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A Three-Step Plan for CFOs

How to help your audit committee work more effectively.

Robert Pozen, CFO Magazine
April 1, 2011

Only Works if CFO Not Part of Problem

While Mr Pozen's statement that "CFOs can play a valuable role in making audit committees more effective by helping them deal with the data deluge..." is quite true, it would not have been a solution to the Lehman Brothers issue which was the lead for the article. In that case, either the CFO was an integral part of the coverup or else management blocked the CFO's access to information about the transactions. In the first case, information about the transactions, as provided to the Audit Committee, would have either been omitted by the CFO or worded in such a way as to minimize or disguise the effect of the transactions. In the second case, the CFO would not have had the information necessary to properly communicate the effect of the transactions to the Audit Committee. For Mr Pozen's recommendation to be useful, the CFO has to both have full knowledge of all relevant activities/transactions AND must have ethics that are so strong as to resist any pressures from other members of management to participate in the frauds or questionable activities. In the case of Repo 105 transactions at Lehman, analyses I've read indicate complicity by the external auditors in covering the transactions to minimize recognition by the Audit Committee. If the external auditors had properly assessed the transactions and had not caved in to management's position that they were valid accounting transactions with minimal risk, they would have been obligated to raise the issue with the Audit Committee. Instead, the auditors seem to have swallowed management's position "hook, line, and sinker" as we say in some parts of the USA. The end result was that investors were left holding lost value, because the auditors seem to have forgotten whom their audits were intended to protect and instead became willing shills for management.

Posted by Richard Archer | April 05, 2011 04:53 am

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