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The Proper Role of a Corporation's Board of Directors
By Michael C. Dennis, MBA, CBF

As the financial scandal among publicly traded companies continues to expand, credit professionals must be asking themselves what can be done to spot financial manipulations. As a practical matter, the answer is nothing. It is extremely unlikely that a credit manager would spot anything in the finished product [a customer's balance sheet, income statement and cash flow statement] that the company's independent auditors might have missed in their detailed analysis of the customer's internal books and records. So where does this leave the credit department? There is reason for optimism based on legislation proposed at the federal level. Among the proposals under consideration are:

  • A tripling of the budget for the U.S. Securities and Exchange Commission.

  • Greatly increased criminal penalties for the federal crime of filing of fraudulent financial statements.

  • A requirement that a CPA firm engaged to perform financial audits not be concurrently engaged to provide consulting services to the same corporation.

  • A requirement that officers of corporations attest to the accuracy of their company's financial statements with unlimited personal liability in the event that the statements are found to be fraudulent.

  • A requirement of a minimum number of independent director's on a public company's Board of Directors.

  • Limitations on the types of loans and the amount of loans that can be made by public companies to their officers and/or directors.

  • The requirement that an audit committee [or more precisely subcommittee] be appointed from among the board of directors.

If all of these changes that are under review are put into place, there is a good chance that the they will be sufficient to restore some of the confidence that has been lost as a result of the literally billions of dollars of financial misstatements that have been reported in the news over the last few months.

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