Voluntary Actions After Enron

In the wake of the past year's reports of numerous corporate misdeeds, relatively few businesses have thought about making substantive voluntary changes in their ways of working. And, among companies that have made changes, the actions are general rather than specific. Those are the findings of “The Enron Enigma: Changing Expectations,” a July 2002 working paper by H.J. Zoffer, dean emeritus and a professor of business administration at the University of Pittsburgh's Katz Graduate School of Business, and Eugene Fram, J. Warren McClure research professor of marketing at New York's Rochester Institute of Technology.

The authors conducted a survey, mailing a brief questionnaire to 2,500 chief financial officers of large companies in the United States and to 2,000 English-speaking CFOs of large European companies. The questions focused on six critical areas in which companies would be likely to take action: internal financial controls; internal and external financial communications; ethics codes and procedures for employees' behavior; relationships with external auditors; relationships with corporate boards of directors; and the composition and scope of responsibility of internal audit or finance committees.

Interestingly, ethics code changes are the least reported activity. The authors speculate that “This may have been because the ethics area has always been a difficult one in which to establish work-place procedures.”

In terms of financial controls, some companies have changed reporting lines for internal auditors to avoid off-balance-sheet activities. Some now report to the chief executive officer, the board or a finance committee rather than to the CFO. Certain companies have also increased their financial communications to board members and regulatory authorities, particularly in 10-Q and 10-K reports. Communications with boards have increased to the extent of instituting weekly progress reports, in some cases.

Some respondents' audit committees have increased in size to include at least 50% of members with backgrounds in accounting or finance. Those committees have also taken on more responsibility. And not surprisingly, several companies have tightened their interactions with outside auditors. One very large organization even requires an outside legal firm to review top executives' personal tax returns.

Despite the survey's promise of anonymity to respondents and their companies, the overall response rate of 1.4% fell short of the 2% to 4% expected for studies of this type. The authors suggest that reasons for the low response rate might include corporate policies against, or CFOs' unwillingness to spend their time on, such surveys, or simply the failure of most companies to think much about changing their policies. If that is the case, the authors conclude, it would be wise for any company to take a look at its own situation — for its own protection, if not that of its shareholders and other stakeholders — rather than waiting to respond to restrictions by the Securities and Exchange Commission and others.

To obtain copies of the paper, contact Zoffer at ZOFFER@katz.pitt.edu.