No Recourse

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 So AICPA, the auditor’s trade association, repealed the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.