PBS's FRONTLINE the KEY: Lynn Turner Interview: Part 2 of 2
Let me ask you -- when you look at Andersen, do you see patterns of behavior that go from one case to another, that go from Sunbeam to Waste Management to Enron?
I think without a doubt we see a pattern of behavior across a variety of clients in the case of Andersen -- and keep in mind I don't think this is just an Andersen issue; I think this is a profession-wide issue -- where people have made decisions, not based upon the interest of investors, but are making decisions based upon whether or not they further their own business interest and the business of the partnership. Which, in turn, will further the interest, at least financially, the interest of the individual partners. ...
If a company like Andersen is both fined by the SEC and hit by large stockholder suits in a case like Waste Management or Sunbeam, why does it then go ahead and get involved in the same kinds of problems in Enron?
What you're really seeing, again, is -- despite the fact of paying out tens, if not hundreds, of millions, having your reputation damaged by being charged with fraud, as it was in Waste Management, paying millions out to the government regulator -- despite that, the number one priority in these firms, as you can see, is growing the practice, growing the business, maximizing revenues and take-home pay for the partners. ...
What's it going to take to get a message through? What's it going to take to get auditing firms back to the business of serving the investors, as opposed to the corporate management?
I think it's going to take a number of changes in the system -- not only to the auditing firms, but in how firms view their relationship with investors, how they view their relationship to the board of directors and to the audit committees [to] perhaps take off some of the pressure on those auditors. Phenomenal pressure, pressure that most people would cave under, I think, when they get into some of these debates, like with an Andy Fastow at Enron. We've got to relieve some of that pressure from the system. The only way we get those fixes made is to make some very basic, very important and necessary fundamental changes in how we operate this profession.
Does it take having top managers, top auditors going to jail, the way Ivan Boesky did, or Milken?
I think when you turn around and go into a 7-11 store and rob the store for a couple a hundred bucks, you go to jail. When you've got auditors who have turned around and watched top management teams basically rob from their shareholders by failing to tell them clearly what's going on and, yet, still taking the investors' money into that company, and the auditor stands by the wayside, knowing that the numbers aren't right, aiding and abetting the management team -- quite frankly, I don't see a difference. ...
Has that happened in recent years in any notable case?
In recent years, we have not seen auditors go to jail. I think the most recent case was in the mid-1980s, where an auditor actually took a bribe to allow the numbers to go out wrong. But aside from that, no. We have not seen that type of punishment come to anyone in the auditing profession. ...
The accounting industry has operated under a system of self-regulation, frankly, since the SEC was set up. Has self-regulation worked in the accounting industry?
Self-regulation has not, is not, and certainly at this point in time, given fundamental changes in business today, self-regulation is not going to work.
Why not?
The financial conflicts are too great. The fact is that we've had a consolidation of these firms from eight firms down into six and five - and now we're looking at probably the final four. With respect to the firms, [there have been] big, fundamental changes in competition and the drive to keep things very professional.
What's taken over is the consolidation of consolidation and power and a change in the attitude of the firms as they made this transformation from being principally an auditing firm, driven by what made an audit right, to a firm that has become much bigger in consulting and providing other services to a company. What's critical to getting that piece of the business is now having a much bigger effect on what makes these firms successful; and as a result, how the CEOs of those four or five firms operate that business.
Now, SEC Chairman Pitt has come up with a number of proposals for fixing the problem and reform. What's your assessment of what Chairman Pitt is proposing? Are his proposals adequate? Will they do the kinds of things that you think are necessary to shape up and restore the integrity of the accounting and auditing system?
Chairman Pitt's proposals, first and foremost, fall way short from what almost every single investor group has asked for. He's clearly set aside the concerns and interests of investors -- falls way short of what they're asking for, falls short of what even the president's ten-point plan includes in it. And it falls way short -- it's almost like a Grand Canyon chasm -- between what Congress is looking at doing and the necessary reforms and what Chairman Pitt has proposed.
I agree with every one of those groups, and I think Chairman Pitt's proposal, while it's a start, quite frankly it's almost in fact a nonstarter, because it really doesn't accomplish much.
In your estimation, what's missing from Chairman Pitt's reform proposal?
In his reform, he falls way short on improving the independence of the auditors. He creates a regulatory oversight body that brings the accounting profession into it. It's not an all-public-interest board, which is what we have today. So it's a step backwards in that regard.
It doesn't have an effective disciplinary or investigation provision. He doesn't give the new body the ability to force investigations through getting testimony and getting documents that they're going to need. It's not given the statutory [authority] to turn around and do that.
