Search the Internet          Tips  Sites: Finance, Investment

Former SEC chiefs champion post-Enron reforms

The most senior panel ever assembled of former chief US market regulators told Congress on Tuesday the financial system needs a major overhaul to restore confidence after the collapse of Enron Corp.

Five silver-haired past chairmen of the Securities and Exchange Commission called for a new accounting industry boss, a shake-up at the US accounting standards setter, a big boost in the SEC budget and limits on consulting by corporate auditors.

"What has failed is nothing less than the system for overseeing our capital markets," said Arthur Levitt, a banker and the SEC's longest-serving chairman, who held the post from 1993 to 2000.

Before members of the Senate Banking Committee, many of whom opposed auditor reforms he fought for years ago, Levitt said investor confidence in US markets had been shaken by the downfall of Enron, the former Houston energy trading giant.

"We do have a crisis of confidence and one that cannot be ignored," Harold Williams, a lawyer and SEC chairman from 1977 to 1981, told the committee chaired by Sen Paul Sarbanes.

Ten congressional panels are probing how Enron slid in mere weeks last fall from being the seventh-largest US corporation to filing the largest US bankruptcy in history on December, devastating investors and destroying thousands of jobs.

Legislation is beginning to emerge from weeks of intensive congressional hearings. The House Financial Services Committee floated the first comprehensive bill on Monday. The Senate will not be far behind, the banking committee hearing showed.

Connecticut Democratic Sen Chris Dodd said he and other lawmakers were drawing up a bill that would include several of the concepts generally endorsed by the former SEC chairmen.

Among these would be new restrictions on the hiring of auditor employees by corporate audit clients. The former chairmen proposed a "cooling-off period" of a year or so.

At Enron, many finance department employees were hired from Andersen, the Big Five accounting firm. Andersen was Enron's long-time auditor and has come under fire for its role in the company's unraveling, which has prompted investigations from the Justice Department and the SEC, along with Congress.

Sen Richard Shelby, an Alabama Republican, introduced legislation that would allow investors to sue those who help companies that produce and release inaccurate financial information.

"Too many in the securities industry have been shielded from investor lawsuits, and that has removed incentives for 'doing the right thing' as far as investors are concerned," he said in a statement.

AUDITOR ROTATION FAVORED

Most of the former SEC chairmen voiced support for the idea of "auditor rotation", requiring public corporations to switch auditors regularly, perhaps every five to seven years, rather than the cozy, indefinite retainers some auditors have now.

Finding new funding sources and new energy for the notoriously sluggish Financial Accounting Standards Board -- which takes years to set accounting standards in America -- was seen as vital by all the former SEC chairmen.

Much of the board's funding now comes from businesses whose standards it sets -- a set-up that Levitt called "crazy."

"FASB should be financed by payments by preparers and users of financial statements," said David Ruder, a university law professor and SEC chairman from 1987 to 1989.

The former SEC chairmen agreed the accounting industry needs a new boss to replace the widely ignored Public Oversight Board affiliated with the American Institute of Certified Public Accountants. The board dissolved itself last month.

Current SEC chairman Harvey Pitt has proposed an accounting oversight panel comprised of accountants and non-accountants, but some of his predecessors said he has not gone far enough.

"A new division within the SEC, not another private sector body, should be formed to oversee performance of auditors," said Richard Breeden, a lawyer and SEC chairman from 1989 to 1993, in the most radical of the former regulators' ideas.

Ruder and Levitt backed a more moderate concept of a new private-sector accounting overseer, but agreed with Breeden when he said, "We have had consistent failure in attempts by the accounting profession at self-regulation."

Finally, all the former regulatory chiefs called for limits on how much consulting work auditors should be allowed to do for their audit clients. In 2000, Andersen booked $25 million in audit revenues and $27 million in other revenues from Enron -- something cited as a conflict of interest by critics.

While accountants came in for the most scolding in the hearing, Levitt said they were not the only ones at fault for the Enron crisis. Lawyers, investment bankers, equity analysts, accounting standard-setters and regulators all shared the blame for Enron in a financial "culture of gamesmanship," he said.

"The problems that brought about Enron, exist in many American companies," he said.

ALSO READ:
The Enron Saga