Questions Every Audit Committee Should Be Asking in the Wake of Enron

® SecMail SecMail® No. 02-02-04 February 4, 2002 Questions Every Audit Committee Should Be Asking in the Wake of Enron On rare occasions, a corporate event has such a far-reaching impact that it defines the legal and regulatory atmosphere for years to come. The demise of Enron is clearly such an event, and directors in every public company – particularly audit committee members – are asking themselves what they should be considering to reduce the likelihood of becoming entangled in problems like those at Enron. With that background in mind, audit committee members should be asking – and getting clear answers to – the following questions. 1. What off-balance sheet financing does the company use? Audit committee members need to be familiar with any off-balance sheet financing mechanisms being used by the company, should be informed of their risks, and should insist on clear, understandable disclosure of those risks. While nothing is inherently troublesome about such transactions, which are permitted under GAAP, audit committees should focus on this issue, given the current environment. The SEC recently provided additional guidance concerning the disclosure of off-balance sheet arrangements, in the context of a broader statement regarding Management’s Discussion and Analysis (“MD&A”) (Release No. 34-45321, Jan. 22, 2002; http://www.sec.gov/rules/other/33-8056.htm.). 2. What related party transactions does the company engage ...