Corporate Governance Sarbanes-Oxley for Nonprofits

Corporate Governance & Sarbanes-Oxley for Nonprofits Fall 2006 Discussion Agenda Topic  SOx Overview Slide # 7  SOx Relevance to Nonprofits  Nonprofit SOx Requirements  Nonprofit Legislative Environment  Nonprofit Corporate Governance  501(c)(3) vs. 501(c)(6) Update  Appendix – COSO Framework – Corporate Governance – Corporate Governance Audit 11 14 21 27 34 We’re here to discuss your concerns & questions Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 2 Introduction What Initiated the Sarbanes-Oxley Act? Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 3 Introduction What Forces Initiated the Sarbanes-Oxley Act? Answer: A convergence of forces at the end of a business cycle. F/S misstatements & business failures •Enron •Adelphia •Worldcom •Xerox Questions about management leadership •United Airlines •McDonald’s •Hewlett-Packard & Compaq Questions about management ethics •Tyco •GE •Global Crossing •Tenet Healthcare Auditor failures and conflicts •Demise of Andersen •Auditing vs. consulting Wall Street conflicts •Merrill Lynch •Citigroup •J.P. Morgan Chase Investor losses •Large pension funds •Individual 401-K’s Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 4 Introduction Notable Quotes ―Sound leadership at the firm level is the first bulwark against financial system instability. It begins with good corporate governance.” ―To ensure financial stability, execution of the overall objectives of the firm must be supported by rigorous internal controls and effective risk management…An effective risk management and control structure is not sufficient, however, if it is not accompanied by an institutional culture that ensures that written policies and procedures are actually translated into practice.‖ William J McDonough Chairman PCAOB Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 5 Introduction Outside Audit Sarbanes-Oxley Changes Take Root Jump in Profit Restatements Shows Impact of Controls; Making Changes Quietly By DAVID REILLY March 3, 2006; Page C3 Restatements of financial results by public companies soared in 2005 as auditors drilled deeper into corporate accounts, in part because of a sharper focus on requirements laid out by the Sarbanes-Oxley corporate-governance act, according to research firm Glass Lewis & Co. The silver lining: The near-doubling in the number of restatements by U.S. companies last year -- 1,195, compared with 613 in 2004 -- could signal that financial-reporting changes made in the wake of the Enron and WorldCom scandals are working. Although restatements -- which, after all, are acknowledgments of accounting errors -- signal that management and auditors have missed problems and can lead to shortterm swings in a company's share price, they also give investors a truer picture of a company's finances. "Over time, as companies continue to improve their internal controls, we expect the number of restatements eventually will decline, perhaps as soon as 2006," San Francisco-based Glass Lewis said in a report to its clients, who include money managers and other large investors. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 6 Understanding the Sarbanes-Oxley Requirements Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 7 Understanding SOx Sarbanes-Oxley Act  Full name: The Public Company Accounting Reform and Investor Protection Act of 2002  Nicknames: ―SOA‖, ―SOx‖ or ―Sarbox‖  Purpose: rebuild confidence in the securities markets and financial reporting  Scope: 11 Sections & 66 Sub-sections  Primary Reference Document: An Audit of Internal Control Over Financial Reporting Performed in Conjunction with An Audit of Financial Statements commonly referred to as ―the Standard‖ as released by PCAOB Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 8 Understanding SOx Who Does the Act Impact • Publicly-listed companies / companies subject to 10-K filing • Officers & directors of publicly held companies • External auditors • Attorneys • Security analysts • The S.E.C. • The P.C.A.O.B. (―Pcob‖ , ―Peekaboo Committee‖) • NONPROFITS Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 9 Understanding SOx The Scope of Sarbanes-Oxley Act of 2002 Signed into law on July 30, 2002, the Act includes eleven titled sections, and sixty-six subsections: Title I Public Company Accounting Oversight Board Title II Auditor Independence Title III Corporate Responsibility Title IV Enhanced Financial Disclosures Title V Analyst Conflicts of Interest Title VI Commission Resources and Authority Title VII Studies and Reports Title VIII Corporate and Criminal Fraud Accountability Title IX White Collar Crime Penalty Enhancements Title X Corporate Tax Returns Title XI Corporate Fraud and Accountability Note – Some of the Act’s provisions contemplate the issuance of corresponding SEC regulations or interpretive releases. