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From Enron to Lehman Brothers: Lessons for Boards from Recent Corporate Governance Failures

Director Notes (No. DN-V4N6, The Conference Board)

Blank Rome attorney Frederick D. Lipman authored “From Enron to Lehman Brothers: Lessons for Boards from Recent Corporate Governance Failures” (Director Notes, The Conference Board. March 2012).

The report identifies common pitfalls in many current whistleblower and compliance programs and offers recommendations on how audit committees can strengthen them.

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In order for boards to fulfill their oversight obligations, the organizations they serve must have robust whistleblower and compliance policies and programs to encourage reporting that can help identify risk exposures, fraud, or other illegal activity. This report identifies common pitfalls in many current whistleblower and compliance programs, and it offers recommendations on how audit committees can strengthen them.

Government investigations, bankruptcy receiver reports, and numerous books provide a rich source of information about the major corporate disasters of the first decade of the twenty-first century. Although the financial implosions, starting with Enron and ending with Lehman Brothers, have significant differences, one common corporate governance theme can be seen: The board, and, in particular, the independent directors, did not have the information required to properly perform their oversight duties, even though such information was known to various members of management.

In almost all the cases, the directors claimed they were misinformed or “duped” by the CEO or CFO.1 In this respect, these disasters were partly the result of corporate governance failure and, in particular, a failure to establish a robust whistleblower system as an internal control. Those failures also offer evidence that the independent directors of companies that suffer shareholder debacles tend to lose their business reputation and their other directorships.

The audit committee members and other independent directors of these companies relied heavily on the fact that the company was receiving clean audit opinions from its independent auditors and failed to develop other independent sources of information. An investment advisory group formed by the Public Company Accounting Oversight Board (“PCAOB”) noted that a number of companies all received unqualified audit opinions within months of their failure.

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