اصلاح پست اداره امور شرکت انرون: انجمن سهامداران امنا و حسابرس

One potentially positive outcome of Enron's demise could be improving the process by which auditors are selected, retained and compensated. A proposal to reform this aspect of corporate governance is outlined in this essay. In addition, this editorial accomplishes two goals: (a) identification of the problem of audit independence as an outcome of vesting the authority to make auditor-related decisions with corporate boards of directors, and (b) proposing a structure to allow shareholders a direct path for deciding on auditor choice and compensation. This structure calls for establishing a Shareholders' Board of Trustees (SBT) independent of the Board of Directors and vest it with the responsibility of selecting, retaining and compensating external auditors. As a side benefit, allowing SBT to participate in the choice of corporate audit committee members could only enhance that committee's independence and effectiveness. To function as an independent agent of shareholders, administering the election process for the SBT has to lie outside the corporation; it could be, for example, administered by the stock exchange for a fee. It is evident that the administrative and procedural matters of implementation need to be developed and need not be binding to give this concept serious consideration.

In theory, auditors are “agents” of the shareholders, but in practice we speak of the management as the audit “client.” Moreover, the letter of engagement is exchanged between the management and the auditor. Yet, the entire present institutional arrangement is built on the premise that shareholders elect and appoint the auditor, which, I believe, is the biggest fallacy in corporate governance today. In today's global economy, corporate ownership is widely dispersed and shareholders, through proxy votes or sheer indifference, have effectively handed over the control of auditor-related decisions (hiring, retention and compensation) to corporate management. That same management will also decide on consulting engagements. Critics often assert that auditor independence may be impaired when the chosen audit firm is also retained to perform consulting services. Contrary to these assertions, I would argue that any such potential threat to audit independence arises from vesting de facto authority for hiring auditors in the hands of the same management that also hires consultants. Audit independence can be achieved by removing from the management's domain such de facto authority to hire and compensate the auditor. When vesting the decision making process in the hands of different organizational units (shareholders choose the auditor, and the management chooses the consultant), audit independence will be attained (even if the same audit firm is retained to perform consulting functions). A possible structure to achieve this goal is developed below.

While acting in a capacity different from that of the external auditor, like the auditor, the corporate audit committee is responsible to shareholders. To affect agents, corporate audit committees must maintain a degree of autonomy from the BOD. This would be difficult to attain in the present system. As with the external auditor, the BOD has the de facto authority of selecting and compensating outside directors who then become members of the corporate audit committee. It is, therefore, not surprising if the corporate audit committee finds it natural to conform to the policies, goals and activities of other (insider) members of the BOD. Without reorganizing the corporate governance structure, mitigating this problem will only result in more rules and regulations. However, the establishment of SBT has the added advantage of possibly reforming the choice of corporate audit committees in a potentially more effective manner. A couple of scenarios come to mind. At one extreme, one could argue for assigning the task of selecting and compensating corporate audit committee members to the SBT. This parallel track to the proposed decision-making process on external auditors has its merits, but also deprives the corporate audit committee from benefiting by the expertise of BOD in the market for executives. Another alternative is to allow for a joint decision-making process: the BOD select two members and the SBT select two others. The SBT appointed members would, in effect, be monitors of the activities of the other members. The different roles each type is likely to assume adds other dimensions that could be the subject of another essay.