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priateness or quality of significant accounting treatments, business transactions that
affect the fair presentation of the corporation™s financial condition and results of op-
erations, and weaknesses in internal control systems. The auditor should do so in a
forthright manner and on a timely basis, whether or not management has also com-
municated with the board or the audit committee on these matters.
Sixth, the corporation has a responsibility to deal with its employees in a fair and eq-
uitable manner.
These responsibilities, and others, are critical to the functioning of the modern public
corporation and the integrity of the public markets. No law or regulation alone can be
a substitute for the voluntary adherence to these principles by corporate directors and
management and by the accounting firms retained to serve American corporations.
The Business Roundtable continues to believe that the most effective way to enhance
corporate governance is through conscientious and forward-looking action by a

The Business Roundtable, Corporate Governance and American Competitiveness (New York: The
Business Roundtable, 1990), pp. 15“16.
6 Corporate Accountability: The New Environment

business community that focuses on generating long-term stockholder value with the
highest degree of integrity.
The principles discussed here are intended to assist corporate management and
boards of directors in their individual efforts to implement best practices of corporate
governance, and also to serve as guideposts for the public dialogue on evolving gov-
ernance standards.4

With respect to establishing and maintaining corporate policies, the board of di-
rectors is responsible to the stockholders for ensuring that management fulfills its
responsibilities in the execution of the corporate policies. For example, the board
can authorize the establishment of an audit committee to assist the board with the
development of the financial accounting policies. In addition, the audit committee
can be authorized to review the preparation of the financial statements as well as to
select the independent auditors. Although the board has the power to delegate au-
thority to the various standing committees, such as the audit committee or the ex-
ecutive committee, the board must render an accountability to the stockholders. In
short, the board has a fiduciary relationship with the stockholders and, as a result,
must report periodically on the status of the corporation™s economic resources.
As John Shandor points out:

Audit committees have become crucial to the audit process. Also, the audit commit-
tee has been considered essential in an organizational approach to making boards of
directors more effective in their interaction with financial management and chief ex-
ecutive officers as well as with internal audit staff and independent auditors.5

In addition to the directors™ fiduciary responsibility, they are expected to attend
board meetings and their appropriate standing committee meetings. A director
must keep informed on the affairs of the corporation and use reasonable care and
diligence in the performance of his or her duties. It is imperative that the director
keep abreast of the corporate developments since he or she is directly responsible
for participating in the decisions that affect the management of the corporation.
Thus the director may be held liable for losses sustained by the corporation as a re-
sult of his or her neglect.
Practically speaking, the concept of corporate accountability extends not only
to the stockholders but also to the other constituencies of the board of directors,
such as credit grantors and governmental agencies. The extension of corporate ac-
countability to the other constituencies is evidenced by a meeting of the American
Assembly. The discussion leaders focused their attention on questions central to
running the corporation vis-à-vis its many constituencies. With respect to a frame-
work for corporate accountability, the participants generally agreed on this:

Boards of directors have a primary role in interpreting society™s expectations and
standards for management.

The Business Roundtable, Principles of Corporate Governance (Washington, DC: The Business
Roundtable, May 2002), pp. iv“vi.
John Shandor, “Audit Committees Take a Broader Role in Corporate Policy,” Corporate Controller 2
(November/December 1989), pp. 46“48.
The Nature and Importance of Corporate Accountability 7

The five key board functions are:
(a) Appraisal of management performance and provision for management and
board succession;
(b) Determination of significant policies and actions with respect to present and fu-
ture profitability and strategic direction of the enterprise;
(c) Determination of policies and actions with a potential for significant financial,
economic, and social impact;
(d) Establishment of policies and procedures designed to obtain compliance with the
law; and
(e) Responsibility for monitoring the totality of corporate performance.
Boards should continue to be the central focus in improving the way corporations are

In addition to the American Assembly™s recommendations, to establish and
maintain a successful program of corporate accountability, the following three
prerequisites are necessary:

1. The board of directors and the officers must assume prime responsibility for
corporate accountability as well as define and clarify the objectives and re-
sponsibilities concerning the different levels of the organization. Therefore, the
individuals who are assigned responsibility at the middle and lower manage-
ment levels should be held accountable for their activities.
2. The organization chart of the corporation is central to establishing corporate
accountability since the jurisdiction for each area within the corporation must
be defined. Also, the extent of authority should not only be clearly outlined but
also commensurate with the individual™s responsibilities.
3. Executive management should create a management environment whereby the
middle and lower management levels understand the nature of corporate ac-
countability. Thus management should maintain an effective communications
network within the organizational structure.

