Is Reform A Bad Joke?

While the accused manipulator, Enron's Andrew Fastow, took his perp walk last week, another and far more important drama was playing out in Washington. This back story raises the question of whether the White House plans to do anything more for reform than handcuff a few bad guys. Is it serious about cleaning up the accounting mess that let Enron get away with murder in the first place? Or will it roll over for all the powerful, monied interests that want no change?

Last week, the answer appeared to be: yes, it's rolling over. But this story is in flux.

At issue is the new Public Company Accounting Oversight Board, created by Congress and signed into law with a flourish by President Bush in July. It's supposed to set new and higher standards for auditors, who check corporate books. To succeed, it will need a true reformer at its head.

The Securities and Exchange Commission will name the board's members. As head, SEC chairman Harvey Pitt chose John Biggs--the respected CEO of the giant teacher's pension fund, TIAA-CREF--say people in a position to know. But the big accounting firms (yes, like the ones that abetted Enron, Tyco, Xerox and WorldCom) scorn goody-goody reformers, and promptly called their political pals. Rep. Michael Oxley (R-Ohio) complained about Biggs and Pitt pulled back. (Oxley's House committee just happens to oversee the SEC.)

Biggs isn't talking and Pitt issued a statement saying the SEC had never made the offer. A spokesperson for Oxley says a "moderate" should head the board. Last I heard, rumors were flying about a replacement.

By the time you read this, Biggs may be out, in or still dangling. Pitt--who, to his credit, chose Biggs in the first place--now looks like an industry lapdog, always ready to woof. "Investor protection" sounds like a bad joke. The SEC looks politicized. If true, that's something it "has never been accused of, going back to its origins," says former SEC chairman Arthur Levitt.

In truth, it's a miracle that a potentially strong public oversight board was created in the first place. After Enron collapsed, Pitt merely proposed new industry oversight. Later, the House passed an Oxley bill telling the SEC to regulate. A much tougher Senate bill from Paul Sarbanes (D-Maryland) was on a fast track to oblivion until WorldCom suddenly exploded, a $7 billion fraud. The Sarbanes bill passed in the aftershock, with a strong, independent reform board as its centerpiece. I thought it a rare victory for investors. Now, it appears that we won the battle but lost the war.

Why might the accounting industry want to torpedo Biggs? The answer lies in his testimony before the Senate Banking Committee last February. He said that corporations should rotate their auditors every few years (would Arthur Andersen have OK'd Enron's deceptive transactions if it knew that another firm would soon be checking its work?). When stock options are granted, Biggs favors subtracting their value from company earnings to give investors an honest picture of their cost (this proposal enrages high-tech firms, which complained about Biggs's nomination, too). He even (gasp!) wants to improve the quality of audits and address the conflicts of interest that tempt auditors to help cook the books.

To a simple dame like me, all this sounds pretty "moderate." To see why it's actually radical, pick up Levitt's new book, "Take On the Street" (Pantheon). It runs through his political battles, blow by blow and name by name, offering a rare peek into money and politics at work.

By the mid-'90s, for example, Levitt had tracked a rising tide of exaggerated earnings. He saw auditors climbing into bed with their clients to protect (and earn) high fees--especially consulting fees. The industry wouldn't change its ways voluntarily. When Levitt proposed regulations, accounting's favorite legislators swung into action (Rep. Billy Tauzin and Sen. Richard Shelby, among many others), threatening to block some SEC funding. Levitt finally had to settle for minor gains.

In another fight, this one for better accounting of stock options, Sen. Joe Lieberman (D-Connecticut), hero of Silicon Valley, cut off reform at the knees. The big accounting firms have even threatened to stop funding the industry's own "oversight" groups, when the scrutiny got tough. John Bogle, founder of the Vanguard funds, says that if the accountants get regulated, "it's their own damn fault. They've proved that self-regulation doesn't work."

Still, money talks--and the industry gave various pols $14.8 million during the 2000 campaign. Who could counter that? Maybe the pension and mutual funds that got slammed by Tyco and WorldCom stock, right along with you. They'd make a difference if they lobbied for reform, but they're "forever on the sidelines," says former SEC commissioner Bevis Longstreth.

By law, there's supposed to be a public oversight board in place by Oct. 28, but it's a train wreck from the start. Who will serve, if one's principal function is to woof when Oxley calls? Where is the White House? If the accountants can nix the chairman, the board is a cipher and investors will have been sold out... again.