Fraud for poets: about to sign a 10-K? Read these books first.

• Author: Kaback, Hoffer
• Position: Quiddities - Brief Article

IF YOU'VE AGREED to serve as a member of the audit committee of a public corporation, you should be sophisticated about financial accounting and auditing. It is not enough for you to be a person of high character. It is not enough for you to have "an inquiring mind" and to be willing to ask hard questions. And it is not enough for you to spend a few hours in a course of some kind, at the end of which a smiling functionary hands you a certificate attesting to your newly-garnered "financial literacy." (Consider how low a standard it is to be, merely, "literate.")

I justified these conclusions in my pre-Enron column "Putting the Dalai Lama on the Audit Committee" [Spring 1999]. I emphasized that you have to have a good command of financial accounting before you start serving on an audit committee. If you need to learn, you're not qualified.

In a nutshell: Poets need not apply. The term "poet" can, in this context, have considerable flexibility. It can include people like the Dalai Lama and also a marketing or manufacturing executive who may be a whiz in that area but who is simply not comfortable with accountmg matters.

It is valuable for some reasonable portion of the non-audit committee directors to have a relatively decent grasp of accounting, too. That is to say: in my view, it is not okay to have poets on the audit committee; it is okay to have some poets on the main board; but it is not particularly wise for there to be a huge drop-off in accounting knowledge between the two. Especially is this so where directors may be confronted with activities that may (or may not) constitute fraud -- and where it could be critical for the board as a whole to know enough to appreciate the difference.

In this connection, then, I list below some books. The list is not complete; it is subjective; and it does not reflect currently popular (or even in print) volumes.

If you have not already read a fair number of these (or their functional equivalents), or do not otherwise possess the knowledge contained in them, then you are unqualified to be on an audit committee. In effect, this list is for all the other directors - for the poets and the quasi-poets.

Basics: Financial Accounting: Basic Concepts by Earl A. Spiller Jr. A well-written, lucid, analytical presentation. The (third) edition on my shelf dates from the late 1970s, the book is out of print, and it may well be that there is no later edition. Obviously, all sorts of FASB pronouncements are not...