Reforming Corporate Governance Post Enron: Shareholders’ Board of Trustees and the Auditor

Abstract

One potentially positive outcome of Enron’s demise could be improving the process by which auditors are selected, retained and compensated. A proposal to reform this aspect of corporate governance is outlined in this essay. In addition, this editorial accomplishes two goals: (a) identification of the problem of audit independence as an outcome of vesting the authority to make auditor-related decisions with corporate boards of directors, and (b) proposing a structure to allow shareholders a direct path for deciding on auditor choice and compensation. This structure calls for establishing a Shareholders’ Board of Trustees (SBT) independent of the Board of Directors and vest it with the responsibility of selecting, retaining and compensating external auditors. As a side benefit, allowing SBT to participate in the choice of corporate audit committee members could only enhance that committee’s independence and effectiveness.

To function as an independent agent of shareholders, administering the election process for the SBT has to lie outside the corporation; it could be, for example, administered by the stock exchange for a fee. It is evident that the administrative and procedural matters of implementation need to be developed and need not be binding to give this concept serious consideration.

Keywords: Auditing, Fraud, Enron, Stockholders rights

JEL Classification: M42, G 34, D23