We were there: FEI's role in shaping the Sarbanes-Oxley act of 2002.

• Author: Livingston, Philip B.
• Position: Financial Executives International - Viewpoint essay

The Enron Corp. scandal put Financial Executives International front and center in 2001 and 2002. The criminal acts of Andy Fastow, Enron's chief financial officer, blatant accounting manipulation and fraudulent financial reporting--as well as ineffective audit committee oversight and auditor Arthur Andersen's failed audit--were all factors that called for a regulatory overhaul in areas central to FEI's mission and purpose.

As president and CEO of FEI at the time, I believed the situation called for proactive leadership along with strong public advocacy on behalf of the membership.

In response, we put together a task force of leading chief financial officers and controllers from FEI's membership. That group met regularly to develop draft recommendations. FEI's prestigious Committee on Corporate Reporting added and amended the recommendations as they came into final form.

In the early days of the scandal, we emphasized the lack of ethical conduct and the inappropriate "tone at the top" as key causes of the Enron bankruptcy. The front line failure of the management team was so shocking and blatant that it drew highlighted attention to the complete failure of the external audits and board oversight.

We ultimately outlined 12 recommendations that included creating a new oversight body for auditor regulation (the eventual Public Company Accounting Oversight Board); restricting the hiring of senior personnel from the external auditor (Enron and Andersen had a revolving door of personnel and auditors from Andersen actively sought lucrative positions at Enron); reforming the Financial Accounting Standards Board; stronger qualification standards for public company CFOs and principal accounting officers; and recommendations to modernize financial reporting.

[ILLUSTRATION OMITTED]

The full list of the 12 recommendations are in the sidebar on page 43.

FEI's Legislative Priorities

FEI lobbied for three major legislative priorities as the bill gained momentum. The first was to eliminate the provision that called for external audit of the internal control system. It was a provision that the audit firms had pursued since the 1980s, and one that corporate America had fought off successfully in the past.

Second, we called for the implementation of higher standards for financial experts on audit committees (which would eventually become Section 407 of the law). Finally, we felt that all companies should require senior management to sign a code of ethical conduct (the eventual Section 406), acknowledging their financial reporting obligations and agency duty while overseeing the corporation's assets.

The internal control audit--the provision that became the infamous Section 404--was especially troubling to our membership, and our letter to Congress and the regulators called for its removal. I recall the meeting of FEI's Committee on Corporate Reporting in which one of our members was the first to point out that the onerous provision had been inserted into the earliest drafts of the bill. We pointed to the impracticality of the concept, as well as the cost it would create.

Looking back it provides little solace to know that we were among the few to object, given our ultimate inability to remove the provision from the final legislation.

And, though FEI opposed Section 404 during the drafting of the bill, since adoption the very large cap companies have found it useful in improving internal controls, while the mid-cap and small companies have...