As a case in point, Bruce W. McCuaig and Paul G. Makosz report that Gulf
Canada Resources, Ltd., has developed a new approach to corporate governance
through the use of an internal control assessment strategy. Such a strategy was de-
veloped based on a clear definition of internal control as a combination of (1) orga-
nization controls, (2) systems development and change controls, (3) authorization
and reporting controls, (4) accounting systems controls, (5) safeguarding controls,
(6) management supervisory controls, and (7) documentation controls. With the
implementation of a management-by-objectives framework and related control
mechanisms, the authors observed that the board of directors and senior manage-
ment are far better informed.7

The American Assembly, Corporate Governance in America, Pamphlet 54 (New York: Columbia
University, April 1978), p. 6.
Bruce W. McCuaig and Paul G. Makosz, “Is Everything Under Control? A New Approach to Corpo-
rate Governance,” Financial Executive 6, No. 1 (January/February 1990), p. 25.
8 Corporate Accountability: The New Environment

The subject of corporate accountability is a dynamic concept in the governance
of the corporation. It is dynamic because the directors not only must assess the
changing needs of their constituencies but also render a stewardship accountabil-
ity based on legal pressures from their constituencies.

The Need for Corporate Accountability
In view of the size and scope of modern corporations as well as the increasing de-
mands in the legal and regulatory environment, the need for corporate account-
ability has become very important in the evaluation of the performance of the
board of directors. For example, the sales figures of these corporations amount to
billions of dollars, which far exceed the gross national product of several coun-
tries. In addition, large corporations have control over the major economic re-
sources of society. Furthermore, the board of directors is subject to numerous
public laws, such as the Environmental Protection Act, the Occupational Safety
and Health Act, federal securities laws, and antitrust laws. Thus many of these cor-
porate enterprises play a significant role in the future of our society, since the de-
cisions of corporate management have a direct impact on the economy.
Unfortunately, corporations are confronted with the problem of a lack of cred-
ibility because they often have been subject to corporate self-interest as opposed
to the public interest. As one former executive partner of Price Waterhouse Inter-
national asserts:

We have all been stunned by the shocking disclosures of alleged improper payments
and similar activities, not by funny fly-by-night firms nobody ever heard of, but by
some of the finest names on the roster of American enterprise. . . . As one inevitable
result, reinforced by uneasy business conditions, public confidence in American
business has plunged to its lowest level since the great depression. It is as if these
events simply confirmed a gathering suspicion that such transgressions are not ex-
ceptional”a suspicion that American business is built on bribery and deceit.8

Samuel A. DiPiazza, Jr., CEO, PricewaterhouseCoopers LLP, and Robert G.
Eccles, president, Advisory Capital Partners, echo that observation:

Public trust has shaken in the institutions on which this value creation depends.
These institutions share a collective responsibility for producing the information on
which people of many levels”investors, lenders, trading partners, customers, em-
ployees”depend to make a wide range of economic decisions. The challenge now
is to institute the necessary reforms to ensure that public trust does not disappear, and
the foundation for those reforms lies in corporate reporting.9

In an effort to close the credibility gap or the expectation gap with respect cor-
porate accounting scandals, the U.S. Congress passed the Sarbanes-Oxley Act on

John C. Biegler, “Rebuilding Public Trust in Business,” Financial Executive 45 (June 1977), p. 28.
Samuel A. DiPiazza and Robert Eccles, Building Public Trust: The Future of Coporate Reporting
(New York: John Wiley & Sons, 2002), p. 2. See also John Morrissey, Securities and Exchange Com-
mission, “Corporate Responsibility and the Audit Committee,” March 21, 2000, www.sec.gov/news/
The Nature and Importance of Corporate Accountability 9

