New Laws Won't Stop the Next Enron...
Former SEC Chairman David Ruder says lawmakers should leave the cleanup to existing accounting and securities watchdogs
David S. Ruder knows a financial scandal when he sees one. In the late 1980s, when he was chairman of the Securities & Exchange Commission, Ruder oversaw the investigation and prosecution of junk-bond kingpin Michael Milken of now-defunct Drexel Burnham Lambert as well as rogue financier Ivan Boesky. But Ruder, 72, says none of the cases that the SEC undertook during his two-year tenure measures up to Enron's collapse, which the SEC is only starting to piece together. "We did not investigate a matter of this significance," he notes.
As astounding as the Enron story is, Ruder cautions against an overreaction. Now a law professor at Northwestern University's School of Law in Chicago, where he returned in 1989, Ruder contends that Congress should leave the criminal investigation to the SEC and the Justice Dept. and any remedies to the SEC and the Financial Accounting Standards Board. Ruder recently talked with BusinessWeek Correspondent Michael Arndt about the case and its impact on the trustworthiness of corporations and their auditors. Here are edited experpts from their conversation:
Q: Do you think we might be at a watershed moment here with Enron?
A: There really are two areas in which one could expect attention to be paid. The first would be whether the Financial Accounting Standards Board addresses this in a very deliberate and methodical way -- to see whether the reported earnings and balance-sheet financial statements should be changed. The second would be whether the Securities & Exchange Commission should adopt regulations requiring greater disclosure. That's more likely to take place, and in a faster way, than changing the accounting rules. I might also mention a third.
Q: What's that?
A: I would hope that Congress doesn't get into trying to legislate on this. This is a very technical area that requires expertise, and I think it ought to be left to the bodies that have the expert knowledge. I think the tendency of Congress to run off and legislate when something goes wrong doesn't recognize the fact that the FASB and the SEC, which are both independent, are quite able to do this. Once they get notice, they tend to do things the right way. So Congress really doesn't need to step in there.
Q: Do you think much of this is sloppiness? Or is this something sinister where people were trying to fool shareholders?
A: I happen to believe that most companies and most officers and most auditors are honest and try to do the right thing. But I would want to investigate the fact. The problem is -- and we see it over and over again -- when a company begins to fail, it's either going to be in a self-delusive mode in which it doesn't believe that things are as bad as they're going to be, or it recognizes that things are going bad and covers up what's wrong because they know if disclosures are made, it will be a self-fulfilling event. There's a great human tendency to try to save things by not disclosing.
Q: Do you think that by merely conducting hearings, Congress is getting in the way? Or can those go on in tandem with an SEC investigation?
A: I think it's perfectly appropriate for Congress to have hearings regarding the supervision of the accounting profession. That's an area in which possibly you might have legislation, although I don't happen to think legislation is warranted. But there are plenty of people who do, who believe that the accounting profession needs to do a better job of policing itself. And the only way that can happen, according to those critics, is through a self-regulatory body.
Q: Why do you think those critics are wrong?
A: The accounting profession has established a system of self-examination called the peer-review system. That system is one which is designed for one accounting firm to examine another, to see whether its systems are correct. And that process goes along extremely well. If you were to create a self-regulatory organization for the purpose of investigating particular wrongs and imposing sanctions, that would be duplicative of what the SEC can do. And I think in this instance, the SEC is the proper arm to do that.
Q: But on your point about peer review, Deloitte & Touche just took a look at Andersen and said its processes seemed to be fine, and then, lo and behold, we learn a little bit later that they were destroying documents at Andersen.
A: Now, a peer review would not deal with the question and the extent to which documents were destroyed. A peer review goes to systems. You're not talking here about a police force, which is going to look at each audit conducted by a firm. To establish a system in which you second-guessed the auditing firm on every one of its audits would be, in my opinion, a tremendous cost burden.
Q: There have been scandals at other companies before this, of course. Does this history of not catching wrongdoing -- or in some cases actually abetting wrongdoing -- hurt the credibility of accountants? Does it undermine shareholder confidence so they do not know whom they can trust?
A: I don't think that the investors are at that level. I think the auditing function is still being handled extremely well. We're not talking about any high percentage of audits. We have 4,000 to 5,000 companies filing audited financial statements every year with the SEC, and the number of poor audits is remarkably small.
On the other hand, when you get a Sunbeam or a Waste Management or a Cendant or an Enron, everybody says, "Where were the auditors?" I think that's a fair question to ask. I happen to think that the auditors overwhelmingly are honest and are trying to do the right job, and what we're seeing are the occasional aberrations in their performance. And we need to be very concerned about it and try to prevent it in the future. But I don't think we can say the system is broken.
Q: Is there evidence that the number of corporate wrongdoers would be higher if not for auditors -- that auditors do, in fact, catch and prevent some wrongdoing?
A: There's no doubt that the auditors play a tremendous role in reviewing company financial statements. One of the great anomalies about all of this, to my mind, is that the accounting firms are playing such an important role for the public by auditing the books and records of corporations. Then when something goes wrong, the finger gets pointed not so much at the company but at the auditing firm. It's like saying to the policeman, "You were supposed to be patrolling the beat when the crime occurred. So it was your fault." It's not the auditor that's the fundamental wrongdoer, it's the company.
Q: Last question: Do you think Andersen will survive?
A: The real potential problem for Andersen is the potential for civil liability, and one can't predict what's going to happen there. Without knowing any facts, if you have a company that's being attacked for the loss of over $80 billion in the market, there has to be a great deal of concern by all of the players here: all of the directors, all of the officers, all of the auditors, and all of the insurers. If Enron can't pay, lawyers will turn to someone else and try to make them pay. That's the way the game works.
Edited by Douglas Harbrecht |
