The ongoing investigation of Enron and Arthur Andersen has spurred much debate over the future of the securities and accounting industries. What has not been discussed is the massive fraud being perpetrated on the American people by the these industries, which have bilked some $4.75 trillion from the American public since 2000, an amount that makes the Savings and Loan crisis, which cost taxpayers $0.52 trillion by 1992, seem minor by comparison. Indeed, parasitic securities managers and their symbiotic auditors now treat public companies as their own private usufruct.
The government's response? An assault of similar, industry-sponsored bills currently slogging through the Senate Banking Committee that will make matters worse. From the language in these bills and from the rhetoric at legislative show hearings, one would think that investors and taxpayers existed solely to support incestuous auditors, self dealing securities managers, and the SEC in their cushy, conflicted relationships rather than auditors and the SEC existing to protect investors and taxpayers.
Indeed, the government's response is focused on completing the ongoing process of deregulation, which has transformed the SEC into what is now essentially a front organization for the securities and accounting industries, and has insured that crony auditors like Arthur Andersen continue to help prepare the tax returns of the firms they audit. That way, the SEC and the IRS will continue to get a consistent lie about a firm's financial condition and tax evasion, should the agencies ever compare notes. American taxpayers-not to mention employees, retirement account holders and investors-are already being asked to pick up the slack( with state tax increases, negative earnings, deflated securities prices, and by increases in national debt that effectively reverse the tax cut last year.
All of the similar bills currently under consideration in Congress, which I call 'Attack of the Clones,' perpetuate unreliable financial reporting by delegating securities oversight authority of the SEC to a publicly unaccountable private corporation, deliberately misnamed a 'public' oversight board (POB).
Resurrected from the failed POB, which disbanded in January, the new POB mandated in each clone is designed to keep the SEC unaccountable for fraudulent financial filings and to divert attention from the filings themselves onto the securities managers who write them or the auditors who falsely certify them. Under the various clones, neither the SEC nor the POB would systematically screen many(or even any(securities filings for deceptive or missing content, thus preventing the detection of smoking guns and ensuring there are no federal findings of legal liability which aggrieved investors and taxpayers can take to court(or to the bank. Under these bills, the securities industry can continue filing treacherously misleading financials, without the SEC ever looking over their shoulders, let alone looking at their books.
How Did We Get Here?
Universal deregulation, begun in the 1970s, legalized vested interests and unreliable financial reporting, which have spurred increasingly virulent financial crises, including the S&L crisis, which cost taxpayers an estimated $520 billion from 1989 to 1992.
Under deregulation, management in the securities, accounting, and related industries, and their private and government 'watchdogs,' have forsworn their fiduciary duties and arms-length relationships. Managers have coopted or disabled safeguards that might detect malfeasance, including prohibitions against kickbacks.
Self-dealing and coopted principals then defrauded non-crony shareholders, clients, creditors, government, and their own firms and employees, treating corporate assets, liabilities and shareholder's equity as their own private cookie jar. They covered their tracks with phony financial reports certified by a coopted 'accounting' process indistinguishable from fiction. They alone knew their Ponzi schemes existed and when they would unravel. Thus, they knew when to sell their stock options and other incentives they had dealt themselves before their firms and massive crony deals imploded(and took the stock, technology, and energy markets with them.
After Enron, these players are anxious to initiate another round of schemes and, of course, protect themselves and their self-dealing, crony relationships from prying federal eyes. They are lobbying Congress to strengthen the deregulations that make their transgressions legal and unaccountable, and have contributed $15.7 million alone to members of two key Congressional committees, according to the Center for Responsive Politics. Considering the astronomical return they have realized, the pay-off to the House Financial Services and the Senate Banking committees smacks of under-tipping.
Where Do We Go From Here?
If the accountants who prepare a firm's tax returns were truly independent of those who audit its SEC filings, two good things would happen. First, the filings would become less dishonest. Second, the fraudulent discrepancies between the SEC filings and IRS returns would surface(if there were any federal examiners who compared SEC filings with IRS returns, which there aren't. Indeed, the SEC reviews almost no filings and IRS reads a miniscule number of returns.
