Congress and the national media are feigning great shock and dismay over the revelations of accounting shenanigans in the collapse of Enron, the giant Texas-based energy corporation.
But, the truth is that the Congress and the financial media have long been aware of the accounting profession’s shortcomings and its predilection to paint a rosy picture of their corporate clients-even when corporations were near collapse.
During the investigations of the savings and loan failures by the General Accounting Office (GAO), Congress and the courts in the 1980s, questions were raised repeatedly about the failure of the accounting firms to find and report the problems which eventually led to the failure of hundreds of institutions and the loss of nearly a half trillion dollars by taxpayers who were forced to bailout the industry. One GAO report based on an analysis of eleven savings and loan failures concluded that the auditors “didn’t really try to determine what was going on.” One Congressional investigator suggested that “elephants were walking through the living room and the accountants missed them.”
Despite the fact that the Congress adopted a number of significant financial reforms in the wake of savings and loan collapse, the practices of the accounting profession were largely left untouched. From 1995 through 1999, the Banking Committees of the House of Representatives and the Senate and the leadership of both Houses devoted great time and energy on what they described as “financial modernization.” In reality, the exercise was simply old-fashioned corporate-driven deregulation of the financial industry, not “modernization.”
Nonetheless, the hearings and the debate over the legislation provided a perfect opportunity for the Congress to take another look at the accounting profession and its role in providing information for investors and regulators across key areas of the financial industry. In the end, the Congress adopted legislation which allowed banks, insurance companies and securities firms to merge under the umbrella of giant financial conglomerates. It certainly seemed that these new giants on the financial midway would need the maximum scrutiny if there was to be protection for consumers of financial products, investors and taxpayers who back the bank insurance funds.
It would be reasonable to assume that provisions for independent audits-truly independent audits-would be front and center in such far-reaching legislation. But, the two banking Committees-and the bi-partisan leadership of Congress-were not interested in consumer, investor or taxpayer protections. They were interested only in meeting the demands of the financial industry and they refused to be bothered by regulatory and audit reforms.
Now, many of the same leaders who pushed the deregulation of the financial industry through Congress will be conducting investigations of what went wrong at Enron. And no one expects any mea culpas from members of Congress who failed to institute audit and other safeguards when the financial industry was salivating in its desire for the bank-insurance-securities conglomerates.
The Securities and Exchange Commission (SEC) needs to be given the assignment of licensing auditing firms. Leaving the licensing function with the 50 states means a crazy-quilt of standards and oversight-with the same shortcomings that plague the 50 separate state insurance departments in regulating multi-national insurance companies. For large corporations, the SEC would assign qualified licensed firms at random to conduct audits, much as judges are assigned in federal courts. No company could select its own favorite auditor. Companies would continue to pay fees for the audits, but they would have no say in selecting their auditor.
In recent years, audit firms have become “consultants” to many companies in addition to carrying out audits. This practice has generated lucrative fees for the auditors and created a conflict of interest thatdestroys the independence so important to a credible audit. Legislation should prohibit accounting firms from accepting these consulting jobs for three years after they have conducted a financial audit of the company.
In addition to its licensing function, the SEC should establish a separate section which would monitor and supervise auditing firms-much as the bank regulatory agencies supervise depository institutions. Congress needs to carry out full-scale investigations of Enron. But to leave the job as simply another splashy investigation for television would be a travesty. Congress needs to use this moment to atone for its failure to protect the public in the past by ensuring that there will be independent accurate information for investors, consumers and regulatory bodies.
It is a tough job for a Congress riddled and compromised by large campaign contributions not only from Enron, but from the entire financial industry. But, the job has to be done because there are other Enrons out there in the corporate world with variations on the scheme to deceive and dupe the public in their quest for easy profits. For more information on Enron visit the CitizenWorks.org web page.