Academic journal article Journal of Accountancy

CPAs as Corporate Directors: Be Diligent, Not Fearful

Academic journal article Journal of Accountancy

CPAs as Corporate Directors: Be Diligent, Not Fearful

Article excerpt

EXECUTIVE SUMMARY

* Section 407 of SOX requires public company disclosure of "financial expert" participation on an audit committee but stops short of requiring one. Reasons for not including one must be disclosed. CPAs have become prime candidates to serve in this capacity because they generally meet the definition of a financial expert.

* Typical corporate director duties include managing a company on behalf of, and in the best interests of, the shareholders in an oversight and advisory role. The audit committee of a board has additional responsibilities, and for public companies these responsibilities must be carried out in accordance with SEC, SOX, and stock exchange requirements.

* Directors are expected to perform their duties according to certain standards of conduct. State and federal guidance on director liability provides that directors acting in good faith and performing duties with due care, loyalty, and diligence should be protected from liability in conjunction with board service.

* Out-of-court settlements in high-profile cases such as Enron and WorldCom may have heightened concerns about the personal liability of directors, but do not create a legal precedent.

* Recent litigation cases involving director liability suggest that board members will be insulated from liability as long as they did not breach their fiduciary duty by engaging in self-dealing and were not personally aware of wrongdoing on the part of the corporation or its officers.

* Being designated an expert means that directors are expected to use that expertise when carrying out duties, and this will be considered when determining whether those duties were performed with due diligence and in good faith.

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Financial scandals routinely highlight the need for improved corporate governance and the reliability of financial reporting. Lawsuits associated with these scandals have focused attention on the individuals involved, management and directors alike, and the personal liability that may result. The profession is at an interesting crossroads--CPAs are needed to fill the roles of conscientious, diligent watchdogs on corporate boards and audit committees. However, personal liability concerns may deter excellent candidates from agreeing to serve. This article summarizes some relevant legal issues and provides suggestions for accountants who are considering whether to serve on a board.

ADDITIONAL DEMAND

The Sarbanes-Oxley Act contains requirements intended to improve the accuracy and reliability of corporate disclosures. Section 407 of SOX requires public companies to disclose whether the audit committee of the board of directors includes at least one "financial expert." Final rules issued pursuant to section 407 (SEC Rel. No. 33-8177) define an audit committee financial expert as a person who has an understanding of GAAP and financial statements; an ability to assess the application of accounting principles; experience in the preparation, audit, analysis or evaluation of financial statements; experience in accounting internal controls; and an understanding of audit committee functions. (For a complete SEC definition of an audit committee financial expert, see page 46.)

Section 407 stops short of requiring the presence of a financial expert on the audit committee, but it does require companies lacking a financial expert to disclose their reasons for failing to include one. It seems companies should prefer including a financial expert on the audit committee rather than explaining the absence of one. A director does not have to be a CPA or an accountant to qualify as a financial expert, but CPAs are prime candidates for the position because they generally meet the qualifications.

DIRECTOR RESPONSIBILITIES

The corporate director's role is to manage the company in the best interests of the shareholders. Directors generally delegate authority and responsibility for daily operations to the CEO and senior management, while taking on an oversight and advisory role. …

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