Auditing Reform, Do or Die
After months of downplaying the gravity of the corporate crime wave that has unnerved investors and battered the stock market, the Bush White House is scrambling. But if President Bush in a landmark speech today calls for tougher penalties rather than basic reforms of the accounting industry, as he telegraphed in a news conference Monday, investors will have no reason to tiptoe back into the market.
The latest revelation, that pharmaceutical manufacturer Merck & Co. overstated its revenue by $12 billion over the last three years, is a case in point. If the experts are right, what Merck did was not only legal but within generally accepted accounting practices. So, even though investors believed they were buying into a larger company than actually existed, there may be nothing to prosecute. It’s the accounting practices that are twisted.
Nearly 1,000 firms have had to restate their profit after admitting to various schemes designed to make their books look better. Investors need solid assurances that companies are producing understandable and trustworthy balance sheets. Because much of the chicanery is arguably legal, Bush can’t stop at new criminal penalties. Nailing chief executives for misdeeds may sound good, but try getting a conviction of a corporate executive wrapped in a blanket of lawyers. The real test is whether Bush will embrace tough regulations that make cooking the books more difficult in the first place.
Securities and Exchange Commission Chairman Harvey L. Pitt, a former lawyer for the Big Five accounting firms, has proposed a namby-pamby oversight board that would allow the accounting industry to continue to set auditing standards. Sens. Tom Daschle (D-S.D.) and John McCain (R-Ariz.) are right to demand that Pitt resign. Sadly, Bush was full of praise Monday for Pitt, calling him “fast to act” against the crisis.
Bush should champion an independent, full-time regulatory board for auditors and a return to auditing as a profession unpolluted by consulting jobs. Both measures are in the Senate reform bill that the administration, congressional Republicans and the accounting industry have opposed. The American Institute of Certified Public Accountants is spending millions to lobby Congress to save its system of weak self-regulation and calls reform proposals a “de facto government takeover” of the industry. Bush at least has softened toward the Senate bill, but clearly he has no love for it.
Bush and Vice President Dick Cheney have corporate pasts that raise questions. A decade ago, Bush was late in disclosing his sale, just ahead of bad news, of shares in a company for which he was a member of the board of directors. Cheney’s former employer, Halliburton Co., is under investigation for its accounting practices at a time when Cheney was CEO. They both would have something extra to prove in championing reforms.
With news footage of WorldCom’s executives taking the 5th Amendment before Congress on Monday still fresh, Bush has no more slack. It’s do or die on market confidence.
