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The Center for Audit Quality Gallery on Corporate Governance

Problems of Performance

Crisis, Round 1

“While attorneys arguably have become too intimately involved in the business decisions of their public company clients, many Boards of Directors have maintained an unhealthy distance from the same. Boards – and particularly outside directors – were conceived of as the shareholders’ representative, yet too often, they are dominated by associates and friends of senior management. Moreover, board membership too frequently has been viewed by outsiders as an honor or a perk instead of a substantive job. Many outside directors have lacked expertise in the relevant industry, and in accounting and financial reporting issues. Thus, Boards were too rarely equipped to uncover and derail the determined efforts of management to cook a company’s books.”

November 1, 2002 Speech by Stephen Cutler, Director, SEC Division of Enforcement at the University of Michigan Law School

The 2001 collapse of Enron and the bankruptcy of WorldCom the next year demonstrated what could happen when management made financial reporting a shell game and directors either overlooked or ignored it. The events gave fresh urgency to earlier initiatives by lawyers, accountants and regulators to better ensure financial statement integrity.⁴²

The result was a groundswell of support for the reform of corporate governance standards and passage of the Sarbanes-Oxley Act in 2002, which imposed federal standards for business conduct, although it left states responsible for direct oversight. Sarbanes-Oxley also sought to improve financial reporting by obliging companies to regularly rotate audit partners and limit the non-audit services that accounting firms could offer. It required that audit committee members be independent directors, with at least one able to interpret financial statements. The audit committee received the power to hire and fire auditors, traditionally a management prerogative. Sarbanes-Oxley finally directed corporate executives to certify their financial reports and required auditors to certify internal controls over financial statement reporting.

As state prerogatives were complemented by federal measures, industry efforts were stepped up. The New York Stock Exchange and NASDAQ revised their listing standards to require boards with a majority of outside directors, and audit, nominating, and compensation committees comprised entirely of independent directors.⁴³

The accounting profession was hardest hit by the scandals. Arthur Andersen, auditor to both Enron and WorldCom, crumbled, turning the “Big Five” accounting firms into the “Big Four.” Sarbanes-Oxley established the Public Company Accounting Oversight Board to more effectively set and enforce standards governing audit firms. The profession itself worked to restore integrity to the audit, launching the non-profit Center for Audit Quality in 2007. With members, including large public company accounting firms, the organization sought to promulgate better practices and inform policy development. With corporate accountability scandals cutting a swath of devastation through the economy of the early 2000s, good corporate governance came in demand, as market participants increasingly integrated it into evaluations of corporate performance.⁴⁴

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Footnotes:

(42) June 5, 2014 Corporate Governance in the New Century.

(43) May 31, 2013 Interview with Alan Beller. See, for example, pertinent New York Stock Exchange listing standards.

(44) June 17, 2013 Interview with Harvey Goldschmid; January 31, 2007 Washington Post, “Accounting Firms Form Policy Group.”

