21st
Century Governance and Financial Reporting Principles
Corporate Governance Center
Kennesaw State University
March 26, 2002
Link
to IIA Endorsement of Principles
The Enron bankruptcy and widespread
financial reporting problems call the governance and financial reporting
practices of U.S. public companies into question. We believe that the attached principles represent the foundation
of corporate governance and financial reporting and should be at the core of
current and future reforms.
Accordingly, we offer these 17 principles to advance the current
dialogue and to promote investor, stakeholder, and financial statement user
interests.
|
Paul D. Lapides, Director a Kennesaw State University 770.423.6587 Paul_Lapides@coles2.kennesaw.edu |
Dana R. Hermanson a, b Kennesaw State University 770.423.6077 Dana_Hermanson@coles2.kennesaw.edu |
|
Mark S. Beasley, Fellow b, c North Carolina State University 919.515.6064 |
Joseph V.
Carcello, Fellow b University of Tennessee 865.974.1757 |
|
F. Todd DeZoort, Fellow The University of Alabama 205.348.6694 |
Terry L. Neal, Fellow University of Kentucky 859.257.3031 |
a Member of the NACD Blue Ribbon Commission on Audit Committees.
b Co-author of Fraudulent Financial Reporting: 1987-1997, copyright COSO, 1999.
c Member of the Auditing Standards Board’s Fraud Standard Steering Task Force.
21st
Century Governance Principles for
U.S. Public Companies
1.
Interaction – Sound governance requires effective interaction among the
board, management, the external auditor, and the internal auditor.
2.
Board Purpose – The
board of directors should understand that its purpose is to protect the
interests of the corporation’s stockholders, while considering the interests of
other stakeholders (e.g., creditors, employees, etc.).
3.
Board Responsibilities – The
board’s major areas of responsibility should be monitoring the CEO, overseeing
the corporation’s strategy, and monitoring risks and the corporation’s control
system. Directors should employ healthy
skepticism in meeting these responsibilities.
4.
Independence – The major
stock exchanges should define an “independent” director as one who has no
professional or personal ties (either current or former) to the corporation or
its management other than service as a director. The vast majority of the directors should be independent in both
fact and appearance so as to promote arms-length oversight.
5.
Expertise – The
directors should possess relevant industry, company, functional area, and
governance expertise. The directors
should reflect a mix of backgrounds and perspectives. All directors should receive detailed orientation and continuing
education to assure they achieve and maintain the necessary level of expertise.
6.
Meetings and Information
– The board should meet frequently for extended periods of time and should have
access to the information and personnel it needs to perform its duties.
7.
Leadership – The roles
of Board Chair and CEO should be separate.
8.
Disclosure – Proxy
statements and other board communications should reflect board activities and
transactions (e.g., insider trades) in a transparent and timely manner.
9.
Committees – The
nominating, compensation, and audit committees of the board should be composed
only of independent directors.
10. Internal Audit – All public companies should maintain an effective,
full-time internal audit function that reports directly to the audit committee.
1.
Reporting Model – The
current GAAP financial reporting model is becoming increasingly less
appropriate for U.S. public companies.
The industrial-age model currently used should be replaced or enhanced
so that tangible and intangible resources, risks, and performance of
information-age companies can be effectively and efficiently communicated to
financial statement users. The new
model should be developed and implemented as soon as possible.
2.
Philosophy and Culture –
Financial statements and supporting disclosures should reflect economic
substance and should be prepared with the goal of maximum informativeness and
transparency. A legalistic view of
accounting and auditing (e.g., “can we get away with recording it this way?”)
is not appropriate. Management
integrity and a strong control environment are critical to reliable financial
reporting.
3.
Audit Committees – The
audit committee of the board of directors should be composed of independent
directors with financial, auditing, company, and industry expertise. These members must have the will, authority,
and resources to provide diligent oversight of the financial reporting
process. The board should consider the risks
of audit committee member stock / stock option holdings and should set audit
committee member compensation at an appropriate level given the expanded duties
and risks faced by audit committee members.
The audit committee should select the external auditor, evaluate
external and internal auditor performance, and approve the audit fee.
4.
Fraud – Corporate
management should face strict criminal penalties in fraudulent financial
reporting cases. The Securities and
Exchange Commission should be given the resources it needs to effectively
combat financial statement fraud. The
board, management, and auditors all should perform fraud risk assessments.
5.
Audit Firms – Audit
firms should focus primarily on providing high-quality audit and assurance
services and should perform no consulting for audit clients. Audit firm personnel should be selected,
evaluated, compensated, and promoted primarily based on technical competence,
not on their ability to generate new business.
Audit fees should reflect engagements’ scope of work and risk.
6.
External Auditing Profession – Auditors should view public accounting as a noble profession
focused on the public interest, not as a competitive business. The profession should carefully consider
expanding audit reports beyond the current “clean” versus modified dichotomy so
as to enhance communication to financial report users.
7. Analysts – Analysts
should not be compensated (directly or indirectly) based on the investment
banking activities of their firms.
Analysts should not hold stock in the companies they follow, and they
should disclose any business relationships between the companies they follow
and their firms.