I looked up Arthur Levitt Jr, 1993-2000 SEC Chairman, and found he made this statement to a US Senate Committee earlier this year.... I wonder just HOW many of the misbehaviors and fraud in companies started in his reign....and how many of the recommendations he makes now were actually tried when he was at the SEC....
Testifying to the US Senate Committee on Banking, Housing, and Urban Affairs
Oversight Hearing on "Accounting and Investor Protection Issues
Raised by Enron and Other Public Companies."
Prepared Statement of The Honorable Arthur Levitt, Jr.
Chairman, Securities and Exchange Commission
1993-2000
10:00 a.m., Tuesday, February 12, 2002 - Dirksen 538
Thank you for the invitation to share my thoughts on the failure of Enron and
its implications for our financial markets.
Today, there is an emerging crisis of systemic confidence in our markets.
What has failed is nothing less than the system for overseeing our capital
markets. We have an opportunity to repair trust in those on whom investors
depend, and in the process, trust in the numbers that are the backbone of our
capital markets. But our response must be comprehensive. Healthy and
resilient financial markets depend on the accountability of every one of its
key actors ? managers, auditors, directors, analysts, lawyers, rating
agencies, standard setters, and regulators.
Enron?s collapse did not occur in a vacuum. Its backdrop is an obsessive zeal
by too many American companies to project greater earnings from year to year.
When I was at the SEC, I referred to this as a "culture of gamesmanship" ?
?a gamesmanship that says it?s okay to bend the rules, tweak the numbers,
and let obvious and important discrepancies slide?
?a gamesmanship where companies bend to the desires and pressures of Wall
Street analysts rather than to the reality of numbers?
? where analysts more often overlook dubious accounting practices and too
often are selling potential investment banking deals?
?where auditors are more occupied with selling other services and making
clients happy than detecting potential problems?
?and where directors are more concerned about not offending management than
with protecting shareholders.
What was once unthinkable in business has become ordinary. In our highly
competitive economy, more and more business leaders are employing financial
maneuvers that approach and sometimes cross ethical boundaries. Accounting
rules are dealt with in terms of "what can I get away with" or "if it isn?t
expressly forbidden, it?s ok." Financial statements, often, are not an
accurate reflection of corporate performance, but rather a Potemkin village
of deceit.
At Enron and throughout much of corporate America, optics has replaced
ethics. Too often, those who manage public companies, audit them, and serve
on their boards of directors have forgotten that the opportunity to realize
wealth in our capitalist system comes with a responsibility to the public
from whose capital they are able to prosper. When the motivation to prop up
stock prices overtakes the obligation to keep honest books, capital flows to
the wrong companies and the very market system from which these executives
profit is fundamentally weakened.
That is why undertaking reforms that preserve and enhance the independence of
the gatekeepers who safeguard the interests of investors is so important.
These steps are certainly not a panacea, but are the beginning of a
much-needed reinvigoration of our financial checks and balances.
First, we must better expose Wall Street analysts' conflicts of interest. For
years, we've known that analysts' compensation is tied to their ability to
bring in or support investment banking deals. In early December, with Enron
trading at 75 cents a share, 12 of the 17 analysts who covered Enron, rated
the stock either a hold or buy.
Two years ago, I asked the New York Stock Exchange and the National
Association of Securities Dealers to require investment banks and their
analysts to disclose clearly all financial relationships with the companies
they rate. Last week, we finally saw a response from the self-regulators. But
it?s not enough. Wall Street?s major firms ? not its trade group -- need to
take immediate steps to reform how analysts are compensated. As long as
analysts are paid based on banking deals they generate or work on, there will
always be a cloud over what they say.
Second, company boards often fail to confront management with tough
questions. Stock exchanges, as a listing condition, should require at least a
majority of the directors on company boards to meet a strict definition of
independence. That means no consulting fees, use of corporate aircraft
without reimbursement, support of director-connected philanthropies, or other
seductions. In Enron's case, at least three so-called independent board
members would have been disqualified under this test of independence.
Third, many accounting rules need to be updated to better reflect changing
business practices to give investors a better understanding of the underlying
health of companies. Because the Financial Accounting Standards Board is
funded and overseen by accounting firms and their clients, its decisions are
agonizingly slow. This well-meaning group must defend itself as well from
congressional pressure, which is often applied when powerful constituents
hope to undermine a rule that might hurt their earnings. FASB's funding
should be secured not just through the accounting firms and corporations, but
also a number of market participants ? from the stock exchanges to banks to
mutual funds. And the Financial Accounting Foundation, which chooses FASB?s
members, should be composed entirely of the best qualified members ? not
merely those representing constituent interests. The FASB should then be able
to focus more on getting the standards right, and avoiding delays and
compromises that ill serve investors.
Let me turn briefly to probably the most urgent area of reform. Like no
other, the accounting profession has been handed an invaluable, but fragile,
franchise. From this Federal mandate to certify financial statements, the
profession has prospered greatly. But as an edict for the public good, this
franchise is only as valuable as the public service it provides, and as
fragile as the public confidence that gives it life.
It's well past time to recognize that the accounting profession's
independence has been compromised. Two years ago, the SEC proposed
significant limits on the types of consulting work an accounting firm could
perform for an audit client. An extraordinary amount of political pressure
was brought to bear on the Commission. We ended up with the best possible
solution ? given the realities of the time.
I would now urge ? at a minimum -- that we go back and reconsider some of the
limits originally proposed. While I commend the firms for voluntarily
agreeing not to engage in certain services such as IT work and internal audit
outsourcing, I?m disappointed the firms have remained silent about consulting
on tax shelters or transactions, such as the kinds of Special Purpose
Entities that Enron engaged in. This type of work only serves to help
management get around the rules.
I also believe that the audit committee ? not company management ? should
pre-approve all other consulting contracts with the audit firm. Such approval
should be granted rarely, and only when the audit committee decides that a
consulting contract is in the shareholders' best interests. I also propose
that serious consideration be given to requiring companies to change their
audit firm ? not just the partners -- every 5-7 years to ensure that fresh
and skeptical eyes are always looking at the numbers.
More than three decades ago, Leonard Spacek, a visionary accounting industry
leader, stated that the profession couldn't "survive as a group, obtaining
the confidence of the public?unless as a profession we have a workable plan
of self-regulation." Yet, all along the profession has resisted meaningful
oversight. We need a truly independent oversight body that has the power not
only to set the standards by which audits are performed, but also to conduct
timely investigations that cannot be deferred for any reason and to
discipline accountants. And all of this needs to be done with public
accountability ? not behind closed doors. To preserve its integrity, this
organization cannot be funded, in any way, by the accounting profession.
Finally, it?s become clear that the reputation of our markets is rooted?in
part?in the quality of their regulation. Earlier this year, Congress passed
legislation to fix the disparity between compensation for employees at the
SEC and employees at other financial regulatory agencies. Unfortunately, the
Administration?s budget doesn?t include funding for pay parity. We can ill
afford -- at a moment like this -- to allow inaction to implicate the quality
of regulation and, as a direct result, the quality of our markets. My message
to the Congress and the White House is simple: Fund pay parity."
The rise of the baby boom generation, changing retirement patterns and
markets that sometimes defied the laws of gravity brought more and more first
time investors into the markets. These are our friends and neighbors, whose
hopes and aspirations became inextricably linked to the health and resiliency
of our markets. We assault those dreams if company executives sell out
shareholder faith and if those purporting to be independent are anything but.
Enron, like every other financial failure before it, proves that investors
bear the ultimate cost. It?s time to repair what has been lost.
Thank you very much.
banking.senate.gov |
