November 2008
The Metropolitan Corporate Counsel
Issues & Over view
The Credit Crisis And The Audit Committee
On December 15, 2006, Lehman Brothers and Bear Stearns reported profits of
$4.05 billion and $2.08 billion, respectively, for the fiscal year ended November
30, 2006. Other Wall Street firms reported similar financial successes. The
tremendous performance of these Wall Street firms was attributed to fixed-income
credit products, such as mortgage-backed securities, asset-backed securities, and
credit derivatives. Now, less than two years later, Lehman Brothers is in bankruptcy and the federal government bailed out Bear Stearns and it was sold. The
collapse of these venerable Wall Street firms was in large part the result of investments in risky securities and trading practices. The collective failure of these and
other financial titans begs the question: could more have been done to prevent
these failures?
The high-profile corporate scandals of the early 2000s placed more responsibility on the audit committee. These scandals led to legislative and regulatory
developments designed to expand the audit committee’s role and responsibilities,
including passage of the Sarbanes-Oxley Act of 2002, related SEC rulemaking,
and the New York Stock Exchange and NASDAQ Stock Market corporate-governance listing standards. The changes strengthened audit committee’s composition
and authority, increased audit committee responsibilities and enhanced the audit
committee’s monitoring role. The result was a shift in the audit committee’s
responsibilities from a largely monitoring role to a more proactive oversight role.
Part of these increased responsibilities for audit committees is to play a critical
role in overseeing and assessing the management of risk. Risk includes not only
the traditional catastrophic risks, but also financial and reputational risks. Best
practices require an audit committee to review and analyze the guidelines and
policies that govern the process by which a company’s exposure to risk is assessed
and managed.
Audit committee standards enacted under Sarbanes-Oxley and related SEC
regulations provide the audit committee of a publicly traded company with the
mechanisms necessary to conduct a thorough review to ensure the completeness
and accuracy of the company’s financial statements, including an assessment of
the company’s risk-exposure. These standards empower an audit committee to
investigate risk and to ensure that the company’s financial statements accurately
reflect that risk. As part of that investigation an audit committee should determine
what risks exist, how those risks are being accounted for and reported, and how
those risks are being managed.
To fulfill its responsibilities, an audit committee should use all available tools,
including its internal audit function, external auditors, and, if necessary, the retention of outside counsel and advisors. Each of these tools serves a key function.
Internal audit can provide the audit committee and management with an assessment of the internal controls in place with respect to the mitigation of risk, as well
as the efficiency and effectiveness of the operations of the company. External
auditors review and report on a number of matters, including the company’s financial statements, its reporting processes and the sufficiency of its internal controls.
Outside counsel and advisors can be retained to investigate or review areas of particular concern to the audit committee.
Given the current credit crisis, it is clear that the oversight role of the audit
committee will continue to expand and to grow in importance. Audit committees
need to be independent and must review management decisions with healthy
skepticism. This process necessarily includes a close analysis of the way companies assess and manage risk. It is easy to forget the truly stunning returns that
financial firms reported less than two years ago. With perfect hindsight, however,
we can now see that these companies failed properly to assess and manage their
risk.
There are tough lessons to be learned from this crisis. Given the enormity of
the global costs being paid for them, we had better learn the lessons well, and
quickly.
Michael S. Greco, Michael J. Missal and Robert A. Lawton
Kirkpatrick & Lockhart Preston Gates Ellis LLP
Editor’s note: Mr. Greco is past president of the American Bar Association and a
partner in the Boston office of K&L Gates LLP. He advises clients on managing
risk and crisis. Mr. Missal is a partner in the firm’s Washington, DC office and is
the practice area leader for the firm’s policy and regulatory practices. Mr. Lawson is an associate in the firm’s Harrisburg office.
Page 25
LAW FIRM ADVISORY COMMITTEE
R. Bruce McLean – AKIN GUMP STRAUSS HAUER & FELD LLP
Howard Rubin – DAVIS & GILBERT LLP
Susanna S. Fodor – JONES DAY
John M. Callagy – KELLEY DRYE & WARREN LLP
Robert F. Perry – KING & SPALDING LLP
Anthony P. LaRoccoi – K&L GATES LLP
Paul S. Pearlman – KRAMER LEVIN NAFTALIS & FRANKEL LLP
Anthony O. Pergolai – LOWENSTEIN SANDLER PC
Anthony J. Marchetta – DAY PITNEY LLP
Michael E. Feldman – PROSKAUER ROSE LLP
Steven E. Gross – SILLS CUMMIS & GROSS P.C.
Carl Lobell – WEIL, GOTSHAL & MANGES LLP
Steven A. Newborn – WEIL, GOTSHAL & MANGES LLP
Thomas H. French – WILLKIE FARR & GALLAGHER LLP
Abby Wenzel – WOLF, BLOCK, SCHORR AND SOLIS-COHEN LLP
CORPORATE COUNSEL ADVISORY COMMITTEE
Northeast Area
Howard J. Aibel
Retired Executive Vice President and Chief Legal
Counsel, ITT CORPORATION and currently Arbitrator
and Mediator of Commercial Disputes
Sigmund R. Balka
Vice President and
General Counsel, KRASDALE FOODS
James T. Breedlove
Senior Vice President, General Counsel and
Secretary, PRAXAIR, INC.
