Corporate Governance and Accountability: What Role for the Regulator, Director, and Auditor?

By Dan A. Bavly

Published by Quorum Books (232 pp; Hardcover, $59.95)

Reviewed by Allan M. Rabinowitz, CPA, professor of accounting,
Lubin School of Business, Pace University, New York, N.Y.

With this survey of a significant and contentious subject, Dan A. Bavly has produced a lucid, thought-provoking, and well researched book containing hundreds of relevant citations. He draws upon his decades of CPA practice in Israel, although much of his study for the book was done as a fellow of the Center for Business and Government at Harvard University’s John F. Kennedy School of Government.

The author says that all corporate governance structures should be examined periodically because we live in a time of rapid change, with company activities growing in range, diversity, and magnitude. He then examines the roles of regulators, directors, boards, CEOs, external and internal auditors, and audit committees in corporate governance, describing shortcomings in today’s systems and proposing some basic changes.

Citing the ’80s savings and loan failures, the BCCI scandal, and the Latin American debt, the author asserts that government regulators should be held more responsible to shareholders and the public. He says regulators’ inadequacy is a contributing factor in corporate collapses, but—unlike directors or auditors, who are often sued for negligence—regulators are absolved of accountability. He points out that regulators often do not share information that could prevent debacles and foster openness, trust, and confidence.

Bavly takes directors and executives to task for being unprepared for sudden, unforeseen crises and (assuming that other companies’ problems do not apply to their own) failing to take adequate preventive measures. He encourages directors and auditors to distance themselves from their companies in order to better serve shareholders, and says that in order to function adequately, directors need to be as well informed about their companies as senior executives.

Directors should spend one-third to one-half of their working time on company matters, studying business activities, communicating freely with corporate staff, having both internal and external auditors report directly to them, and setting director compensation or having a proposed public body do so. Under the author’s proposed structure, this independent public body, similar to a stock exchange, would also appoint and pay directors and would be supported by fees charged to public companies, which would have a voice in the appointments. In addition, CEOs would retain executive authority (subject to approval of this body)and could remove directors, which would be fewer in number, receive higher retainers, and have limited terms.

Bavly questions whether FASB has lost touch with reality and says that regulators often overlap, duplicate, or conflict with each other. In his view, the auditing profession is in a state of turmoil, has lost its sense of direction, lacks innovative thinkers, carries out minimal audit procedures, devotes limited time to the actual audit, struggles when providing both audit and consulting services to the same client, suffers from fee constraints, and—along with directors—is usually among the last to learn about damaging client improprieties.

Audit committees, while still in their formative years, are said to have made encouraging contributions to governance but often lack the necessary training to do their jobs. Bavly maintains that directors increasingly look to the internal auditors for assistance in carrying out their fiduciary duties and for coordinating the external audit. He raises the prospect of stronger ties between internal and external auditors where the former perform core audit duties and the latter provide specialized expertise.

Although this reviewer does not agree with every point Bavly makes, most of his opinions are well founded in fact. I would recommend this book without reservation.

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