CPAs are beginning to see some familiar faces in corporate boardrooms—including their own. Until recently, most boards were made up largely of CEOs of other organizations. In the past few years though, board members’ backgrounds have become more diverse, and more CPAs are serving as directors, in part because of concern over corporate fraud and other accounting and auditing issues. The Sarbanes-Oxley Act requires all public companies to have an audit committee made up solely of independent directors. All members must be financially literate, and the company must identify at least one “audit committee financial expert” or explain why it doesn’t have one.
This new rule should have resulted in large numbers of companies adding board members with these skills, particularly former audit partners and current or former CFOs. That hasn’t happened yet, but I believe this will change and more such appointments will follow in the next five years. In this article I’ll share my experiences as a corporate board member and explain some of the dos and don’ts for CPAs who want to join the ranks of accountants heading to the boardroom.
A SEAT AT THE TABLE
I joined my first board in the fall of 2001, and I’m now a member of three: Kimberly-Clark Corp., Legg Mason Inc. and MCI Inc. (formerly WorldCom). I am chairman of the audit committees of all three companies and also serve on the governance/nominating committees of two.
Being a board member has been the most interesting experience of my professional career. I get involved with a broad range of business matters and have the opportunity to learn about many new areas. It’s like getting a real-world MBA through on-the-job training. Beyond the interesting nature of the work, there’s also the prestige. And it’s not a bad part-time job; director fees already are generous and are getting better as responsibilities increase.
Quite a few accountants have spoken to me about becoming directors. They are interested but don’t know how to get started. After all, director positions just don’t appear in newspaper help-wanted ads. So how do you go about becoming one? Two of my opportunities came through personal contacts; they were referred to me by a retired senior partner of an accounting firm who was unable to consider them himself. So the message is to keep in touch with the high-profile people you know who already serve on boards and make sure they know you are interested.
My third position came through an executive search firm specializing in board searches that contacted me. In addition to search firms, the AICPA, Financial Executives International, the National Association of Corporate Directors and other similar groups keep registers of interested CPAs. But the best approach is to network with business associates, law firms, investment bankers and other professionals.
Of course, it’s important to remember being a director can be a stressful job if the company gets into trouble. And if things really get bad, you could be sued and lose your entire net worth. But doing your homework and generally taking this responsibility seriously will protect most directors from serious legal exposure.
Good news: A company has contacted you to gauge your interest in a board position. Assuming you’ve had some initial interviews and the company has shown a strong interest in having you join its board, the nature and amount of due diligence you undertake has to be a personal judgment. There’s no specific approach that fits all circumstances. However, a few steps you should consider taking are
Meet with the company’s senior officers and as many board members as possible. Are these people you’d feel comfortable working with? Do they seem genuinely interested in having you join the board? Do they have a specific role in mind for you?
Introduce yourself to the accounting firm engagement partner and ask him or her about the company’s accounting practices.
Discuss the directors and officers insurance coverage with the company’s general counsel as well as provisions in the articles of incorporation or bylaws that call for indemnification of directors in appropriate circumstances.
Discuss your possible appointment with your own legal counsel to make sure there are no conflicts with your business or personal life.
And, of course, read everything you can get your hands on about the company. Start with the latest annual report, 10-K, proxy statement and analyst reports. Review management letters and other correspondence from the outside auditors. It’s also a good idea to type the company’s name into your Internet search engine to find out what others are saying and writing about it.
In one instance I had some preliminary discussions about joining a board and met with several current directors. After those meetings, I received feedback from the CEO that some of the directors were concerned I didn’t have broad general management experience as most of them did. They knew I could contribute in my “narrow area” but felt I might not be able to participate effectively in discussing strategy and other big issues facing the company. Hearing that, I decided I might not be considered an equal partner with other directors and withdrew from further consideration.
SEC rules on auditor independence are complicated, so be sure any current or former relationships you have with a company or its independent audit firm will not create an independence problem that disqualifies you from board membership.
