Those of you who have read about fraud, greed and mismanagement of many S&Ls, banks, insurance companies, brokerage firms and other hybrid financial institutions might have shared my amazement at recent hearings by the Senate Securities Subcommittee.
The Subcommittee was not at all focused on strengthening the corporate criminal laws and reducing the legal roadblocks for the victims of these swindles to have their day in court. Instead, the agenda was the same as that of the wrongdoer’s lobby — to tie the hands of judges and juries and make it more difficult to sue the culprits and recover adequate compensation. Behind this legislative drive are the large accounting firms whose inaccurate or reckless audits were part of the ways these financial institutions misled investors and then fleeced them.
These Big Six accounting firms have amassed large campaign finances to spread around the Capitol Hill politicians as well as a huge lobbying fund. Senate Securities Subcommittee Chairman, Christopher Dodd (D-CT) and the lead water-down-the-law sponsor in the House of Representatives, Rep. “Billy” Tauzin, (D-LA) have received tens of thousands of dollars from these accounting firms and their allies.
What is remarkable about the Big Six accounting firms is their forked tongue. On the one hand, they are moaning and groaning about alleged “frivolous” law suits and the huge settlements they have had to pay our compared to their gross income. Class Action Reports took apart their figures to show how they include other than plaintiffs’ securities fraud lawsuits and how they exclude half of the revenues of these firms that come from consulting and tax-advice activities.
As one reporter, Beverly Moore, Jr., declared “Why don’t they give us the names of these “frivolous” lawsuits so we can check them out?
On the other hand, these accounting firms, worried that their culpable behavior will impair their recruitment on campus, wrote faculty members downplaying their litigation burdens.
In November 1992, Ernst & Young sent letters to accounting faculty describing how easily the firm absorbed a $400 million settlement with the federal government bank and thrift regulators. (In a headline, the New York Times had described this settlement as a “bargain.”) According to Ernst & Young, 75 percent of the $400 million settlement was covered by insurance and the balance of the annual payments over the next four years “are about one percent of our revenues and well within our financial capability.”
Both Arthur Andersen and Coopers and Lybrand issued similar statements that settlements affecting their firms would not have a material impact on their financial conditions.
It is well to remember that even the American Institute of Certified Public Accountants (AICPA) recognizes that there have been “very significant incidents of fraud.” Recall the Lincoln Savings and Loan debacle or the Miniscribe debacle.
But it is a May 1993 circular by the AICPA that exposes the wild exaggerations of the Big Six’s move on Congress to drastically limit their future liability in similar situations. The circular declared that reported litigation alleging audit failure is at a steady, not climbing, rate: “About 50 lawsuits alleging audit failures involving public companies are filed each year, and that number has remained constant over the last ten years,” it said.
That is the forked tongue. For one audience–members of Congress, they roar alarums and demand relief for their abuses – for another audience — their business clients and accounting faculty members — they say “no problem.”
Imagine, only 50 lawsuits a year in a financial world where thousands of banks, insurance companies, and other publically held financial institutions were and are awash with fraud and deception. Not only investors paid for this greed, recklessness and crime; you the consumer and taxpayer will pay as well because Uncle Sam and state governments bail out these culprits on your back. Witness the half a trillion bailout bill handed to you over the next 25 years for the Savings and Loan wreckage alone!
If you wish to advise Senator Dodd to toughen, not weaken, the securities fraud laws, drop him a line at the U.S. Senate, Washington, D.C. He’ll be surprised that you know what he and his corporate allies are about to propose.
For more information about the best single reform to avoid future shenanigans and bailouts, write to Consumer Justice, P. 0. Box 19367, Washington, DC 20036.