On a family trip into Manhattan when I was about 10 years old, we happened to pass a showroom displaying new and vintage models of the famed Rolls Royce.

As I gazed at their dazzling shades of paint, gleaming chrome and meticulous contours, I asked my father what kind of gas mileage cars like that got.

He looked at me and repeated a line that the great financier J.P. Morgan had uttered nearly 50 years before: "If you have to ask, then you can't afford it."

Knowing that was probably as close to a Rolls Royce as I'd ever come (and thus far it is), I tucked that line away for future use, although I had trouble envisioning anything I might later own that would warrant me mimicking J.P. Morgan.

I did learn that rarely can you get around the fact that quality costs.

True enough.

And in some cases when it comes to the quality of audit committees, it can also pay.

Recently, a study conducted at the University of Chicago's Graduate School of Business discovered that the share prices of some 300 public companies increased by nearly 5 percent when the financial literacy quotient of their audit committee members had improved over a three-year period.

The UC committee had painstakingly pored over the proxy statements and determined the grade of accounting experience. The top grade assigned was a four, which denoted a considerable background in accounting such as accountants and controllers, while bankers were assigned a three and so on. Members with no financial background were given a one.

Where was this study when I was a rookie investor?

According to reports, the top company was chemical concern Dow at 443, while pharmacy chain CVS was at the bottom with a score of 221.

Now, in the interest of disclosure, I'm not a shareholder in CVS, but I do get my prescriptions filled there. And while the audit committee appears a bit sparse with regard to financial pedigrees, I do hope they employ a qualified pharmacist or two.

But I digress.

My question is does a company -- which based on these calculations, has an audit committee score resembling my grade point average in college -- stand a greater chance of becoming embroiled in a corporate scandal than those being assigned a score of four across the board?

Well, Berkshire Hathaway, according to the scoring was rather low on the chart, while Denver-based Qwest ranked No. 5.

Hmmm.

While I think it's crucial to have a competent and financially literate audit committee, its probably more important to have a cadre of ethical executives who more or less lead by example for the rest of the company.

There are probably a number of executives with extensive backgrounds in finance now either on trial, or awaiting trial for their part in engineering mammoth corporate frauds.

I'll bet some of them at one time drove a Rolls Royce.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access