Related Museum Resources

Papers

April 12, 2001: Letter to Thomas Newkirk, SEC Division of Enforcement from Ralph Ferrara on Waste Management, Inc.
image pdf (Courtesy of the National Archives and Records Administration)
December 7, 2001: Request to SEC Chairman Harvey Pitt from U.S. Representatives W.J. Tauzin and James Greenwood for Enron materials
image pdf (Courtesy of the National Archives and Records Administration)
December 17, 2001: Memo to David Becker from Robert Herdman and David Martin with Enron information
image pdf (Courtesy of the National Archives and Records Administration)
December 17, 2001: Reply letter to U.S. Representative W.J. Tauzin from David Becker, SEC General Counsel concerning Enron materials
image pdf (Courtesy of the National Archives and Records Administration)
January 9, 2002: Request for SEC Commission Action: Congressional request for briefing and documents concerning Enron Corporation
image pdf (Courtesy of the National Archives and Records Administration)
January 16, 2002: Action Memorandum from SEC Office of the Chief Accountant: Statement regarding MD&A
image pdf (Courtesy of the National Archives and Records Administration)
January 16, 2002: Request to SEC Chairman Harvey Pitt from U.S. Senators Joseph Lieberman and Carl Levin for briefing on Enron and Arthur Andersen
image pdf (Courtesy of the National Archives and Records Administration)
January 17, 2002: Draft reply to U.S. Senators Joseph Lieberman and Carl Levin from David Becker, SEC General Counsel
image pdf (Courtesy of the National Archives and Records Administration)
January 18, 2002: Minutes of the U.S. Securities and Exchange Commission
image pdf (Courtesy of the National Archives and Records Administration)
January 22, 2002: Letter from Eugene H. Rotberg to James Leach, Chairman Emeritus, U.S. House Financial Services Committee on Enron
image pdf (Courtesy of Eugene H. Rotberg)
January 23, 2002: Letter to SEC Chairman Harvey Pitt from U.S. Representative W.J. Tauzin with additional questions on Enron
image pdf (Courtesy of the National Archives and Records Administration)
February 1, 2002: Action Memorandum from SEC Office of Congressional and Intergovernmental Affairs concerning Enron
image pdf (Courtesy of the National Archives and Records Administration)
February 1, 2002: Draft reply to U.S. Representative W.J. Tauzin from David Becker, SEC General Counsel
image pdf (Courtesy of the National Archives and Records Administration)
February 1, 2002: Memo to David Becker from Alan Beller with Enron information
image pdf (Courtesy of the National Archives and Records Administration)
February 4, 2002: Action Memorandum from SEC Pacific Regional Office concerning Global Crossing Ltd.
image pdf (Courtesy of the National Archives and Records Administration)
February 12, 2002: Request for SEC Commission Action: Intention to propose rules on corporate disclosure
image pdf (Courtesy of the National Archives and Records Administration)
March 11, 2002: Action Memorandum from SEC Division of Enforcement concerning WorldCom, Inc.
image pdf (Courtesy of the National Archives and Records Administration)
March 19, 2002: Request for SEC Commission Action: Testimony concerning "Corporate and Auditing Accountability, Responsibility and Transparency Act"
image pdf (Courtesy of the National Archives and Records Administration)
April 2, 2002: Action Memorandum from SEC Division of Corporation Finance concerning proposed rules on acceleration of periodic report disclosure and Website access to periodic reports
image pdf (Courtesy of the National Archives and Records Administration)
April 8, 2002: Action Memorandum from SEC Division of Enforcement concerning Xerox Corporation
image pdf (Courtesy of the National Archives and Records Administration)
April 9, 2002: Action Memorandum from SEC Northeast Regional Office concerning Adelphia Communications Corporation
image pdf (Courtesy of the National Archives and Records Administration)
April 26, 2002: Action Memorandum from SEC Division of Corporation Finance concerning disclosure in MD&A about critical accounting estimates
image pdf (Courtesy of the National Archives and Records Administration)
April 30, 2002: Open Meeting of the U.S. Securities and Exchange Commission
image pdf (Courtesy of the National Archives and Records Administration)
May 3, 2002: Action Memorandum from SEC Office of General Counsel concerning United States v. Arthur Andersen LLP
image pdf (Courtesy of the National Archives and Records Administration)
June 2002: Sample statement under oath of principal executive officer and principal financial officer regarding facts and circumstances relating to Exchange Act filings
image pdf (Courtesy of the National Archives and Records Administration)
June 3, 2002: Action Memorandum from SEC Division of Corporation Finance concerning certification of disclosure in quarterly and annual reports
image pdf (Courtesy of the National Archives and Records Administration)
