Audit Reform’s Hard Grind
Investors by now have plenty of reasons other than Enron to be jittery about the truthfulness of corporate balance sheets. On Monday, the Securities and Exchange Commission charged five former executives of Northern California high-tech firms Unify, Quintus and Legato Systems with falsely inflating sales figures. It also charged auditing firm Ernst & Young with conflicts of interest involving the joint development and sale of software with a company it was auditing, PeopleSoft.
These latest cases of potential corporate malfeasance should prompt Congress to act, even as the auditing industry works feverishly to stymie reform.
In the aftermath of Enron, federal regulators have opened 49 investigations into corporate financial reporting. But enforcement, however belated, is not enough. Tougher rules and standards also need to be put on the books.
The House made a stab at reform in April, passing a bill by Rep. Michael G. Oxley (R-Ohio) that would have the SEC create and oversee a five-member auditing board. But under the rules, up to four members could be from the accounting industry and the board probably would have to rely on accounting firm assessments for funds. Far simpler and tougher is legislation by Sen. Paul S. Sarbanes (D-Md.), chairman of the Senate Banking Committee, that would provide for an independent auditing board representing the public interest and funded by Congress. Sarbanes’ bill, strongly endorsed by respected former Federal Reserve Chairman Paul A. Volcker, also would crack down on accountants who left their positions to work for companies they recently audited. It would require them to wait at least a year before taking the new jobs.
To hear the American Institute of Certified Public Accountants tell it, these modest reforms would be sugar in the gas tank of capitalism. They would result in “serious, harmful consequences.” Reform opponents on the Banking Committee, led by Sen. Phil Gramm (R-Texas), succeeded in weighing down the bill with 123 killer amendments. When Congress returns from the Memorial Day recess, it should strip out the amendments and pass the original bill.
This is a tough fight, a smaller version of the pitched battle over campaign finance reform. Killer amendments are offered by politicians who swear they really, truly support reform. The real forces of reform then have to marshal their troops and return straying votes to the fold. It may be a long grind, but it must succeed. Otherwise, the accounting industry will remain accountable mainly to itself. We know where that led.
