(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Senate Report Rebukes Enron Board, Makes Recommendations

A report issued by the Senate Subcommittee on Investigations concluded that the Enron board of directors ignored numerous questionable practices by management to the detriment of the shareholders, and contributed to the company's downfall. The report cites numerous failures of duty by the board, including the failure to stop Enron from using misleading accounting; the failure to ensure adequate public disclosure of material off-the-books liabilities; and the failure to ensure the independence of the company's auditor.

Among other things, the report found that the board knowingly allowed Enron to engage in high risk accounting practices. In addition, the report concluded that the board knowingly allowed Enron to conduct billions of dollars in off-the-books activity to make its financial condition appear better than it was and failed to ensure adequate public disclosure of material off-the-books liabilities that contributed to the company's collapse. The Senate report also noted that the independence of directors was compromised by financial ties between the company and certain board members.

More generally, the report reminded directors that one of their most important duties, shared with company management and auditors, is to ensure that the financial statements fairly present the financial condition of the company. Citing federal court precedent, the report emphasized that this responsibility requires more than ensuring the company's technical compliance with generally accepted accounting principles. While technical compliance may be evidence that a company is acting in good faith, it is not necessarily conclusive. The critical test is whether the financial statements as a whole fairly present the company's financial position.

Against this backdrop, the subcommittee recommended that corporate directors prohibit accounting practices and transactions that put the company at high risk of non-compliance with generally accepted accounting principles and result in misleading and inaccurate financial statements. Similarly, they should prohibit conflict of interest arrangements that allow company transactions with a business owned or operated by senior company personnel. The report calls on the SEC and the national stock exchanges to require a majority of outside directors to be free of material financial ties to the company other than through director compensation.

On this theme, the report said that audit committees should be chaired by those possessing financial management or accounting expertise, and be required to have a written charter obligating the committee to oversee the company's financial statements and accounting practices and to hire and fire the outside auditor. Finally, the report asks the SEC to strengthen the requirements for auditor independence by prohibiting the company's outside auditor from simultaneously providing the company with internal auditing or consulting services and from auditing its own work for the company.