The new body that Chairman Pitt would propose doesn't even have the ability to set their own rules with respect to what auditors should be required to do, or the quality of their audits. He's going to leave all of that in the hands of the profession. And as we've seen from the last 25 years, as we've seen from the $200 billion in losses investors have already suffered, quite frankly, that dog just doesn't hunt.
Let me just get this straight. How much would you say investors have lost through corporate restatements?
If you go back and look over the last half-dozen years, give or take a year, up to the point of about a year ago, investors had lost probably close to a $100 billion -- suffered those type of losses from these situations like Cendant, Waste Management, Sunbeam, Microstrategies, Rite Aid, Lucent, Xerox -- a litany of them. Investors had already suffered losses that they were looking at in terms of a $100 billion.
Then along comes Enron. The loss on the market cap of Enron, just for the common stockholders, was around $63 billion. The total loss when you add in the debt and all is gonna be twice the losses that this country suffered on 9/11. Phenomenal. Six times the losses from the hurricane damage to Florida on Hurricane Andrew. This is a phenomenal number.
And we add on now every day. Global Crossing and others have come to the forefront. Investors are now looking at losses probably coming close to $200 billion. This is the magnitude of what this country lost when taxpayers had to bail out the savings and loan industry -- again, where the numbers weren't right.
A high price to pay.
It's a phenomenal price to pay. And in terms of the fact that our capital markets today are the crown jewel -- a third of the wealth of the country at the height of the market was tied up in that stock market.
When you're exposing it to these type of losses, it is does real, real damage to the country. It means companies can't get the capital they need to develop new technology. They can't get the capital they need to build new plant, to provide new job opportunities. In the case of companies like Enron and Waste Management, you see the companies have to lay people off. They lose their savings, not only for their future retirement; for their kids' education.
This is a phenomenal damage to the American public that needs to be resolved before more damage occurs in the future. Without reform, there's no question we'll see more damage inflicted. ...
What do you think was the impact on the corporate climate and the performance of accounting and auditing firms and so forth of the 1995 "safe harbor" law? Did it have any impact? Where did the SEC stand on the 1995 "safe harbor" law when it was being debated?
At the time the 1995 tort reform act was being debated, we were in a situation that was not healthy in this country where, quite frankly, there was probably lawsuits being litigated that just didn't have a real basis for. Some people called it "ambulance chasing," even on the part of some of the attorneys. That wasn't healthy, and that cost investor money, because some companies had to pay out money just to settle, even though the suits didn't have merit.
On the other hand, some of those suits were very good. There had been some bad things done, and the companies and their management team should've been sued.
The problem is that I think we turned around and made it much too tough for investors to turn around and pursue their claims in court when they were wronged by whoever. It might have been management, the auditors, whatever. What we had before was too loose, made it much too easy for people to turn around and pursue those. We've got to get it somewhere between being too tough and too easy. ...
There have been things that have changed, whereby even if a professional aided and abetted in the fraud that went on -- not necessarily because they did it directly themselves, but stood by and watched it happen and could have done something -- it is now unlawful to be able to go after people in those situations.
I don't think the average investor is going to think that it's right that people can stand by -- especially the professionals, the experts in these cases -- can stand by and watch things happen, thereby aiding and abetting those things occurring, and think that they should go without punishment. Neither do I.
Do you think the passage of the 1995 tort reform law affected the behavior of accountants, of corporate boards, of corporate officers, of law firms, of investment banks in any way; made them feel, "Well, we're not quite as vulnerable as before?" or conversely, "We're more vulnerable?"
When you step back and look at the effects of the 1995 tort reform act, what you see is accounting firms now who turn around and still don't like to be sued. No one likes to be sued and without a doubt, it's in the back of all of their minds. But probably what's at the forefront of their minds is the fact that now there is, without a doubt, less litigation exposure. The chance of getting sued has been reduced. People say, "Well, there's been more financial fraud lawsuits." That's true, but it's because there's been more financial fraud.
But the auditing firms now view this, to some degree, as risk management. Not an issue of, "Do I get the audit done right?" but, "I do tradeoffs between how much audit work I'm going to do, versus how much risk do I have," or, "Exposure to litigation, given that the passage of that 1995 act, actually reduced the chances that someone's going to successfully sue me." That trade-off is not a healthy situation in the profession right now.
Did you and others in the SEC want to have the SEC take a more vigorous position to limit the reach of the 1995 tort law?
From my perspective, where I sat as chief accountant of the commission, I would have liked to have had more tools and the ability to do more effective discipline that was really meaningful, that really had more bite when, in fact, we did see cases where the auditors had truly not engaged in professional conduct. Our rules made it very difficult to reach out and touch, if you will, the auditors, unless their conduct had gotten extremely reckless, fraudulent.