July 25, 2002, and President George W. Bush signed the bill into law on July 30,
2002.10 Now the standards of corporate accountability have been enacted into
statutory law, including securities laws and self-regulatory organizations™ listing
standards. Such legislation will provide a framework that can be used to measure
the performance of audit committee members, independent auditors, chief execu-
tive officers, and chief financial officers. Consequently, directors of publicly help
corporations may be more vulnerable to lawsuits as well as to the increased risk of
liability. As a result, many qualified persons may be reluctant to accept a position
on a board of directors.
Although the standards of corporate accountability have been addressed re-
cently in the U.S. Congress, the call for higher standards in corporate gover-
nance and financial reporting has remained a top priority, as evidenced by these
The need to resolve the credibility gap is evident. Corporate management must
adopt standards of corporate accountability. As one proponent points out:

Every corporation™s business is conducted by some standard. If it is not formulated
systematically at the top, it will be formulated haphazardly and impulsively in the
field. And top management will be called on to defend practices that were unneces-
sary and unintended.11

Consequently, the need for corporate accountability is not only apparent but es-
sential in shaping and projecting a corporate image to the public.
Shaun F. O™Malley, former co-chairman of Price Waterhouse World Firm (now
PricewaterhouseCoopers), points out that dramatic changes have occurred in the
roles of boards of directors, auditors, and management and in the relationships be-
tween these groups. Corporate accountability is a question of balance among the
three groups as well as between government and the private sector. Shareholders
and other constituencies of the company will continue their demands for protect-
ing the company from fraud along with communicating warning signals of possi-
ble business failures.12
Daniel J. McCauley and John C. Burton comment on the changing expecta-
tions of director responsibility and audit committees:

The limited responsibility of the directors for financial matters, as it formerly ex-
isted, has been significantly changed in recent years. The public™s loss of confidence
in the business community has been accompanied by a correlative demand for
greater director vigilance over company financial integrity. This oversight function
of the board has been promoted as one of the means for restoring business™s

Sarbanes-Oxley Act of 2002, H.R. Rep. No. 107-610, July 25, 2002, and Title 1 of Public Law No.
107-204, July 30, 2002.
Biegler, “Rebuilding Public Trust in Business,” p. 29.
Shaun F. O™Malley, “Auditing, Directors, and Management: Promoting Accountability,” Internal Au-
diting 5, No. 3 (Winter 1990), p. 3.
Daniel J. McCauley and John C. Burton, Audit Committees, C.P.S. No. 49 (Washington, DC: The
Bureau of National Affairs, 1986), p. A“3.
10 Corporate Accountability: The New Environment

As previously discussed, during the late 1990s, unprecedented public attention
was focused on the role and responsibility of audit committees in promoting cor-
porate accountability and investor confidence in the integrity of the audit processes
and financial reporting process. Although the concept and practices of audit com-
mittees were recognized and accepted over the past 20 years, unexpected failures
of major corporations and disclosures of questionable financial reporting practices
diluted investors™ confidence in the capital marketplace. Notwithstanding, the
common question asked by investors was “Where were the auditors?” Another
question was “Where was the audit committee?” As a result, a number of public
and private sector initiatives were undertaken in the late 1990s and the post“Enron,
post“WorldCom period in response to high-profile accounting scandals and the
demise of a large accounting firm.
This time line provides a chronology of the important developments and/or stud-
ies related to audit committees. (The time line presents major developments; the
reader may wish to visit the websites noted parenthetically for further reading.)

1998 SEC chairman Arthur Levitt™s speech, “The Numbers Game” (Remarks
at New York University™s Center for Law and Business and the SEC™s
Nine-Point Action Plan)
1999 Blue Ribbon Committee on Improving the Effectiveness of Corporate
Audit Committees,
Report and Recommendations of the Blue Ribbon Committee on Improv-
ing the Effectiveness of Corporate Audit Committees
Securities and Exchange Commission,
Final Rules, Audit Committee Disclosure, and approval of the New York
Stock Exchange, Nasdaq, and American Stock Exchange
American Institute of Certified Public Accountants™ Auditing Standards
Statement on Auditing Standards No. 90, “Audit Committee Communi-
National Association of Corporate Directors (NACD) Blue Ribbon Com-
mission on Audit Committees,
Report of the NACD Blue Ribbon Commission on Audit Committees (visit
the NACD website, www.nacdonline.org.)
Committee of Sponsoring Organizations of the Treadway Commission,


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