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Memorandum
To Blockbuster Executive Management
CC John Antioco, Chairman of the Board
From Directors Audit Committee
Date 1/10/00
Re Expectation of Roles, Duties and or, Responsibilities
The now famous Enron collapse entered the public eye almost one year ago. If it were a case in which Enron were alone in their dealings and this was purely a tail on one corporation's greed, the buzz would surely have died down. The discussion has not died down and there has been a huge reverberative effect on the economy not only from those involved and subsequently effected by Enron and it's partners deceptive practices, but from many other corporations that have now been put under the same regulatory microscope. It is estimated that the Enron collapse cost investors approximately 60 billion. In addition, jobs have been lost, businesses closed or damaged, and most importantly, consumer confidence has been destroyed. Some or our largest, strongest and most trusted corporations, like Citicorp, Chase, and Arthur Anderson, have not merely made mistakes but apparently set out to conspire with Enron to knowingly deceive investors. JP Morgan Chase is said to have developed the structure of the transactions with what Enron called "Special Purpose Entities", which merely amounted to shell companies, and for their deceptive scheme they were paid 5.5 million. Deceptive tax strategies, buying and selling of businesses, questionable loans, were all part of the plan and there were many outsiders along the way warning of the risks and many insiders taking the risks to make huge amounts of money and maintain their lucrative relationship with Enron. I would venture to say that if the Board of Directors, and the investors in any of the above named companies were to be asked now if they think their dealings with Enron were worth the gain, the answer would surely be no.
Blockbuster Inc. is publicly traded and that should mean something. The equities market exists to build companies, provide jobs, provide goods and services, and provide financial gain for all that invest not just a select few. As the Directors audit committee, we do not have the ability to single handedly change the investors minds and instantly instill confidence in the US equities markets. However, we can play a large part in making sure Blockbuster Inc. remains a viable, ethical and profitable as long as investors choose to trust Blockbuster Inc. with their investment dollars. With that in mind, we have set out to outline our expectations of the roles, duties, and responsibilities of senior management and our outside auditors in relation to the certification of the company's financial condition and results of operations. In addition, we have outlined those same expectations when it comes to our roles as the directors audit committee.
Senior Management
Senior Management is responsible for taking ownership of projects as well as preparing briefings on business changes and providing guidance on risk management. These managers must set the pace for the overall business strategy. This should be implemented by initially describing the short term and long term direction of the business. Accordingly, Senior management must define the business vision, strategic themes and incorporate avenues for changes or enhancements to current programs and project contributions. Due to the fact that there will be changes in the business environment, Senior management must be prepared to monitor and update areas when necessary. They should anticipate future needs as well as current business requirements. In a recent speech by SEC Commissioner, Roel C. Campos he stated, "senior management should make it clear to employees through their words and conduct that ethics matter. Senior management should establish practices that acknowledge and commend acts of honesty and ethical behavior." (Campos pg.1) Senior management must be fair, honest and demonstrate to both employees and shareholders that an ethical culture is a privilege and not a sacrifice. In order for a business to truly be successful, senior management must be honest and trustworthy. There must be a constant focus on ensuring that there are adequate standards and procedures in place to meet goals. Senior managers should focus on, "advising the auditing department of all matters affecting the fulfillment of their responsibilities, including the distribution of new approved policies and procedures within the respective units." (McPhilimy pg. 1) By utilizing training and communication initiatives along with monitoring and auditing systems, Senior management will be able to maintain a better grasp of day to day operations.
Outside Auditors
The outside auditors role is to ensure that Blockbuster is operated more efficiently by ensuring that its public records are maintained accurately and taxes are paid properly and on time. The auditors are to perform these roles by offering an array of business and accounting services.
Their specific duties should vary widely among the four major fields of accounting. Public accounting will perform a board range of accounting, auditing, tax, and consulting activates. Management accounting will record and analyze the financial information of Blockbusters' ethical work. Government accounting will maintain and examine the records of government agencies and audit Blockbusters' activities that are subject to government regulations. They should also specialize in internal auditing this is to verify the accuracy of Blockbusters' records and check for mismanagement, waste, or fraud.
The duties and/or responsibilities of the outside auditors will be to annually inspect reports of Blockbuster. The auditors will have been empowered to investigate and discipline Blockbusters' accounting procedures. Some of the other responsibilities will include
· Offer advice in areas of compensation and employee healthcare benefits.
· Evaluate the design of the accounting and data processing systems.
· Review the controls to safeguard assets.
· Investigate and interpret bankruptcies and various complex financial transactions.
· Analyze and interpret the financial information for corporate executives need to make sound decisions.
· Prepare financial reports for stockholders, creditors, regulatory agencies, and tax authorities.
· Review Company operations- evaluating their efficiency wants compliance with corporate policies and procedures.
Qualifications for outside auditor's personnel
· Auditors are required to test compliance with securities laws and regulations related to accurate records to describe and significant defects in issuer's of inter control and any material noncompliance of which the auditor should know based on the audit testing.
· The lead auditor and concurring auditors for the audit team should be replaced every three years.
· The current Chief Executive Officer, Chief Financial Officer, Controller Chief Accounting Officer can not have pervious work history with the audit firm, or any other affiliation with Blockbuster.
The outsider auditors are to retain work papers of audits for at least seven years in sufficient detail to support the conclusion of all audit findings. All in all the Securities and Exchange Commission (SEC) requires every publicly held company to issue an annual financial statement and the outside auditors are to ensure the Board of Directors the report is filed.
Directors Audit Committee
Shareholders rely on the audit committee to embrace the new rules and provide independent and effective supervision of the financial reporting process. What is also important are the expectations the audit committee places on other players in the financial reporting process. This committee is largely expected to provide advice and counsel to the staff and especially to the senior management team. The primary objective of this committee is to assist the board in fulfilling its responsibilities in respect of the accounting and reporting policies, in addition to providing an unbiased and detailed scrutiny of all financial reports to be reported to the Board of Directors.
This audit committee expects help from senior management team in understanding the key elements of the company's internal controls over the financials, yet we will also seek outside independent advice in the review and interpretations of those controls and their effectiveness. Since we are the overall guardians of the financial integrity for Blockbuster Video shareholders, we will request that appropriate financial capital is allocated to the company's financial reporting process. We also expect this committee and the senior management team should have unlimited access to one another. An open and candid dialogue is very imperative in order for each party to meet the other's expectations.
Conclusion
As noted above in regards to the Enron scandal, it was a collaborative effort that caused the collapse of the corporation and subsequent loss of jobs, money, and businesses by many whom had no control. What we have outlined above is a collaborate effort to ensure that that does not happen at Blockbuster. The individual profit motive and pressure to meet analyst expectations is a healthy motivator in all publicly traded organization, yet this same motivator can cause people to make bad decisions as well. We must utilize an effective and evolving system of checks and balances to make sure that special interests and individual motives are kept in check. Our plan above outlines the roles and responsibilities as they relate to certifying our financial condition and operations results. It is our entire ongoing obligation to the shareholders to always look to improve the systems that are designed to protect and preserve Blockbuster Inc. as a long term thriving and growing asset.
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