“The Board of Directors & Audit Committee Guide to Fiduciary Responsibilities”

Lucia A Worthington

Oversight has become critical and the former “vanity boards” of placing favored citizens on boards are now highly scrutinized. It is important to remember that if some members simply “rubber stamp” management strategies, or fail in their role as stewards, other board members are also at risk if these management strategies are deemed illegal.

Since the collapse of giants such as Enron, WorldCom and Arthur Anderson, the U.S. Securities and Exchange Commission (SEC) and The Sarbanese-Oxley Act (SOX) have added teeth capable of severe bites to scrutinizing and enforcing wrongdoings. In 2011 alone, the SEC filed 735 enforcement actions – many focusing on financial wrongdoings.

It is important for directors to ask the right questions before accepting an invitation to join a board. Directors are not just window dressing. Instead, they are the guardians of the organization and must satisfy regulatory and legal expectations and requirements. They direct both internal and external audits and need to have substantial knowledge of financials and management issues. Most importantly, directors must be vigilant and proactive to reduce organizational exposure to risk and fraud. Board members can be sued for perceived inaction if they fail to spot “red flags” of mismanagement or fraud within the organization they oversee.

In their book, “The Board of Directors and Audit Committee Guide to Fiduciary Responsibilities,” authors Sheila Moran and Ronald Kral outline ten critical steps to understanding and protecting oneself as a director and as an organization. A chapter is devoted to each step, and each chapter is written in easy-to-understand, no frills language. The chapters flow with bulleted items that stand out for preview scanning. Action steps are included throughout the chapters to allow for reflection. It is an easy read and can serve as a continuing reference book once read.

The ten steps as outlined in the book are listed below with examples from each area:

  1. Nominate independent directors. Prescribed guidelines are provided by the U.S. GAAP (generally accepted accounting principles) and SOX, but new awareness also focuses on sourcing directors that have the necessary competencies for oversight as well as diverse experiences.
  2. Establish a culture of action. This includes four basic fiduciary duties: care, loyalty, obedience and oversight. Chapter two gives details on how these lay the foundation for a culture that protects the organization from harm.
  3. Evaluate the audit committee. Be brutally honest and ensure that the audit committee is competent and can perform their duties
  4. Direct the external audit. Remind the external audit committee that they work for the audit committee and not management.
  5. Scrutinize financial statements. Raise your professional skepticism level for management to not issue misleading financial statements or disclosures.
  6. Leverage internal audits and outside resources. Utilize surprise audits.
  7. Satisfy regulators and other stakeholders. Be vigilant in ensuring that the record-retention policy of the organization is comprehensive and current.
  8. Address risk proactively. Be careful of management providing mounds of irrelevant data to camouflage unpleasant realities.
  9. Spearhead-deterrent initiatives. Challenge management to segregate duties to avoid merging of transactions that need to be kept separate and transparent.
  10. Expect the unexpected. Be proactive in setting up a crisis management team before it is needed.

I recommend this book to all who are members of boards or those considering joining a board to oversee organizational practices. The book is a reminder that being a director is serious business and challenges us to consider what we do not know and to build those knowledge gaps rather than to rely on the staff within the organization who we are obliged to oversee.

Lucia Worthington is a seasoned successful business woman, a professor of business and management and can be reached at global.learning@lworthington.com. To recommend a book for review, email bookreviews@vbjusa.com.

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