The Board of Directors and Internal Controls

Cardozo Law Review, Vol. 19, No. 2 (1997) (Symposium on the Essays of Warren Buffett).

Posted: 10 Oct 1997

See all articles by Melvin A. Eisenberg

Melvin A. Eisenberg

University of California, Berkeley - School of Law

Abstract

The monitoring model of the board has been widely accepted in both theory and practice. Until now, however, the focus of that model has been on board process and board structure, rather than on the board's substantive responsibilities. This article develops a substantive responsibility of the board of a publicly held corporation that is critical to implementation of the monitoring model: the responsibility for internal control. Under a widely accepted definition, internal control is a process involving a control environment, risk assessment, control activities, information and communication, and monitoring, designed to provide reasonable assurance regarding the achievement of corporate objectives in (i) the effectiveness and efficiency of operations, (ii) the reliability of financial reporting, and (iii) compliance with applicable laws and regulations. The thesis of this article is that in publicly held corporations the board should be responsible for the existence, integrity, and efficacy of the corporation's internal control. One reason why the board should be responsible for internal control is that internal control is an instrument to constrain managerial opportunism in seizing short-term profit opportunities that involve violations of corporate policies or legal rules. A second reason is that internal control, and the information flows associated with such control, comprise an important method for dealing with the problem of asymmetric information in publicly held corporations. Since the monitoring model assumes both some degree of oversight of the managers and an adequately informed board, the board's responsibility for internal control flows naturally from that model.

JEL Classification: G34

Suggested Citation

Eisenberg, Melvin A., The Board of Directors and Internal Controls. Cardozo Law Review, Vol. 19, No. 2 (1997) (Symposium on the Essays of Warren Buffett)., Available at SSRN: https://ssrn.com/abstract=11400

Melvin A. Eisenberg (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Law Building
Berkeley, CA 94720-7200
United States
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510-643-2672 (Fax)

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