Introduction to the Report and Recommendations of the Blue Ribbon committee on Improving the Effectiveness of Corporate Audit committees
Ira M. Millstein, 54(3): 1057–66 (May 1999)
In February 1999, the Blue Ribbon committee on Improving the Effectiveness of Corporate Audit committees released its Report which advances practical recommendations for enhancing audit committee oversight of corporate financial reporting. As co-Chair of the committee, the author introduces a reprint of the Report by reviewing its focus on "process." Because Generally Accepted Accounting Principles leave wide areas of discretion, "quality" financial reporting cannot be dictated by precise accounting rules and strictures. Therefore, the recommendations focus on ways to improve the process by which the audit committee monitors how this unavoidable discretion is exercised by management and viewed and reviewed by the independent auditors. The author also addresses the issue of how to define " quality" financial reporting and the misconception that the Report may lead to increased audit committee liability.
Report and Recommendations of the Blue Ribbon committee on Improving the Effectiveness of Corporate Audit committees
Blue Ribbon committee on Improving the Effectiveness of Corporate Audit committees, 54(3): 1067–95 (May 1999)
How to Really Make Audit committees More Effective
John F. Olson, 54(3): 1097–1111 (May 1999)
The Blue Ribbon committee on Improving the Effectiveness of Audit committees has made ten recommendations to the major securities markets and the SEC. This Article puts these recommendations in context with twenty years of governmental and private sector efforts to improve corporate financial reporting and reduce financial fraud. It questions whether the focus of the recommendations on formal qualification and certification requirements for auditing committees will result in better financial reporting or simply increase liability risks for committee members. Based upon his own experience in counseling boards and audit committees, the author offers ten practical suggestions for making substantive improvements in the functioning of audit committees.
Independent Directors as Securities Monitors
Hillary A. Sale, 61(4):1375-1412 (August 2006)
This paper considers the role of independent directors of public companies as securities monitors. Rather than engaging in the debate about whether independent directors are good or bad, important or unimportant, the paper takes their existence and basic governance role as a given, focusing instead on what recent statements from Securities and Exchange Commission officials indicating an increased focus on independent directors and their role in preventing securities fraud. The paper notes that the SEC believes that independent directors are on the board to act, at least in part, as securities monitors. This securities monitor role is another aspect of the information-forcing-substance disclosure model that the SEC has used to achieve improved corporate governance. Although directors face heightened risk when they draft or sign disclosure documents, they also have an ongoing responsibility to be informed of developments within the company, ensure good processes for accurate disclosures, and make reasonable efforts to assure that disclosures are adequate. Independent directors with expertise should be involved in reviewing and, sometimes, drafting statements. All directors, however, should be fully aware of the company's press releases, public statements, and communications with security holders and sufficiently engaged and active to question and correct inadequate disclosures. In addition to defining the role of independent directors as securities monitors, the article reviews the liability independent directors might face under private causes of action and contrasts it with the SEC's enforcement powers and remedies. The article describes some of the SEC's prior statements that emphasize the role of independent directors as securities monitors and the importance of their providing both guidance and check and balance.
Internal Investigations and the Defense of Corporations in the Sarbanes-Oxley Era
Robert S. Bennett, Alan Kriegel, Carl S. Rauh, and Charles F. Walker, 62(1): 55–88 (Nov. 2006)
Internal investigations long have been an integral part of the successful defense of corporations against charges of misconduct, as well as an important board and management tool for assessing questionable practices. With the heightened standards of conduct and increased exposure created by Sarbanes-Oxley, this essential instrument for safeguarding corporate interests has become even more crucial in identifying and managing risk in the enforcement arena. This article examines from a practitioner's standpoint when and how internal investigations should be conducted in order to protect the corporation in criminal, civil and administrative proceedings. Particular attention is paid to the issues created by a concurrent government investigation and in dealing with employees and former employees in the course of an investigation. The article also addresses the role of the Audit committee under Sarbanes-Oxley, and the important issue of reporting the findings of the investigation to appropriate corporate officials. The subject of self-reporting by the Company to enforcement authorities is considered as well. In this context, the article explores the SEC's position on crediting self-reporting and cooperation as set forth in the Seaboard report; Department of Justice policy as embodied in the Thompson Memorandum; and the impact of the Federal Sentencing Guidelines for Organizations.
Disclosure Obligations Under the Federal Securities Laws in Government Investigations
David M. Stuart and David A. Wilson, 64(4): 973-998 (August 2009)
With the prevalence of government investigations into corporate conduct, public companies frequently face decisions about whether, when, how, and where to disclose to investors the existence of such investigations and the facts learned in the course of, or as a result of, those investigations. While the federal securities laws (and the rules and regulations promulgated thereunder) require disclosure of specific events that may arise during an investigation, neither those laws nor the courts that have interpreted them provide clear guidance for many of the disclosure decisions that must be made over the course of an investigation. As a result, counsel must carefully analyze numerous facts and circumstances, understand the company's previous disclosures, make "materiality" assessments, and determine whether to make disclosure in a current report or wait until the next periodic filing. This Article seeks to present, through an analysis of precedent disclosures, caselaw, rules, and practical ramifications, the considerations counsel must take into account in evaluating disclosure decisions in the context of an investigation. These considerations can help counsel avoid having a disclosure decision worsen the already difficult circumstances posed by the investigation itself.
Caveat Auditor: Back to First Principles
David R. Herwitz, 65(1): 95–106 (November 2009)
The Sarbanes-Oxley Act of 2002 ("SOX") substantially revised the rules governing auditors of public companies, in an effort to counter the auditing weaknesses exposed in the Enron, WorldCom, and similar fiascos. Among the most important changes were a substantial upgrade in the role and responsibility of corporate audit committees, and the creation of a new agency, the Public Company Accounting Oversight Board ("PCAOB"), to take complete charge of overseeing auditors and all aspects of the auditing process. Some commentators have expressed disappointment in the SOX efforts to reform public company auditing, and this subject is likely to receive renewed attention in view of the U.S. Supreme Court's grant of certiorari in Free Enterprise Fund v. PCAOB, a case challenging the constitutionality of the PCAOB. This Article takes the position that rather than focusing on audit committees, effective reform of auditing lies in a significant step-up in the responsibility of auditors, by returning to the original purpose of an audit: to provide as fair and meaningful a picture as possible of a company's financial performance. The Article argues that in applying this high standard to a company's proposed financial statements, the auditor should express its "present fairly" opinion without any limitation based upon GAAP; in addition, whenever there are reasonable alternatives to any of the accounting treatments utilized in the company's financial statements, the auditor's report should disclose the reason for the choice made, as well as whether the auditor would have made the same choice if deciding on its own.
Dilution, Disclosure, Equity Compensation, and Buybacks
Bruce Dravis, 74(3) 631-658 (Summer 2019)
Equity compensation and company share buybacks are complementary: Equity compensation share issuances increase outstanding shares; buybacks decrease outstanding shares. Yet the two types of transactions require very different approval processes and securities and financial disclosures, and generate different financial and tax results, all of which are described in this article, and illustrated by data collected from fifty-nine of America’s largest public companies. This article encourages critics of buybacks to consider the complexity and interrelationship of buybacks and equity compensation.