Table: Costly Lessons

Here's where the Enron board's audit committee came up short and some possible fixes.

DISCLOSURE

Companies are required to disclose some, but not all, financial ties with directors. Critics have cited conflicts at Enron (ENE ), which correctly disclosed its consulting contract with one audit-committee member, but not the charitable contributions made to affiliated organizations of two others.

SOLUTION: Disclose all financial ties.

KNOW-HOW

Audit-committee members must demonstrate basic financial literacy, and one must have financial expertise. Enron's committee included an accounting professor, an economist, and two businessmen. But they apparently didn't understand the risks in some of the company's complex limited partnerships.

SOLUTION: Committees should have to meet more often, review internal audits, and get industry-specific finance training.

COMPENSATION

Most companies pay directors largely in stock to align their interests with those of shareholders. But at Enron, where some directors sold shares near the August, 2000, high, large holdings may have made directors less willing to ask tough questions.

SOLUTION: Pay in stock, but ban stock sales as long as directors are on the board.

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE