Final answer:
Auditing standards require that material fraud and illegal acts be communicated to the audit committee and management, significant internal control deficiencies should be communicated, and all communications should be done in a timely manner. Written communication is encouraged but not strictly necessary. The conversation is part of broader corporate governance objectives, which failed in the case of Lehman Brothers.
Step-by-step explanation:
When communicating with the audit committee and management, it's important to understand that according to auditing standards:
- (A) Only material fraud and illegal acts are required to be communicated. However, what is considered "material" can be subject to professional judgment.
- (B) Not all internal control deficiencies are required to be communicated, but those that are significant to the operations or financial reporting should be.
- (C) Communications should indeed be made in a timely manner. This allows those charged with governance, such as the audit committee or board of directors, to take appropriate action in the face of any issues that are identified.
- (D) While written communication is encouraged for the sake of clarity and record-keeping, not all communications must be in writing.
The regular conversation between the agency and its political principals is crucial for ensuring good corporate governance, functioning as intended and facilitating improvements where necessary.
Corporate governance provides a system of rules, practices, and processes by which a firm is directed and controlled. The primary players in corporate governance include the board of directors, the auditing firm, and outside investors. Cases like Lehman Brothers showcase the failures of corporate governance leading to the significant financial consequences for investors due to the provision of inaccurate financial information.