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 10 Relevance of SOx to Nonprofits Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 11 The Nonprofit SOx Impact SOx Legislation Directly Impacts Nonprofits • The legislative environment is emphasizing greater accountability for both the public and nonprofit sectors of the economy • Only 2 provisions of SOx directly affect Nonprofits: 1. Whistle Blower Protection  Title VIII. Corporate and Criminal Fraud Accountability Section 806 Protection for Employees who Provide Evidence of Fraud  Title XI. Corporate and Criminal Fraud Accountability Section 1107 Retaliation against informants 2. Document Retention  Title VIII. Corporate Fraud Accountability Section 802 Criminal Penalties for Altering Documents Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 12 The Nonprofit SOx Impact SOx Legislation Directly Impacts Nonprofits • Some states have / are beginning to consider state regulations that impose parts of the COSO framework and other aspects of SOX on nonprofits.  California has already passed such legislation • As SOx applies to more and more for-profit entities, parts of it are emerging as the expected standard of performance in the eyes of public and private funding sources; consequently, at the very least, nonprofits should expect that expectations regarding conflicts of interest (independence), audits, and evidence of internal controls will increase and will follow the general outline of SOx. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 13 SOx Sections VIII & XI: Whistleblower Protection and Document Retention Obligations Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 14 Nonprofit SOx Requirements – Whistle Blower Whistle Blower Protection Summary of SOx Provision: • The Sarbanes-Oxley Act provides new protections for whistleblowers and criminal penalties for actions taken in retaliation against whistle-blowers. • The Act protects whistle-blowers who risk their careers by reporting suspected illegal activities in the organization. • It is illegal for a corporate entity (for-profit and nonprofit alike) to punish the whistle-blower in any manner. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 15 Nonprofit SOx Requirements – Whistle Blower Whistle Blower Protection Nonprofit Relevance: • An organization must develop procedures for handling employee complaints. • A nonprofit must establish a confidential and anonymous mechanism to encourage employees to report any inappropriateness within the entity’s financial management. • No punishment for reporting problems — including firing, demotion, suspension, harassment, failure to consider the employee for promotion, or any other kind of discrimination — is allowed. – Even if the claims are unfounded, the nonprofit may not reprimand the employee. • The law does not force the employee to demonstrate misconduct; a reasonable belief or suspicion that a fraud exists is enough to create a protected status for the employee. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 16 Nonprofit SOx Requirements – Whistle Blower Whistle Blower Protection Nonprofit Requirement: • Nonprofits must develop, adopt, and disclose a formal process to deal with complaints and prevent retaliation. • Nonprofit leaders must take any employee complaints seriously, investigate the situation, and fix any problems or justify why corrections are not necessary. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 17 Nonprofit SOx Requirements – Whistle Blower Whistle Blower Protection Detection of Frauds by Owner / Executive Notified by Police External Audit 18.4% 9.0% 2.0% 10.9% 27.5% Method of Detection All Cases Owner / Exec Internal Controls By Accident Internal Audit Tip 0% 5.9% 11.8% 21.3% 23.8% 23.5% 39.6% 51.0% 10% 20% 30% 40% 50% 60% percent of cases Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 18 Nonprofit SOx Requirements – Whistle Blower Whistle Blower Protection Fraud Detection 70.0% 62.0% 60.0% 50.0% 40.0% 30.0% 20.0% 11.0% 10.0% 0.0% Count on Insights sm Internal Audit External Audit Whistleblowers & by Accident 6.0% Clifton Gunderson LLP, a Leading Member of HLB 19 Nonprofit SOx Requirements – Document Retention Document Retention Summary of SOx Provision: • The Sarbanes-Oxley Act addresses destruction of litigationrelated documents. • The law makes it a crime to alter, cover up, falsify, or destroy any document (or persuade someone else to do so) to prevent its use in an official proceeding (e.g., federal investigation or bankruptcy proceedings). • The Act turns intentional document destruction into a process that must be monitored, justified, and carefully administered. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 20 Nonprofit SOx Requirements – Document Retention Document Retention Nonprofit Relevance: • Common sense dictates that individuals, nonprofit organizations, and companies regularly need to shred or otherwise dispose of unnecessary and outdated documents and files. Like their for-profit counterparts, nonprofit organizations need to maintain appropriate records about their operations. For example, financial records, significant contracts, real estate and other major transactions, employment files, and fundraising obligations should be archived according to guidelines established by the organization. • Because of current technology, electronic files and voicemail can complicated as we come to understand the relevance of the delete button as a permanent method of file removal. