Can Senators Remember?
Editorial
The Washington Post
Saturday, June 15, 2002; Page
A22
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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