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Audit committees often lack accountability, knowledgeBy ROBERT TRIGAUX © St. Petersburg Times, published December 21, 1998 Hazing frequently means assigning a new board member to the dreaded audit committee. That is the group of directors charged with the independent monitoring of the corporation's financial integrity. Most directors lack accounting skills and prefer participating in less demanding and certainly more entertaining tasks such as setting executive pay -- the job of the board's compensation committee. Even Governor-elect Jeb Bush was hazed as a director. When he joined the board of Jacksonville's Ideon Corp. in 1995, he was placed on the audit committee of a deeply troubled company with a history of accounting gimmicks. The company lost millions and was later sold. "Historically, every new board member or the weakest board member is thrown on the audit committee," said John Nash, the former chief executive of the National Association of Corporate Directors in Washington. The result? Corporate boards increasingly are blind-sided by financial problems of the companies they were supposed to oversee. This year, boards at large companies such as Sunbeam Corp. in Delray Beach and Cendant Corp. in Parsippany, N.J., were caught flat-footed when huge accounting problems forced each company to restate earnings, suffer serious declines in the value of their shares and face shareholder lawsuits. Now the long-ignored audit committee is getting special attention. Securities and Exchange Commission chief accountant Lynn Turner has held at least seven meetings this year to discuss the increase in accounting gimmickry and fraud at U.S. companies. Beyond their concern about accountants, regulators are worried that those charged with monitoring the accountants -- the audit committees of corporate boards -- are not doing their jobs because of ignorance or cronyism. The SEC next month will propose rules that would disqualify directors from serving on audit committees if they or any family member work at that particular company. Directors also would be disqualified from these committees if they have a personal financial stake in the company. Separately, a panel of accounting and legal experts assembled by Nash are analyzing ways to boost the influence and caliber of boardroom audit committees. "How can we raise the bar of performance so boards can see the red flags? If people want to commit fraud, they will get away with it for a time," Nash said. "If we can equip audit committees so they can ask insightful questions, perhaps they can identify problems early on at the company." Nash's panel insists that audit committees consist only of independent, outside directors. That is still unusual at most corporate boards and almost unheard of at midsize or smaller companies. Many companies in the Tampa Bay area tend to include executives or outside directors with close ties to the company on their audit committees. "People serving on audit committee should have no affiliation with the company," Nash said. "They should never have done any business or consulting with it. They should not be friends of the management, and maybe not even friends with the other directors. They must be totally independent." Nash's panel expects its final recommendations to be out by June.
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oining a corporate board of directors is a lot like pledging to a college fraternity. Like the lowly pledge, a newcomer often gets hazed by fellow directors.
