Preventing future Enrons.

• Author: Livingston, Phil
• Position: President's Page - Strong financial management needed - Brief Article - Column

The Enron collapse demonstrates the value of a strong management team -- especially a strong financial management team. While there were other contributing factors, a downfall of this proportion only comes from reckless financial stewardship that abuses the company's assets, whether through speculative expenditures or over-leverage, and permits corporate ego to overwhelm management's fiduciary obligations to stakeholders.

Not only did poor financial stewardship take Enron to the brink, but it also brought the fatal blow, which was struck by the crisis in confidence in the company's financial reporting and investor relations. Enron had at its core a valuable set of assets and cash flow streams. But that value was ultimately offset by the huge liability and capital cost incurred when investors couldn't trust the company's management.

Even a perfect regulatory structure will never be as effective as strong financial management and control on the part of a company's top executives. But within that investment and risk-taking environment, financial management plays a key role in maintaining capital market efficiency through transparent financial reporting and strong internal control. Senior financial executives -- namely, CFOs, finance directors and controllers -- have a special duty to stakeholders to protect the company's assets and provide full and fair disclosure to investors.

What can be learned, and how do we prevent another failure of this kind? Senior executives and directors across America need to continue the dialogue and ask themselves some hard questions, among them:

How do we increase the effectiveness of checks and balances to prevent situations where corporate egos overwhelm good control systems?

My response -- Audit committees must immediately add true financial experts to their membership -- directors who have hands-on experience in corporate financial management. The current definitions of audit committee financial experts are inadequate. Audit committees and management teams should do self-assessments on the aggressiveness of their accounting policies and disclosure posture. Further, audit committees should adopt a formal policy prohibiting the hiring of partners and managers from the auditor for employment...