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 21 Nonprofit SOx Requirements – Document Retention Document Retention Nonprofit Requirement: • A nonprofit organization must have a written, mandatory document retention and periodic destruction policy (such policy should help limit accidental or innocent destruction). • The document retention policy should include guidelines for handling electronic files and voicemail. Electronic documents and voicemail messages have the same status as paper files in litigation-related cases. • The policy should also cover back-up procedures, archiving of documents, and regular check-ups of the reliability of the system. • If an official investigation is underway or even suspected, nonprofit management must stop any document purging in order to avoid criminal obstruction charges. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 22 Current U.S. Legislative Environment for Nonprofits Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 23 Nonprofit Regulatory Environment US Senate Finance Committee Hearing on Charitable Giving In June 2004 Mark W. Everson, the commissioner of the IRS testified : " there are abuses of charity that principally rely on the tax advantages conferred by the deductibility of contributions to those organizations. If these abuses are left unchecked, I believe that there is the risk that Americans not only will lose faith in and reduce support for charitable organizations, but that the integrity of our tax system will also be compromised." Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 24 Nonprofit Regulatory Environment US Senate Finance Committee Hearing on Charitable Giving As a result of these hearings a staff discussion paper was released with recommendations for closer regulation of nonprofits. The recommendations included:  Five-year review of tax-exempt status by the IRS.  Improving the scope and quality of form 990 and financial statements.  Improving non-profit transparency by improving the availability of financial records. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 25 Nonprofit Regulatory Environment California’s “Nonprofit Integrity Act” (SB1262) Key provisions of this law include: – Applicable to nonprofits w/ an operating budget > $2 million • Nonprofits will be required to have an annual audit performed by a CPA who is ―independent‖ as defined by U.S. Govt auditing standards. • The results of the audit will need to be made available to the public and the Attorney General. • Nonprofits will be required to have an audit committee whose membership cannot include staff and must not overlap more than 50 percent with the finance committee; the audit committee can include members who are not on the organization’s board of directors. • The Board must approve the compensation, including benefits, of the corporation’s president or CEO, and its treasurer or CFO, for the purposes of assuring reasonable compensation packages. • Fundraisers must be registered with the Attorney General’s office. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 26 Nonprofit Regulatory Environment California’s “Nonprofit Integrity Act” (SB1262) Key provisions of this law include: – Applicable to all nonprofits regardless of size • Make their audits available to the public on the same basis as their IRS Form 990 if they prepare financial statements that are audited by a CPA. • Except for emergencies, notice of a solicitation campaign by a ―commercial fundraiser for charitable purposes‖ must be filed at least 10 days before the commencement of the solicitation campaign, events, or other services. Each contract must be signed by an official of the nonprofit, and include the contract provisions specified in the law. • Regarding fundraising activities, the law states that a nonprofit must not misrepresent or mislead anyone about its purpose, or the nature, purpose, or beneficiary of a solicitation. • Further, the law specifies that there be specific disclosures in any solicitation that the funds raised will be used for the charitable purpose as expressed in articles of incorporation or other governing documents. • The nonprofit is expected to ensure that fundraising activities are adequately supervised to ensure that contracts and agreements are in order and that fundraising is conducted without intimidation or undue influence. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 27 Nonprofit Regulatory Environment Nonprofit Legislation Summary • The legislative environment is emphasizing greater accountability for both the private and independent (nonprofit) sectors of the economy. • As was seen in the California law, the best practices that emerged from the federal legislation are now being applied to nonprofits. • Although California is one of the first states to enact such a law, other states such as New York are considering similar laws. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 28 Nonprofit Corporate Governance Best Practices Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 29 Establishing the “Platinum” Standard Nonprofit Platinum Operating Standards • Effective BODs • Greater accountability • Effective protocols • Better publicized practices • Greater capability to recruit talent and to attract critical funding Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 30 Establishing the “Platinum” Standard Nonprofit Corporate Governance Best Practices Insider Transactions and Conflicts of Interest – The board should establish and/or update the organization's conflict of interest policy. – Nonprofit organizations should not provide personal loans to directors or executives. – If loans are provided, all terms should be disclosed and approved by the board. Independent and Competent Audit Committee – All nonprofits that conduct outside audits should have separate audit and finance committees. – The audit committee should operate within guidelines established in the Act. – This includes having at least one member serving as the financial and accounting expert; serving as a liaison between the auditor and management, including the rest of the board; and monitoring the nature and amount of non-audit services provided by the audit firm. – This also includes having the committee members be fully independent Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 31 Establishing the “Platinum” Standard Nonprofit Corporate Governance Best Practices Independence – In the context of the Sarbanes-Oxley Act, "Independent" means that none of the members of the committee are part of the management team and that no one receives compensation from the company (directly or indirectly), though board service may be compensated. – Ideally, the board of directors should have at least some "independent" members (i.e., individuals who are not organization members, management staff or key donors), if not a majority, preferably with knowledge of or expertise in financial and accounting matters. – In hiring an individual as CEO, CFO, Controller, or comparable positions of responsibility, the organization should not consider someone employed by the audit firm during the one year period preceding the audit, unless the board's audit committee is actively involved in the audit and approves the hire. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 32 Establishing the “Platinum” Standard Nonprofit Corporate Governance Best Practices Certified Financial Statements – The CEO and CFO as well as the Board of Directors of a nonprofit should review the Form 990 or 990-PF before it is submitted to the IRS to ensure that it is accurate, complete, and filed on time. – While the current guidelines do not envision making knowingly signing a misleading financial statement a criminal offense (ala Worldcom), a public declaration of these forms' accuracy by a CEO can enhance your organization's credibility in the eyes of funders. Financial Statement Accessibility – Current law requires that tax-exempt organizations make their Forms 990 or 990-PF available to anyone who requests them. However, to increase their availability, progressive organizations are posting these documents directly on their web-sites. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 33 Establishing the “Platinum” Standard Nonprofit Corporate Governance Best Practices Board Development – The organization should evaluate and train program directors and staff to improve their understanding of internal financial reports, budgeting and other financial management processes. – Board size limited to less than 15 directors. Code of Ethics – Senior Management and BOD signoff. Investigative Protocol – The board's audit committee should establish procedures to investigate and resolve complaints by employees, donors, members, and others about internal controls or financial reporting matters. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 34 Establishing the “Platinum” Standard Nonprofit Corporate Governance Best Practices External Auditor Considerations – The audit committee should ensure that the lead audit partner/shareholder be rotated every five years. – Nonprofit organizations would be well served to adopt the Sarbanes-Oxley rule of preventing auditing firms from providing non-auditing services. This provision precludes a conflict of interest between the auditing firm and the client. At a minimum, the application of the rule should be considered in each case. At the same time, certain services can be pre-approved by the audit committee, and there is no reason why tax services and preparation of the Form 990 or 990-PF (for private foundations), for example, could not and should not be undertaken by a nonprofit’s auditing firm. This can also ensure that certain economies are achieved for the nonprofit client organization. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 35 Establishing the “Platinum” Standard Nonprofit Corporate Governance Best Practices Enhanced Internal Control Environments – Organization should also, of course, deal with broader internal control issues such as handling cash, soliciting and accounting for donations, making bank deposits, disaster recovery, procurement efforts, disbursements as well as other significant operational activities (e.g., confidentiality and privacy of donor information, community reputation management) through enhanced internal and/or outsourced internal audit efforts. Risk Assessments / Corporate Governance Audits – The board’s audit committee should investigate and complete an organizational risk assessment in order to identify, quantify, and prepare applicable responses to relevant threats to achieving the organization’s goals – The board's audit committee should actively pursue / execute a corporate governance audit in order to ensure and monitor progression and/or achievement of specified organizational goals. Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 36 The COSO Internal Control Framework Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 37 COSO Definition of Internal Control Internal control is a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: • Effectiveness and efficiency of operations • Reliability of financial reporting • Compliance with applicable laws and regulations Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 38 What is Internal Control COSO Components: comprised of 5 interrelated components • Monitoring • Information and Communication MONITORING ACTIVITY 2 • Control Activities • Risk Assessment • The Control Environment INFORMATION AND COMMUNICATION UNIT B ACTIVITY 1 CONTROL ACTIVITIES UNIT A RISK ASSESSMENT CONTROL ENVIRONMENT Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 39 COSO Framework What is the COSO Control Framework? • A model for thinking about how to control risk • The Control Framework has 5 Elements  Control Environment  Risk Assessment  Control Activities – how does the company create and maintain the right ―tone at the top‖? – performance of identifying & quantifying relevant organizational risks - how risks are directly managed – the integrity of information systems and their outputs  Information & Communication  Monitoring – assurance that controls continue to operate full-time • The COSO Control Framework originated from the National Commission on Fraudulent Financial Reporting Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 40 The Control Environment The core of any business is its people, their individual attributes, including integrity, ethical values and competence and the environment in which they operate. They are the engine that drives the entity and the foundation on which everything rests. Control Environment Components 1. 2. 3. 4. 5. 6. 7. Count on Insights sm Integrity & Ethical Values Commitment to Competence Board and Audit Committee Management Philosophy & Operating Style Organizational Structure Assignment of Authority & Responsibility Human Resource Policies & Procedures Clifton Gunderson LLP, a Leading Member of HLB 41 Corporate Governance compliance is no longer an option Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 42 Achieving Good Corporate Governance Compliant vs. Good Corporate Governance The systems and processes an organization has in place to: 1) enhance & 2) protect the interests of its diverse stakeholder groups (i.e., owners, shareholders/investors, employees, management, the community, suppliers, customers) “Sometimes what counts can’t be counted, and what can be counted doesn’t count” - Albert Einstein "It's what counts, not how it's counted“ - Warren Buffett Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 43 Achieving Good Corporate Governance The Importance of Corporate Governance Corporate Governance meant to primarily:  Meet Legal Requirements and Fiduciary Responsibility to Investors/Stakeholders Corporate Governance is also depended upon to:  Attract People  Attract & Retains Directors  Gain Community Support  Establish and Maintain a Competitive Advantage in the Market Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 44 Achieving Good Corporate Governance The Importance of Corporate Governance In addition, Good Corporate Governance can:  Keep CEO & CFO out of handcuffs  Help Board Members, CEOs & CFO’s avoid Congressional committees  Mitigate and/or minimize potential reputation risks …. and  Improve shareholder’s returns (financial and non-financial) Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 45 Achieving Good Corporate Governance Compliant vs. Good Corporate Governance Good corporate