Allen R. Bromberger
Executive Director, POWER OF ATTORNEY
William D. Cotter
Vice President, General Counsel and Secretary
VISTA CAPITAL LLC
Lee Cushman
Executive Director, WESFACCA
Paul Dacier
Senior Vice President and General Counsel
EMC CORPORATION
Sean C. Delany
Executive Director
LAWYERS ALLIANCE FOR NEW YORK
William L. Ellis, Jr.
Senior Counsel,
MCKENNA LONG & ALDRIDGE LLP
Retired Senior Vice President, General Counsel
and Secretary
DIAGEO NORTH AMERICA, INC.
Former President of THE CORPORATE BAR
John C. Fast
Executive Chairman and CEO
SCS Partners Group
Kenneth C. Frazier
Executive Vice President and General Counsel
and President, Global Human Health
MERCK &. CO., INC.
George S. Frazza
Retired General Counsel, JOHNSON & JOHNSON
Sophia J. Gianacoplos
Executive Director, NEW YORK COUNTY LAWYERS
ASSOCIATION
Sharon Cohen Gold
Counsel,BREWSTER WALLCOVERING COMPANY. and
Former President of the NORTHEAST CHAPTER
ASSOCIATION OF CORPORATE COUNSEL-AMERICA
Robert S. Gorin
Senior Vice President, General Counsel and
Secretary, W.R. BERKLEY CORPORATION (Retired)
Thomas A. Gottschalk
Senior Vice President & General Counsel
GENERAL MOTORS CORPORATION (Retired)
Pamela Green
Managing Director
KELLY LAW REGISTRY
N. Michael Grove
General Counsel,
COMSTELLAR TECHNOLOGIES, INC.
Robert L. Haig
Former President of NEW YORK COUNTY LAWYERS’
ASSOCIATION and member of KELLEY DRYE &
WARREN LLP
Andrew D. Hendry
Senior Vice President, General Counsel & Secretary
COLGATE-PALMOLIVE COMPANY
R. William Ide III
Partner
MCKENNA LONG & ALDRIDGE LLP
Board of Directors, AFC ENTERPRISES
Peter M. Kreindler
Senior Vice President and General Counsel,
HONEYWELL INTERNATIONAL INC.
Frank M. Lesher
Executive Vice President and General Counsel
SONY CORPORATION OF AMERICA (Retired)
E. Nobles Lowe
Retired General Counsel,
WESTVACO CORPORATION
E. Robert Lupone
Senior Vice President, General Counsel
& Secretary
SIEMENS CORPORATION
William B. Lytton
Senior Counsel, DECHERT
David S. Machlowitz
General Counsel, MEDCO HEALTH SOLUTIONS, INC.
Jay Meltzer
Managing Director, KWATCHER LEGAL CONSULTING
Sam Scott Miller
Formerly Senior Vice President and
General Counsel of PAINE WEBBER GROUP INC.,
member of ORRICK, HERRINGTON & SUTCLIFFE,
designee of THE ASSOCIATION OF THE BAR OF THE
CITY OF NEW YORK
Roger M. Moak
Executive Vice President, General Counsel
and Corporate Secretary,
RISK ENTERPRISE MANAGEMENT
LIMITED (REMSM) (Retired)
Richard E. Mulroy, Jr.
Senior Vice President and General Counsel,
MONY (Retired)
John H. Ogden
Executive Director of the Greater New York
Chapter, ASSOCIATION OF CORPORATE COUNSEL –
AMERICA
Francis C. Poli
Executive Vice President, General Counsel
and Secretary
COHEN AND STEERS, INC.
Steven P. Reynolds
Senior Counsel,
TEXAS INSTRUMENTS INCORPORATED
Thomas L. Sager
Senior Vice President and General Counsel
DuPont Legal
E.I. DU PONT DE NEMOURS & COMPANY
Stevan A. Sandberg
President,
STAUBACH ADVISORY SERVICES
Barbara Ann Sellinger
Enterprise Vice President,
Labor and Employment Law
WYNDHAM WORLDWIDE
William K. Slate, II
President, AMERICAN ARBITRATION ASSOCIATION
David W. Smith
President, AMERICAN SOCIETY OF CORPORATE
SECRETARIES
James Tallman
President and CEO, DATACERT, INC.
Lynne J. Tomeny
Deputy General Counsel, TEREX CORPORATION
David J. Walsh
Executive Vice President & Corporate Counsel
SWISS RE LIFE & HEALTH AMERICA INC.
Craig H. Weaver
Counsel
AVAYA INC.
John C. Weber
General Manager, TYMETRIX
Lisa Whitney
Vice President and General Counsel,
NAUTICA ENTERPRISES, INC.
Wendell L. Willkie, II
Senior Vice President and General Counsel,
WESTVACO CORPORATION
William Wise
Corporate Counsel,
ANALOG DEVICES INC.
Teri Wilford Wood
Associate General Counsel,
IBM CORPORATION
Paul E. Yestrumskas
Vice President, General Counsel and Secretary
PLAYTEX PRODUCTS, INC.
David Zarfes
Executive Vice President, General Counsel and
Corporate Secretary
CAP GEMINI ERNST & YOUNG, U.S. LLP
Steven Zeidman
Executive Director, FUND FOR MODERN COURTS