CPAs, whether working for public accounting firms or in industry, are in a unique position to recognize and communicate to business leaders that good governance practices lead to good management and financial results.
The Value of Better Governance
There are many situations where better governance could have precluded business problems. Consider the following examples:
- ▪ Lack of board oversight of mission-critical activities, resulting in significant legal liabilities and business losses,
- ▪ Strategic and operating decisions made without the input of all appropriate internal and external stakeholders,
- ▪ Lack of comprehensive risk analysis in business decisions,
- ▪ Focus on GAAP financial statements without understanding the impact on cash flows, and
- ▪ Not testing compliance with established governance, including the adequacy of internal reporting to management and to the board, among others.
Examples of inadequate governance contributing to legal, financial, and human consequences abound:
- ▪ Boeing—Vice Chancellor Morgan T. Zurn, in her September 7, 2021 memorandum opinion (https://courts.delaware.gov/Opinions/Download.aspx?id=324120) found “the (Boeing) directors’ complete failure to establish a reporting system for airplane safety… their turning a blind eye to a red flag representing airplane safety problems,” and that “the Board publicly lied about if and how it monitored the 737 Max’s safety.”
- ▪ Wells Fargo—Responding to wide-spread abuses in consumer sales practices and control breakdowns that occurred at Wells Fargo Bank over a period of several years, on February 2, 2018, the U.S. Federal Reserve Board announced consent and cease and desist orders requiring improvements in the firm’s governance and risk management processes, controls, and board oversight. The orders included a restriction in the company’s growth until sufficient improvements are made. The Federal Reserve also criticized the job performance of the bank’s board and CEO in a press release (https://tinyurl.com/bdfupnhx).
While Boeing and Wells Fargo are sizeable, such issues are not limited to large public corporations. Organizations of all sizes, including publicly traded, private, and not-for-profit, can struggle with governance issues—and suffer potentially dire consequences when things go wrong.
Checks and Balances
Today, accepted good governance standards have shifted from a “tone at the top” approach to a more effective focus on “checks and balances.” Experience has shown that tone at the top does not ensure effective guidance or ethical behavior, with examples ranging from WorldCom to Enron to Tyco.
The issues being addressed are complex. Future columns will address key aspects of governance to better guide CPAs in their role as trusted advisors to management, with an emphasis on their practical applications for CPAs, whether in industry or public practice, including internal and external auditors. Topics will include the following:
- ▪ Understanding organizational governance and the underlying economic fundamentals
- ▪ Stress testing the governance structure
- ▪ Transitioning from “tone at the top” to “checks and balances”
- ▪ Creating an executive committee of the board
- ▪ Monitoring cash flows and related internal information
- ▪ Protecting the organization’s intellectual capital
- ▪ Board member selection and interaction.
