Oblivious to a Strong Smell
Energy giant Enron’s conduct has been so egregious that even President Bush, a personal friend of just- resigned company Chairman Kenneth L. Lay, has finally felt compelled to denounce the corporation’s alleged defrauding of employees and outside investors. If politicians are starting to return donations from Enron to assure the electorate that Congress isn’t bought and paid for, then drastic measures surely need to be taken to reassure investors as well.
Unfortunately, Securities and Exchange Commission Chairman Harvey Pitt is taking exactly the opposite course. The giant Andersen accounting company is under intense scrutiny for its auditing in the Enron debacle. Instead of pushing for reform, however, Pitt is dismissing the need for it, claiming “there is nothing rotten with the accounting industry.”
Pitt has called for creating an oversight board. The five-member board currently responsible for ethics oversight has resigned, and its head, Charles Bowsher, a former U.S. comptroller general, has denounced Pitt’s proposals as too friendly to the industry that is supposed to be monitored. The new oversight board would apparently be largely controlled by the industry’s American Institute of Certified Public Accountants.
Pitt, as the head regulator of financial markets, has come up with some cozy proposals that are astonishing. But they are less so considering that Pitt, a lawyer, had as clients the five biggest U.S. accounting firms, including Andersen, as well as the American Institute of Certified Public Accountants. Unless he changes course, he will be unable to restore investor confidence that fair and open audits are taking place.
Despite Pitt’s claims, there is a lot that is rotten in the accounting industry. It appears that Andersen did not just wink at Enron’s end run around the law; Andersen may have abetted it. Though Andersen is reported to have shredded paperwork, memos have surfaced showing that auditors were aware of Enron’s enormous manipulation of its reported earnings, which were really losses, and did nothing to expose it. On the contrary, because auditors can also be consultants to the companies they are supposed to monitor, the incentive is for them not to blow the whistle. Andersen, for example, received $27 million from Enron for consulting work.
Congress needs to pass a law that would create an oversight board that would have enough power to police the industry effectively. It also needs to make it illegal for auditors to work in any capacity for corporations other than auditing. That would help end the smell from the accounting industry that Pitt is pretending doesn’t exist.
