Will S.E.C.'s Needs Be Met? Not by Bush
The New York Times
February 8, 2002
FLOYD NORRIS
Tis a gift to be simple, 'Tis a gift to
be free.
'Tis a gift to come down where we ought to
be.
ALL this the Shaker market, after the hymn
that should be the market's theme song.
Simple is in.
Companies that engaged in complicated
financial engineering, or that borrowed
money to buy other companies, are in
trouble. The more complicated a company,
the more accounting games it could be
playing.
The operative word there is "could." Enron
may have been both complex
and crooked, but those words are not
synonyms. Nonetheless, complicated
companies are understandably starting to be
treated as guilty until proven innocent.
Money managers look at the way Alliance
Capital is being pilloried - for having
bought Enron stock on the way down -
and realize that buying a questioned stock
entails big risks.
One way to become complicated is to make
a lot of acquisitions. Greg Jensen of
Bridgewater Associates put together a list of
the top 20 United States acquirers over the
last four years. As a group, they are down
15 percent in 2002, while the Standard &
Poor's 500- stock index is off 6 percent.
What investors need are ways to separate
the crooked from the complex. Many things
could help, but two stand out.
The first is better disclosure. The two
accounting rules that Enron abused the most
dealt with keeping subsidiaries off financial
statements and using "mark-to-market"
calculations to produce profits based on
questionable forecasts. The rules need to be
modified, but both were adopted for good
reasons. Companies should be required to
disclose enough information in these areas to
allow investors to conclude whether games
are being played.
Once those disclosures are required, the Securities and Exchange
Commission must assure that all investors have easy access to them.
Unfortunately, Harvey L. Pitt, the S.E.C. chairman, thinks that individual
investors should not be burdened with too much data. He is pushing a plan to
take complicated stuff out of printed annual reports while allowing those who
care about such things to seek them out on the Internet. That would leave
investors even more dependent on the supposed pros - the Wall Street
analysts.
More and better cops are also needed. As Richard Breeden, a former
chairman, points out, the S.E.C. needs more accountants to review the filings
companies make. As it is, companies can go for years without an S.E.C.
review of their financial results. It's not easy to spot dubious financials
without looking at them. An S.E.C. staff with more accountants might have
asked questions about Enron's baffling disclosures much earlier.
To make matters worse, the S.E.C. has had high staff turnover because it
pays far less than the private sector and, more amazingly, less than other
federal regulatory agencies. Congress finally passed legislation last year to
pay S.E.C. people what bank regulators are paid, but President Bush's new
budget provided no money for pay parity or for hiring a single additional
accountant. Mr. Pitt says he wants pay parity but has not sought more staff.
Simplicity has its virtues, but it would be tragic if honest complex companies
find themselves at a continuing disadvantage in the capital markets because
of Enron's sins. Better disclosures and better policing would help avoid that.
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