Don't Wait to be Told What to Do
from January/February 2003
by Arjay Miller
With or without new laws or regulations, corporate audit committees can do much to improve financial-statement accuracy simply by taking these actions:
- Monitor external audits. Since financial statements are certified only once a year, the audit committee should require that the external auditor meet with the chief accounting officer each quarter before the books are closed to discuss discretionary items that will affect the bottom line. Although accounting appears to be an exact science, it is not. At every quarterly closing, judgments must be made about such matters as inventory valuations, reserves for bad loans, and the interest rate needed to calculate pension obligations. There will frequently be goodwill write-downs and other one-time items to be considered, as well as an obligation to disclose off-balance-sheet transactions. Such decisions can have an enormous effect on financial results.
At each meeting of the audit committee—there should be at least four a year—the outside auditor should review the important matters discussed at the pre-closing meeting and why the decisions went the way they did. He should state what changes he would make in the financial statements if he had sole responsibility for preparing them. He should also say whether the internal audit department is functioning well. I always gave the outside auditor my phone number and told him to call me whenever he had information he thought I should know. Once he called to say that the CEO had instructed the chief accounting officer to ignore a consultant’s report calling for the write-down of a certain corporate asset. I ordered that the write-down be taken that quarter—and said that if the CEO reversed my decision, his action would be the first item on the agenda at our next committee meeting, which he would be invited to attend. Case closed. - Ask timely questions. At the audit committee meetings, make specific inquiries. Shortly after the enactment of the Foreign Corrupt Practices Act of 1977, I asked the controller of a global company if it was in compliance with the law. His reply: “We are guilty in only one country, and have only one more payment to make.” You can be sure that someone in that country was disappointed that he didn’t collect his last installment.
- Invite the chief counsel to attend audit meetings. Ask him to report on what the company is doing to comply with laws and regulations, especially in areas such as OSHA and antitrust that might expose the company to significant risks. The question of what should be reported should be left to the judgment of the chief counsel—but if conditions warrant, do not hesitate to call in outside legal help.
- Run down rumors. On one occasion, a rumor circulated that the CEO’s wife had received a “suitcase of cash” from a foreigner who wanted the company to build a facility in her native country. The audit committee asked the CEO to attend its meeting. He denied the accusation and explained how the rumor got started. The committee believed him.
- Make full use of the internal auditor. He should be an employee of the company reporting to someone other than the chief accounting officer. The audit committee should meet privately with him at least once a year and seek his opinion as to the probity of the company’s financial reporting. The chairman should visit him periodically in his office, just to pick up water-cooler gossip. Promise him that if he loses his job because he tells the committee about an impropriety, you will help him find another one.
- Conduct exit interviews. Meet with any departing chief counsel, internal auditor, or chief accounting or financial officer to determine whether his leaving is related to improprieties at the company.
- Establish and stick to a code of business ethics. Every company should have a strict code that sets forth clearly what can and cannot be done. As we have learned, the code should be consistently adhered to.
Following these suggestions will not guarantee that a company keeps out of trouble—some luck would be nice, too—but staying on this path will certainly help.
Arjay Miller, 86, is a former president of Ford Motor, dean emeritus of Stanford University’s Graduate School of Business, and a retired director of Chronicle Publishing, Levi Strauss, Litton Industries, Santa Fe Southern Pacific, Trans World Airlines, Trans World Corp., Utah International, the Washington Post Co., and Wells Fargo Bank.
