Member Article

The recent media coverage of the ENRON crisis and the related Congressional investigations have combined to precipitate new discussions about the adequacy of corporate governance, accounting oversight and financial disclosures. As a result, there is a strong push afoot for new federal requirements in these areas primarily through new SEC regulations. We are again reminded that “bad facts make for bad law” and a crisis often leads to over reactions. Even so, boards of directors and their audit committees must struggle to figure out what all this means to them. While we believe it is still too early to definitively say what boards can learn from the ENRON crisis or how possible new federal requirements will impact them and their audit committees, we expect that for now, boards will want to go back over “the basics” in re-examining certain board policies and the inquiries that they direct to management and their professional advisors. Corporate fiduciary duties call for directors to be vigilant and fully informed in carrying out their oversight responsibilities. Accordingly, below are the kinds of inquiries and policies that boards are likely to discuss and consider in light of ENRON and new regulatory requirements that may be just over the horizon. Boards should seek input from their management, auditor, legal counsel and other appropriate advisors in assessing these matters. After study and deliberation, directors should exercise their own independent business judgment in deciding whether their current conduct or policies should be modified. 1. INQUIRIES OF THE AUDITORS AND MANAGEMENT POST-ENRON Below are the kinds of inquiries directed to auditors and management that audit committees may focus on in light of the current aftermath of ENRON. 1.1 Inquiry about the company’s accounting treatment and disclosures with respect to its “special-purpose” entities and other complex financing transactions. 1.2 Inquiry about major disagreements that management may have had with the auditors over any accounting issues. 1.3 Inquiry about accounting policies and practices of the company that would most likely be scrutinized by the SEC or another third party if any were so scrutinized. 1.4 Inquiry about whether there have been any articles, analysts’ reports or other credible third-party sources that are critical of the company’s accounting policies or financial disclosures. 1.5 Inquiry about whether the financial statements and disclosures comport with the disclosure requirements of the federal securities laws notwithstanding their conformity with accounting principles and practices. 1.6 Inquiry about whether there have been (i) any allegations of director or officer misconduct or corporate misconduct by the company (whether made by employees or third parties) or (ii) any violation or waiver or investigation of a violation of the company’s conflict of interest or internal control policies.