June 26, 2002: Action Memorandum from SEC Division of Enforcement concerning WorldCom, Inc.
image pdf (Courtesy of the National Archives and Records Administration)
June 26, 2002: Minutes of the U.S. Securities and Exchange Commission
image pdf (Courtesy of the National Archives and Records Administration)
June 27, 2002: Minutes of the U.S. Securities and Exchange Commission
image pdf (Courtesy of the National Archives and Records Administration)
July 2, 2002: Request to SEC Chairman Harvey Pitt from U.S. Representatives W.J. Tauzin and James Greenwood regarding WorldCom, Tyco, Global Crossing, Xerox and Qwest
image pdf (Courtesy of the National Archives and Records Administration)
July 5, 2002: Request to SEC Chairman Harvey Pitt from U.S. Representatives W.J. Tauzin and James Greenwood regarding Rite Aid, Adelphia, Waste Management, Kmart, Sunbeam, Enron, Peregrine and MicroStrategy
image pdf (Courtesy of the National Archives and Records Administration)
July 11, 2002: Action Memorandum from SEC Office of Legislative Affairs concerning Congressional request for documents of Qwest and Global Crossing
image pdf (Courtesy of the National Archives and Records Administration)
July 15, 2002: Action Memorandum from SEC Office of Legislative Affairs concerning July 5th Congressional request for documents
image pdf (Courtesy of the National Archives and Records Administration)
July 17, 2002: Minutes of the U.S. Securities and Exchange Commission
image pdf (Courtesy of the National Archives and Records Administration)
August 1, 2002: Statement of the Commission regarding the Public Company Accounting Oversight Board
image pdf (Courtesy of the National Archives and Records Administration)
August 2, 2002: SEC Release: Certification of Disclosure in Companies' Quarterly and Annual Reports
image pdf (Courtesy of the National Archives and Records Administration)
August 5, 2002: Action Memorandum from SEC Division of Corporation Finance for release on amendments to Section 16(a)
image pdf (Courtesy of the National Archives and Records Administration)
August 5, 2002: Draft SEC Release: Notice of Supplemental Information on Section 16(a) and Related Rules
image pdf (Courtesy of the National Archives and Records Administration)
August 15, 2002: Action Memorandum from SEC Division of Corporation Finance on final rules on acceleration of peroidic report disclosure and Website access to periodic reports
image pdf (Courtesy of the National Archives and Records Administration)
August 16, 2002: Action Memorandum from SEC Division of Corporation Finance concerning certification of disclosure in quarterly and annual reports
image pdf (Courtesy of the National Archives and Records Administration)
August 27, 2002: U.S. Securities and Exchange Commission Open Meeting Agenda
image pdf (Courtesy of the National Archives and Records Administration)
August 30, 2002: SEC report to Congress on implementation of Sarbanes-Oxley Act Section 302: certification of financial information
image pdf (Courtesy of National Archives)
January 23, 2003: SEC report to Congress on rules requiring audit committee disclosure
image pdf (Courtesy of National Archives)
January 28, 2003: SEC report to Congress on rules strengthening auditor independence
image pdf (Courtesy of National Archives)
February 19, 2003: Letter to Congress from Kathleen Wannisky, General Accounting Office confirming SEC compliance
image pdf (Courtesy of National Archives)
April 9, 2003: SEC report to Congress on implementation of Sarbanes-Oxley Act Section 301: audit committee requirements fro SRO listings
image pdf (Courtesy of National Archives)
June 5, 2003: SEC report to Congress on implementation of Sarbanes-Oxley Act Section 404: report of management of internal controls
image pdf (Courtesy of National Archives)
May 14, 2004: SEC interpretive guidance regarding Public Company Accounting Oversight Board's Auditing and Related Professional Practice Standard No. 1
image pdf (Courtesy of National Archives)

Oral Histories

14 April 2008 Daniel Goelzer With Dr. Kenneth Durr

edited transcript (pdf)

Daniel Goelzer served on the staff of the SEC from the mid-70’s through 1990. He began his SEC career in 1974 as a staff attorney in the Office of the General Counsel, and rose through the ranks to become the Commission’s General Counsel from 1983 to 1990. He also worked in the Office of the Chairman and was Executive Assistant to both Chairman Harold Williams and Chairman John Shad. After leaving the SEC, he was partner at the law firm of Baker & McKenzie LLP in Washington, DC until his appointment as a founding Board member of the Public Company Accounting Oversight Board (PCAOB) in 2002. He served as PCAOB’s Acting Chairman from 2009 – 2011 and returned to Baker & McKenzie after his PCAOB term ended in 2012. He was one of the founding Trustees of the SEC Historical Society.

09 March 2012 Michael Oxley With Dr. James Stocker