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Herley scandal shows need for financial experts

By ASSOCIATED PRESS
Published September 19, 2006

When Herley Industries Inc. released its proxy report this year, it said having no "financial experts" on its board's three-person audit committee was in the "best interest" of the company. Try telling that now to the defense contractor's battered shareholders.

In recent months, the Lancaster, Pa., company and its former chairman were indicted for fraud, its outside auditors quit and its stock slumped 30 percent.

It sure sounds like those experts could have been a big help - possibly to avoid this mess, and certainly to aid the company in cleaning it up.

The irony in all this was pointed out by accounting expert Jack Ciesielski, who noted in a recent blog that "there's a reason why a financial expert belongs on audit committees, and Herley has provided an excellent example."

It seems amazing that five years after the implosion of Enron set off a wave of accounting scandals across corporate America that some companies don't understand the importance - and necessity - of packing their board with top-notch expertise.

On audit committees, experience can really count. Getting individuals with some accounting background can allow the boards to keep better tabs on companies' financial measures and mechanisms.

The Sarbanes-Oxley corporate reform act has helped make that happen by forcing companies to disclose whether their audit committees include at least one member who is deemed a financial expert. If they don't comply, they then must say why.

And that's just what Herley did this year. In a financial filing, the company said none of its audit committee members had the required financial expertise since they were not current on all aspects of generally accepted accounting principles. Known as GAAP, those are the standards companies must follow to complete their financial statements.

Herley noted, however, that the three members had experience in assessing the performance of companies through their service on its board and through their work at other companies and government agencies. Those serving on the audit committee include two retired admirals from the U.S. Navy and a former dean of engineering and computer science at Syracuse University.

"Nevertheless, the board of directors believes that they competently perform the functions required of them as members of the audit committee, and given their backgrounds, it would not be in the best interest of the company to replace any of them with another person to qualify a member of the audit committee as a financial expert," the company said in its proxy filing.

Such reasoning might have sounded fine months ago, but since then, Herley has been rocked by scandal. Suddenly, as Ciesielski pointed out, the idea of working in the best interest of the company sounds "sadly comical."

Of course, there is no telling if putting a financial expert on the audit committee would have really changed things for Herley - but it at least would have served as a potential safeguard.

"It is a way to ensure that you are watching out for shareholders' interests in every possible way," said Annalisa Barrett, a senior research associate at the Corporate Library, an independent governance research firm. But by not doing that, she asks, "Did the board really meet its fiduciary duties to shareholders?"

That will be for the courts to decide. Until then, investors can cast their vote.

Rachel Beck is the national business columnist for the Associated Press. Write to her at rbeck@ap.org.

[Last modified September 18, 2006, 23:08:23]