks. Furthermore, the audit committees of NYSE listed companies are required to review the company’s policies with respect to risk assessment and risk management. Public companies’ approach to these requirements varies significantly based on various considerations, such as the busi - ness and size of the company, the materiality of such risks, and the relative investor and other stakeholder interest in such matters. Public companies are also required to: • maintain disclosure controls and procedures to ensure timely reporting of required information in accordance with federal securities laws; and • maintain internal control over financial report - ing to provide reasonable assurance regarding the reliability of the company’s financial reporting and the preparation of its financial statements in accordance with US generally accepted account - ing principles. A public company’s principal executive and financial officers are responsible for designing and implement - ing these controls and, subject to certain exceptions for newly public companies, must certify annually as to the effectiveness thereof.
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