February 2006 Newsletter
Australia's Pension Plan
Social Security reform in America has been the subject of intense debate in recent times, with many commentators now looking overseas for a solution. According to Bloomberg.com, the forth-largest retirement-savings market in the world is Australia, a country with a population of around 20 million people. A 1992 law required employers to set aside 3 percent of workers wages, that figure has since risen to 9 percent creating a national retirement fund of over US$500 billion with over US$50 billion added each year.
Not only does this system aid future retirees but it has also had an immediate effect upon the economy and in particular, the stock market. Government data shows that around a third of pension assets are invested in Australian equities which has helped the S&P/ASX 200, Australia's equity benchmark, to rise by 44 percent over the last two years. Australian retirement savings also provide significant amounts of capital to Australian banks. Social security reform is a complex and sensitive issue, however the Australian system has shown that it is possible for a nation to not only save for the future but also assist the economy today.
Management Override of Internal Controls
As the Skilling and Lay trial begins, we point to the increased duty upon corporate directors for management actions that carry the wrong "tone at the top". This term is used by the AICPA in its publication Management Override of Internal Controls: The Achilles Heel of Fraud Prevention. The warnings in this guidance to audit committees seem to impose stringent if not severe duties upon audit committee members. The entire publication can be downloaded from http://www.aicpa.org/audcommctr/download/achilles_heel.pdf.
According to the AICPA, audit committee members must: maintain skepticism; have a strong understanding of how the business works; actively "brainstorm" among themselves and with others to identify potential fraud risks; enforce the code of conduct required by Sarbanes-Oxley; cultivate the whistleblower network both inside and outside the corporation and develop a broad information gathering network.
A watchful eye and actively involved approach to identify potential fraud pressures, incentives, attitudes and rationalizations contrasts with historical reliance upon internal auditors and outside professionals. This substantial duty may be best exemplified by the recommended "brainstorming" sessions where directors must try to identify potential areas of fraudulent activity and compare these with the independent auditors who are doing the same. Likewise, the recommendation to monitor employee attitudes seems a significant undertaking.
Audit committee members of corporations as well as their external auditors presently face very high standards for their conduct.
We have encountered two instances recently of an expert allowing an attorney or another expert to completely write their expert report. According to Rule 26 of the Federal Rules of Civil Procedure ("Rue 26", a written report is required that has been both prepared and signed by a witness providing expert testimony, except as otherwise stipulated or directed by the court. In Trigon Ins. Co. v. United States, 204 F.R.D. 277 LEXIS 18824, the court more specifically addresses an allegation that the defendant had been "ghost writing" the expert reports of testifying experts. Ghost writing of a testifying expert's report is "the preparation of the substance writing of the report by someone other than the expert purporting to have written it."
In instances of ghost writing, the expert effectively becomes the alter-ego of the attorney and fails to provide additional assistance to the trier of fact. Although an expert is required to prepare his own report, counsel is not precluded from providing assistance to the expert. The Advisory Committee Notes accompanying Rule 26 clarified the intended meaning of the phrase "prepared and signed by the witness", explaining that a report can be "prepared" by an expert witness even if counsel has aided the witness in preparing an expert's report. Aid does not appear to be equivalent with authorship. In Marek v. Moore, 171 F.R.D. 298, the court commented that, "[t]o help ensure complete disclosure of the required information, counsel ordinarily should supervise preparation of the expert's witness report." We read this to mean that counsel's aid should be limited to issues of form and not substance. Preparation of the substance of an expert report is the responsibility of the expert witness.
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