HOW CPAs CAN CONTRIBUTE
Shareholders elect directors to serve as their representatives in overseeing a corporation. Thus, all directors have general oversight responsibility. CPAs shouldn’t join a board with the expectation of concentrating only on accounting or auditing matters. With their analytic skills and experience working with a variety of businesses, accountants have much to contribute in the boardroom.
Corporate governance is, of course, a broad topic. While CPAs won’t be expected to be expert in all of those subjects, they can certainly contribute in many areas.
Corporate governance practices involve adherence to regulations or company policies, and CPAs have great experience designing and performing compliance tests.
Accountants have expertise understanding and evaluating the financial effects of complex contracts, a skill often necessary on board compensation committees. Recall the Walt Disney Co. and New York Stock Exchange situations in which some directors claimed they didn’t know how lucrative a senior executive’s employment contract was until it was too late to change it.
An important aspect of governance is ethical behavior, and CPAs have experience complying with their own ethical standards as well as seeing that their clients or companies do the same.
AUDIT COMMITTEE ISSUES
Notwithstanding the need for all directors to be generalists, it would be unusual for a CPA to join a corporate board without also being added to the audit committee. That committee’s principal responsibility is oversight of the company’s financial reporting process. This involves a review of the annual report, 10-K and 10-Q before those documents are finalized. Audit committees also are responsible for hiring and compensating the outside auditing firm.
Carrying out these and other assigned responsibilities involves a careful balancing act. This still is a part-time activity, and audit committee members must resist the temptation to micromanage the finance function, external audit or related activities. At the same time, an effective audit committee can enhance a company’s financial reporting function. CFOs and controllers usually prefer to deal with qualified audit committee members who understand and will support a strong financial reporting activity.
An effective audit committee also can be an important contributor to internal control over financial reporting. PCAOB Auditing Standard no. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements, recognizes this and requires external auditors to evaluate the effectiveness of audit committees as part of their audit of internal control under section 404 of Sarbanes-Oxley. Earlier this year the AICPA issued a paper, Management Override of Internal Controls: The Achilles’ Heel of Fraud Prevention—The Audit Committee and Oversight of Financial Reporting, that helps explain how such committees can contribute to internal control compliance.
AUDIT COMMITTEE FINANCIAL EXPERTS
I believe the biggest reason corporations will continue to add accountants to their boards is the Sarbanes-Oxley/SEC requirement that all audit committees have a financial expert. The SEC’s implementing regulations left the qualifications quite broad, and many companies have designated individuals with only a very general understanding of accounting and auditing as their audit committee financial expert.
The expert is supposed to understand GAAP, internal controls and audit committee functions. He or she also should have experience with financial statements and accounting issues generally comparable with those the company in question might face. However, rather than requiring hands-on experience with these matters, the SEC decided others who analyze or evaluate financial statements, or who actively supervise individuals who perform any of these functions, would qualify as well. Most CEOs who actively supervise a CFO would be eligible to be considered financial experts for audit committee purposes. In fact, it appears a large number of companies have settled on such people as their experts.
One critical reason for CPAs to seek these positions is that most CEOs can’t really “speak accounting.” They don’t have specific knowledge of GAAP, SEC accounting regulations, PCAOB auditing standards and similar requirements. Thus, they must depend heavily on the finance executives and outside auditors of the companies on whose boards they sit. One CFO told me she was concerned that audit committee members may not have understood her explanations but she had no way of knowing without embarrassing them.
As the need to designate an audit committee financial expert becomes better understood, I think it is inevitable both the individuals and the companies involved will rethink some of these appointments, creating more opportunities for CPAs. The SEC specifically said it doesn’t intend to inflict more liability on experts, but it is not clear how the courts will interpret the requirement.
Accountants historically have contributed to corporate governance through external audits and internal financial management roles. Now in the 21st century it’s time for more CPAs to enhance their role by taking a seat in the boardroom and offering companies their significant financial expertise in a way that will benefit both the company and its shareholders.
Dennis R. Beresford, CPA, is the Ernst & Young Executive Professor of Accounting at the J.M. Tull School of Accounting at the University of Georgia, Athens, and a former chairman of the Financial Accounting Standards Board.