Can Senators Remember?
TWO YEARS ago Arthur Levitt, the chairman of the Securities and Exchange Commission, fought to curb the auditing conflicts of interest that facilitate fictitious financial statements. He was beaten back by legislators who had received money from the audit companies. Then, after Enron's implosion, many of those same legislators put on new reformist clothes, explaining that they had never really opposed the Levitt reforms but had merely pleaded against rushing them. We look forward to this coming week's vote in the Senate banking committee, when some of these claims will be tested.
Take Sen. Wayne Allard (R-Colo.). In July 2000 he wrote to the SEC urging that reform go slowly. But in March of this year, he assured the Rocky Mountain News that he "supported changes in the rules" but "sought the delay to solicit constituents' comments." "The conflict-of-interest rule should have been implemented. I know it's not in the letter, but I did support it," he went on; "if I had to vote for it today, I would vote for it." Well, Mr. Allard will get a chance to vote for the Sarbanes reform bill next week. For the time being, he has misgivings -- though his office is vague about his latest thinking.
Or take Sen. Richard Shelby (R-Ala.), another go-slow guy back in 2000. In the aftermath of Enron, he waxed indignant about auditors who act like "lap dogs, instead of watchdogs," and spoke out about the link between "properly functioning capital markets" and "the independent financial audit." During a Senate hearing in February, Mr. Shelby suggested that audit firms could be rotated in order to prevent them from getting too close to the firms they oversee. "You steal something at the grocery store, and you're caught and you should be prosecuted," the senator observed. "But people in corporate America, a lot of them have stolen and cheated people out of millions, hundreds of millions, if not billions of dollars."
Sounds like Mr. Shelby supports strong reform? We will find out next week, but for now he remains undecided. His spokeswoman suggested early this week that the Sarbanes bill was "restrictive," but yesterday she said he had an open mind.
Then there is Sen. Jim Bunning (R-Ky.). In 2000, he too opposed Mr. Levitt's reforms. But at a Senate hearing in March of this year he had a fresh position. "I do think that we must have a true auditor independence," the senator said. "Although the firms have split off consulting arms, I think we should codify that split into law. If you audit someone, you should not be able to do their business consulting." Can't get much clearer than that. But Mr. Bunning appears to be leaning against the Sarbanes bill, though his office won't provide the reasons.
It's not as though there's some other measure that reformers might favor. The Republican alternative to the Sarbanes bill, crafted by Sen. Michael Enzi (R-Wyo.), would not prevent auditors from providing any consulting services that the SEC does not restrict already. The House has passed a bill asking the SEC to take care of auditor conflicts; but the SEC's past failure to do that, even under Mr. Levitt's reformist leadership, is something that the senators we've mentioned here know intimately. There is talk that the Enron scandal itself will drive companies to improve their bookkeeping, so maybe Congress doesn't need to act. But bad habits will soon return unless the incentives to cheat are weakened.
In 1981 consulting represented 13 percent of the revenues at America's main auditing firms. By 1999 it represented more than 50 percent. Auditors are supposed to be independent of company managers, but they can't be when they depend on managers for more than half their income. Messrs Allard, Shelby and Bunning seemed to understand this in February and March. Surely they, and perhaps some of the other Republicans on the banking committee, will still understand the issue when the committee convenes on Tuesday?
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