Association of Audit Committee Members | From Enron to Lehman Bros.: What Can We Learn From These Corporate Governance Failures? (PART I)
This links to the home page
  • From Enron to Lehman Bros.: What Can We Learn From These Corporate Governance Failures? (PART I)
    04/23/2013 | by Lipman, Frederick D.
    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 21st century. Although the financial implosions, starting with Enron and ending with Lehman Bros., have significant differences, there is one major corporate governance theme which appears. The board of directors 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 a failure of corporate governance, particularly the failure to establish a robust whistleblower system as an internal control. Independent directors of these companies which suffer shareholder debacles tend to lose their business reputation and their other directorships.[2]

    The audit committee 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 the following companies all received unqualified audit opinions within months of their failure:

    A Sampling of Failed Financial Institutions
    All of which received unqualified audit opinions within months of the failure

    Company Event Event Date Investor Losses ($m)* Audit Firm
    Lehman Bros. Bankruptcy 9/15/2008 31,437.10 E&Y
    AIG TARP 9/16/2008 155,499.60 PwC
    Citigroup TARP 10/26/2008 212,065.20 KPMG
    Fannie Mae Gov’t takeover 9/6/2008 64.10 Deloitte
    Freddie Mac Gov’t takeover 9/2/2008 41.50 PwC
    Wash Mutual Bankruptcy 9/26/2008 30,558.50 Deloitte
    New Century Bankruptcy 4/2/2007 2,576.40 KPMG
    Bear Stearns Purchased 3/17/2008 20,896.80 Deloitte
    Countrywide Purchased 1/11/2008 22,776.00 KPMG

    * Calculated based on decline in market capitalization from one year prior to the event and the event date. Fannie Mae and Freddie Mac data is from 10/9/07 and 9/12/08.

    It is clear that corporate governance oversight cannot be effective if the only source of board information is the CEO, CFO and the independent auditor.


    [1] F. Lipman, “Whistleblowers: Incentives, Disincentives and Protection Strategies”, John Wiley & Sons, Inc. (2012), pp. 82-83.

    [2] The story of Herbert S. “Pug” Winokur, Jr., former head of the Finance Committee of the Enron Board of Directors, who subsequently lost his directorship with the Harvard Corporation, is eloquently told by Andrea Redmond and Patricia Crisafulli, Comebacks: Powerful Lessons from Leaders Who Endured Setbacks and Recaptured Success on Their Terms (San Francisco: Jossey-Bass, 2010).