governance is the “right thing to do”, improved shareholder returns (financial and non-financial) justify the effort and cost “Manifestations of lax corporate governance, in my judgment, are largely a symptom of a failed CEO...corporate governance to a very large extent reflects the character of the CEO” – Alan Greenspan Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 46 Achieving Good Corporate Governance Compliant vs. Good Corporate Governance Good corporate governance requires more than focusing on legal and regulatory compliance. Good corporate governance that will withstand the test of time requires:  Structuring the organization to execute and support shareholder’s best interests  Establishing a company-wide culture of sound business practices and ethics  Ensuring that management has a comprehensive understanding of how to manage risks  Implementing the right processes and controls for managing and monitoring risks  Ensuring that management truly understands the organizational business and financial model Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 47 Achieving Good Corporate Governance Corporate Governance Dynamics • Monitoring • Enterprise Risk Management Corporate Decision Management Corporate Structure • Board of Directors & Committees • Executive Compensation Communication • Legal & Regulatory Compliance • Business Ethics & Fraud Prevention Corporate Responsibility Corporate Performance Management • Business Modeling & Strategy • Business Practices • Internal Controls • Transparency & Disclosure Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 48 Achieving Good Corporate Governance Essentials for an Ethical Corporate Culture  “tone at the top” resides with the compensation committee  The character of senior corporate managers is critical  The climate of transparency must be set at every level  Communicate directly and honestly with employees  Management must be engaged in the compliance and ethics program  Employees must be “invested”  Establish a corporate ombudsman  Separate the message from the messenger  Provide a mechanism for various constituencies to raise their concerns internally, and then respond effectively to them  Keep careful records Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 49 Achieving Good Corporate Governance Essentials for an Ethical Corporate Culture  Use a compliance committee  Employ quarterly reviews  Require forensic audits  A “de minimus” ethical or compliance breach doesn’t exist  Employ a system of rewards for good ethics  Employ a senior officer in charge of ethics and compliance  Play out crisis scenarios  Government regulation isn’t a cure all  Sometimes, bad things happen to good organizations Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 50 Conclusion Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 51 Walk-the-Walk Foreword As Officers and Employees of Enron Corp., its subsidiaries, and its affiliated companies, we are responsible for conducting the business affairs of the companies in accordance with all applicable laws and in a moral and honest manner. To be sure that we understand what is expected of us, Enron has adopted certain policies, with the approval of the Board of Directors, which are set forth in this booklet. I ask that you read them carefully and completely and that, as you do, you reflex on your past actions to make certain that you have complied with the policies. It is absolutely essential that you fully comply with these policies in the future. If you have any questions, talk them over with your Supervisor, Manager, or Enron legal counsel. We want to be proud of Enron and to know that it enjoys a reputation for fairness and honesty and that it is respected. Gaining such respect is one aim of our advertising and public relations activities, but no matter how effective they may be, Enron’s reputation finally depends on its people, on you and me. Let’s keep that reputation high. July 1, 2000 Kenneth Lay Chairman and Chief Executive Officer Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 52 Introduction Notable Quotes ―Sound leadership at the firm level is the first bulwark against financial system instability. It begins with good corporate governance.” ―To ensure financial stability, execution of the overall objectives of the firm must be supported by rigorous internal controls and effective risk management…An effective risk management and control structure is not sufficient, however, if it is not accompanied by an institutional culture that ensures that written policies and procedures are actually translated into practice.‖ William J McDonough Chairman PCAOB Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 53 Please contact us if you have any questions. Ronald P. Pachura – Business Risk Services Director Ronald.Pachura@cliftoncpa.com 1301 W. 22nd Street, Suite 1100, Oak Brook, IL 60523 (630) 573-8600 www.cliftoncpa.com Count on Insights sm Clifton Gunderson LLP, a Leading Member of HLB 54