The Securities and Exchange Commission will scrutinize the behavior of corporate audit committees in every investigation it begins into companies' financial reporting, the agency's enforcement chief said.
"An audit committee or audit committee member cannot insulate herself or himself from liability by burying his or her head in the sand," Stephen Cutler, SEC director of enforcement, told hundreds of securities lawyers meeting in Washington.
"It just won't work that way," said Cutler, whose agency has never brought an enforcement action against an audit committee or audit panel member. "In every financial reporting matter we investigate, we will look at the audit committee."
His remarks come as the SEC, Justice Department and a dozen congressional committees are investigating the collapse of Houston-based Enron Corp, once the seventh-largest US company by sales.
Last November, Enron disclosed that it overstated profit by US$586 million over four years by shifting debt or losses into partnerships managed by company executives. The probes into Enron's bankruptcy, the biggest ever in the US, are striking fear in the hearts of audit committees of corporate boards nationwide, said Richard Walker, general counsel of Deutsche Bank AG and SEC enforcement director from 1998-2001.
Running Scared "Audit committees in the United States right now are very scared," said Walker. "They are worried about potential SEC enforcement action."
Many of their lawyers are counseling them that the best protection is "due diligence," Walker said.
That means doing their job, including not taking at face value the earnings and other data auditors and company officials give them, he said.
"Ask questions," said Walker who was on the same panel as Cutler at the annual "SEC Speaks'' meeting sponsored by the Practicing Law Institute.
"The bottom line," said Linda Thomsen, SEC deputy director of enforcement, "is that there is a great range of exposure. We have a number of tools to work with. We may have more tools going forward," she said, alluding to legislation in Congress to give regulators more legal ammunition against corporate financial fraud.
Asked to what extent audit committees can rely on the reports of a company's officers and independent auditors, Thomsen said, "That depends on how reasonable those reports are. They obviously have to depend on people reporting to them. On the other hand, you can't ignore any sign that those reports are inaccurate."
Fighting Complacency Hal Degenhardt, head of the SEC's district office in Fort Worth, Texas, said fear may now be the best medicine for audit committees.
"It may shake them out of their complacency and get them to do the job they are supposed to be doing," he said during the panel. That job "is to ask the hard questions -- not just sit there."
Degenhardt and Thomsen said the SEC doesn't want people to get so scared that they shun serving on audit committees.
"All we mean to say is that if you are going to serve, we expect you to do your job," Degenhardt said.
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