No Recourse

The price of securities deregulation is rapacious financial practices, phony audits and a sham SEC


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At a time when the Enron scandal is bringing intense Congressional scrutiny on corporate auditors, SEC chairman Harvey Pitt is quietly proposing to pass the enforcement buck from government back to the private sector. The investing public is sadly mistaken if it thinks that either government, auditors, or companies will back reliable financial disclosure that is legally enforceable.

Pitt's response would place securities regulation in the hands of the private sector, which lacks legislative authority and ensure that neither Congress nor the SEC enacts legally enforceable laws, remedies, or punishments to require reliable corporate disclosure or to prevent auditor conflicts of interest of the sort that have cropped up during the Enron scandal. Pitt is ensuring that his real constituency, corporate and auditor robber barons, break no effective laws by seeing to it that there are none to break.

Pitt should quit. He's betraying the public interest and proving his complicity with the government, corporate, and auditor interests that are dismantling the SEC and leaving the empty facade the public mistakes for a securities regulator.

Don't be fooled. No authority, public or private, now enforces the public's interest in either reliable disclosure or auditor independence-and none will. That's the price of deregulation. But today it's clear that deregulation has backfired. Only a government auditor-regulator as fully independent as the Federal Reserve would have any hope of restoring credibility to the securities industry.

'I'm not too enthused with Mr. Pitt's current proposal for a new oversight process on independence, which would still largely leave it in the private sector . . . something stronger [is needed],' says Andy Bailey, professor of accounting at the University of Illinois.

'The problem's at the top,' agrees Jim Cox, professor of law at Duke University. 'SEC should take responsibility, issuing its own rules [for] independence [and] proper accounting for subsidiaries, [which] has become extremely abusive.'

The government deregulated auditors and accountants in the 1970s, alleging that ethical prohibitions against competition and advertising constituted a 'restraint of trade.' 'Those were the cops saying that,' says Don Schneeman, AICPA general counsel from 1972-1994. So AICPA, the auditor's trade association, repealed the relevant standards.

The resulting competition imposed conflicts of interest on auditors, compromising their independence. Their once invaluable certification on SEC filings lost credibility, by undermining the fundamental safeguard for SEC filings, 'that financial statements be audited [independently] by a public accounting firm to be sure that the registrant was in compliance,' says Richard Dietrich, professor of accounting at Ohio State University.

'If you're Enron and I look at your books and say 'I don't think this conform[s] with GAAP [Generally Accepted Accounting Principles],' I can't force you to change them,' Dietrich explains. 'All I can say is, 'If you leave them that way, I'll give you a qualified audit opinion.' So of course, you then say, 'If you do that, I won't be in conformity with [SEC] filing requirements, my security [will be] delisted by my exchange. This will cause me grievous harm, I will file a lawsuit against you and fire you and hire somebody else.''

Contrary to popular belief, the SEC won't pick up the slack left by dysfunctional auditors because it neither audits nor reviews filings. According to both Bailey and Lynn Turner, the SEC's former chief accountant, the agency reads less than a quarter of the annual and few if any of the quarterly and other filings it receives. Except for IPO applications, 'there was no regular, ongoing review of any 10-Ks during 1999-2000, the period I was there,' says Dietrich. Turner adds that the SEC's oversight of audits filed by companies is limited to about 200 at any time out of more than 12,000 registered firms. 'SEC is not permitted to keep filing fees,' says Dietrich. In fact, SEC's fee unit says it no longer charges for many filings. Why sustain an agency everyone's trying to eviscerate?

In the Great Depression, as now, Congress lacked the political will to enact an independent regulator. With each corporate bankruptcy crisis, SEC has abdicated its oversight powers to the private sector, weakening on each round. Today, SEC is primarily a filings clearinghouse to legitimize privately promulgated loopholes in GAAP that are big enough to drive most corporate trucks through.

Reregulation might incrementally fortify private auditors, but we'd still be sending dependents to do an independent's work. (c) 2002 by Barbara Langer. All rights reserved.