May 31, 2005

Treasury Issues Guidance on Private Jet Use

On Friday, the Treasury issued the long-awaited guidelines on how companies can (and can’t) take deductions for executives’ private use of company aircraft. The guidelines implement Section 274(e) of the JOBs Act. Get hard-hitting analysis on private jet use in the upcoming May-June issue of The Corporate Counsel.

SEC Has Its Own Material Internal Control Weaknesses

Last Thursday, GAO (i.e. Congress’ Government Accountability Office) released this report that found “material internal-control weaknesses” in the SEC’s internal controls. The weaknesses primarily relate to the recording of fines and restitution to investors that it wins in settlements with companies and individuals, the preparation of the SEC’s financial statements and the security of information. As a result, the report says that the SEC “did not maintain effective internal control over financial reporting as of Sept. 30, 2004.”

In response, the SEC will add new staff to handle financial reporting and establish an internal committee – similar to a boards’ audit committee – to monitor and correct deficiencies. The business media had a field day generating creative titles for articles on the GAO’s report, such as the Washington Post’s “What’s Good for the Goose.”

The Audit Committee Disclaimer

I was fascinated with this article in last Thursday’s Washington Post article because of its extensive discussion of the disclaimer about audit committee activities included in AIG’s 2001 and 2002 proxy statements. The article surmises that the disclaimer should have been a red flag to AIG’s independent auditor, PwC, that something was amiss at the company. According to the article, the disclaimer stated that the audit committee’s oversight did “not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles” and that it couldn’t assure that the audit had been carried out according to normal standards or even that PWC was in fact “independent.”

As the article notes, those types of disclaimers became far less common after Sarbanes-Oxley – but it will be interesting to see if AIG’s disclaimer helps the company’s audit committee avoid liability.

Note that an August 2001 article by Amy Goodman and Mike Scanlon of Gibson Dunn (entitled “Survey of Audit Committee Charters and Audit Committee Reports in 2001 Proxy Statements”) from Insights found that a majority of audit committee charters had disclaimers in them way back in 2001. These disclaimers normally qualified the responsibilities and actions of audit committee members, such as the audit committee members:

– neither performed nor certified the auditing work
– are not responsible for preparing the company’s financial reports and relied on the statements of management
– are not accounting experts and provided no expert or professional assurances
– have no duty to resolve conflicts between management and independent auditors
– are not deemed to have accepted a duty of care greater than the other directors

Let me know if you have conducted (or seen) a more recent study, as it would be helpful to see how far disclaimers have changed.