Given the limitations of the staff at the SEC, given the limitations of funding, were private lawsuits to some extent an enforcement tool that was helping you?
There's no question that private lawsuits are a big part of the existing deterrent in the country today. Private lawsuits probably have a much greater impact, even [more] than the SEC, on the behavior of company executives and auditors. ...
When you left the SEC, did you have a backlog of fraud cases you were investigating? And if so, how many? How serious was it?
At the time I left the SEC, we had a backlog of about 200 to 250 enforcement cases of fraud that we were investigating. And some of those, I think, will turn into major cases.
What was very concerning about it was there was all of a sudden becoming a growth in the number of cases that we were seeing not against small companies, but against the household names. You'd see names start to pop up like Xerox, like Lucent, like Rite Aid, where people know these companies; they're big companies. That was something that was concerning, because not only was it little penny stock people that were causing the problems; but now it was great big companies. And when you have these great big companies, given the massive amount of market value that they have, the chances for major damage to investors in the marketplace grows exponentially. And that was very troubling. ...
To date, we've not seen much of that backlog worked off. I think that's in part because of staffing. The SEC just doesn't have the resources to do it and, unfortunately, some of those major cases will never be brought to action because the SEC hasn't got the resources to do 200, 250 cases. ...
Talk to me about the fight with the accountants. What was that like? Why was the Levitt effort to separate accounting and consulting important? And what was the battle like?
... In the cases that we had seen and what was going on with them, like Waste Management, it had become clear to us that the auditors were not as independent as they should be. And it was becoming a growing trend. At the same time, we'd seen a growing trend in the number of financial restatements, 85 percent of which came out of actions other than the SEC. We'd never seen them before they'd showed up in the paper. So we were very concerned about the trend.
Given that, we decided that we couldn't wait any longer, that we needed to go try to do that fix. We'd actually talked to the accounting firms for quite a period of time even before we proposed the rule, trying to get the firms in agreement on a plan that might address the issues. When we couldn't get them to agree to anything -- and, in fact, there was a violent split amongst the profession about what the fix could be -- then we decided we had to act on our own.
What kind of fight did you get into?
It was easily described as a 15-round, knockdown, drag-out-to-the-final-bell type of fight. It was the accounting firms using the power of their money, using the power of their Washington, D.C., lobbies, heavy lobbying in Congress -- and using that to try to get Congress at every turn to oppose what we were trying to accomplish. And that was very difficult. ...
It basically took everything we had, every resource within the commission, to avoid having Congress actually cut off our appropriations so we could do no more reform. And that forced us into watering down quite a bit the final reforms that were eventually passed. ...
I guess you weren't at the SEC at the time of the big stock option fight in the early 1990s.
No.
Where do you stand on whether or not stock options should be expensed on the balance sheet, and why?
I've been an executive in a major international corporation where we granted stock options. Certainly stock options, I think, are good, and should be used. But they are equally subject to abuse. And economically, there's no question I was giving a value something significant to my employees. I think the financial statements clearly need to reflect that. ...
At the same time, one of the things that is concerning to me is you've got these stock option plans in companies where they've opposed letting the shareholders, the people who own the business, vote on them. It's phenomenal to me that a management team, who is supposed to be serving investors, aren't even willing let the investors vote on stock option plans, where the management team is able to give away 15 percent, 20 percent of the company. That is just not good corporate governance. We have to address that. ...
Why do you think Sen. Lieberman, who has been outspoken in this spring of the need for reform, has been such an adamant foe of expensing stock options?
I think those who have been so strong in their opposition to stock options just aren't dealing with economic reality. There's no question but what these things have value. If they didn't have value, heck, we wouldn't be giving out so many of them to everyone. And to turn around and say that, "Let's not show that number to investors," is no different -- absolutely no different -- than turning around and saying, "Let's not show investors the debt. Let's keep it off the balance sheet."
So when a congressman turns around and tells me, "Let's put all the debt on the balance sheet, but leave all the stock option expense out," in the back of my mind, I can only assume that there's someone else out there with money that's influencing their decisions. ...
You get the feeling that there's an insiders' game and an outsiders' game. The insiders all understand what's going on here, and it's only the general public -- which got heavily involved in the market in the 1990s -- it's in the dark. Is that a level playing field?
We need a lot more sunlight on the system, so that the public can see what's going on. And that would be good, because if the accounting profession is scared to operate in the public domain, out in the sunlight so people can see everything that's going on, then, quite frankly, that should tell you something -- that there's something wrong. The accounting firms should recognize it; the public should understand it. And Congress, probably along with the SEC, needs to make reforms. |