Better yet, if private sector securities audits were outlawed, the feds themselves could audit the filings and calculate the income tax. This single-track, authentically independent, conflict-free accounting process would leave no place for securities to hide fraud or evade income tax. Neither the SEC nor the IRS is up to the job of auditing many, let alone all securities. Indeed, they seem unable to manage their present duties.
That's why I'm proposing the creation of a Federal Bureau of Investor-Taxpayer Protection (FBI-TP) (see the proposed legislation at www.honestfinancialreporting.org). Think of it as the FBI that works for the little guy. By auditing and calculating the income tax of all securities, FBI-TP could stop securities fraud cold and ensure that IRS knows how much tax the securities really owe ( and that they pay their fair share. FBI-TP would have each company certify a public summary of each audit FBI-TP performed, the reverse of private sector audits. Then it would publish the certified audit summaries for all registered securities and their material subsidiaries on a public data base called FairFile. FairFile will replace and improve on EDGAR, the data base where SEC currently posts filings of domestic securities. Unlike EDGAR, FairFile will be equipped with an automated forensic screening tool, which will empower investors and taxpayers, to evaluate all registered securities with state-of-the art fraud detection free of charge.
Remember, tax credits enabled Enron to pay less than zero corporate income tax from 1996 to 2000, according to Citizens for Tax Justice. Every dollar of tax avoided by and credited to Enron has to be made up by ordinary taxpayers like you and me or it increases the national debt(which we and our grandchildren pay anyway.
It's time that securities like Enron stopped stealing from taxpayers as well as from shareholders. My draft FBI-TP Establishment Act restores justice to both.
Rep. Dennis Kucinich, (D-OH), recently sponsored a similar measure, which starved to death on the House floor on April 24 for lack of nurturing-and because it didn't go far enough. Although it would have federalized audits, which is good, it would have kept them under SEC auspices, which is tantamount to letting chief fox Harvey Pitt guard the henhouse.
Taxpayers and investors who fight back now will be rewarded by more than virtuous feelings. They will shift the disproportionate tax burden they are shouldering back where it belongs, onto the corporations getting the lion's share of national net income but banking it in offshore tax havens or burying it in fraudulent partnerships and subsidiaries.
If the FBI-TP Establishment Act passes, FBI-TP will be free to promulgate new audit rules and Government Accepted Accounting Principles (new GAAP) to replace the corrupt Generally Accepted Accounting Principles (old GAAP) which Enron and Arthur Andersen exploited. For the first time in history, investors would get reliable financial reporting and individual taxpayers would pay less now, without paying more later.
Demanding that Congress outlaw private sector securities audits and oversight agencies and replace them with conflict-free federal securities audits under the aegis of FBI-TP will do more than make audits honest. It will change the nature of accounting itself. Because tax expenses are material to an accurate picture of a firm's financial condition, FBI-TP will also calculate the tax owed by or refund due to each security, with the goal of merging financial and tax accounting into a single process and a single set of books. IRS's job of collecting from corporate tax evaders will be much easier, so ordinary taxpayers will be rewarded with a reduced tax burden.
Regardless of whether federal or private audits prevail in Congress, all securities filings should be reviewed by some federal agency, not the private sector, and independently screened by an automated, forensic screening tool that will automatically detect, deter, and report fraud and financial shenanigans-and offer that information free to the public on an unlimited basis.
The best approach, however, is a combination of incorruptible federal audits and automated forensic screening, an approach that will keep securities honest, restore investor confidence, and ensure fair taxation for all.
The alternative is for taxpayers and investors to stand by until dishonest financial reporting, self-dealing, rigged trading and crony loans pauperize the entire system.
This article is a follow-up to 'No Recourse,' which appeared earlier on Utne Online and is archived at No Recourse. (c) 2002 by Barbara Langer. All rights reserved. She welcomes your comments and can be reached at