Date: May 7, 2002

Contact: Jerry Flanagan, CALPIRG (916) 448-4516

Assembly Business and Professions Committee To Vote On Third Accounting Reform Bill: National Accounting Firms Mount Aggressive Opposition Campaign in Sacramento

Download the CALPIRG "Common Sense Accounting Reforms" report.

On the tails of their recent victories to kill key accounting reform provisions in Congress, representatives of the Big 5 accounting firms increase their pressure on state legislators to halt new California legislation. The reform bill package, introduced in response to the Enron and Arthur Andersen debacle and ongoing problems with corporate financial statements, earning restatements, accounting conflicts of interest and the loss of investor confidence has met heavy resistance from industry lobbyists in Sacramento as the reform effort shifts from the D.C. to the states. Today, members of the Assembly Appropriations Committee will vote on two bills designed to ensure that California investors businesses have the necessary information and protections they need in the marketplace (AB 1995 & AB 2873). Within the week, two other reform measures will be voted on by the state Assembly in what is expected to be an intense effort to stop the bills before they are passed onto the Senate.

"When the Supreme Court said that auditors are 'public watchdogs' it meant that they are to work on behalf of investors and the public interest. Yet, the California marketplace is plagued by increasing conflict-of-interest problems between auditing firms and their clients, resulting in inaccurate corporate audits, billions of dollars in bad investments and a loss of investor confidence," said Jerry Flanagan, Legislative Advocate for CALPIRG.

Lobbyists for four of the Big 5 accounting firms (Deloite & Touche, KPMG, PriceWaterhouseCooper, Ernst & Young) have mounted an aggressive campaign to stop the reform bill package. The national auditors have encouraged small California auditing firms and individual CPAs to write letters and make phone calls to state legislators in opposition to the measures. However, Arthur Kroeger of the Society of California Accountants, which represents small and mid size accounting firms in California, supported the bill package, saying that such measures will help to return investor confidence.

On Tuesday, May 7 the Assembly Business and Professions Committee approved AB 2970, a bill sponsored by Assembly Member Wayne (D- San Diego) that would require an auditor to wait two years before accepting employment with a publicly traded company for which the auditor performed auditing duties. Accounting reform advocates have raised concerns that conflict-of-interest often arise when an auditor accepts employment with an audit client following, or in the course of, an audit engagement with that client or client affiliate. Such conflicts-of-interest may result in audits that inaccurately represent a company's fiscal health. In turn, inaccurate and misleading audits have resulted in huge financial losses to investors and business.

"Public confidence in the stock markets depends upon reliable accounting and honest and complete reporting of financial risks and results," said Jerry Flanagan.

Even though the Enron matter is still under investigation, a June 2001 SEC settlement order concerning Andersen's auditing of Waste Management, Inc, provides ample explanation of the need to close the revolving door. In this case, Arthur Andersen agreed to settle charges without admitting wrongdoing that it had issued "materially false and misleading audit reports on Waste Management, Inc.'s financial statements for the period 1993 through 1996." Andersen paid record civil penalties of $7 million in the settlement. According to the SEC:

"Andersen regarded Waste Management as a "crown jewel" client. Until 1997, every chief financial officer and chief accounting officer in Waste Management's history as a public company had previously worked as an auditor at Andersen. During the 1990s, approximately 14 former Andersen employees worked for Waste Management, most often in key financial and accounting positions."

When inaccurate audits are identified, companies are required to produce a restatement of their previously audited financial statements. In the mid-70s through the early 80s, there were only a handful of restatements issued annually.

"With 100 million Americans invested in the stock market either directly or through mutual funds, retirement accounts and pension plans, any issue that affects investor confidence or the flow of accurate information in the marketplace jeopardizes consumers, investors and businesses alike," stated Flanagan.

Support for the new state legislation has grown rapidly as key provisions loose momentum in Congress.

"Last week's action by the House of Representatives is indicative of the roadblocks to accounting reform at the Federal level. Although it is being touted as a reform, H.R. 3763 essentially punts necessary accounting reforms back to the Big 5-controlled Securities and Exchange Commission (SEC)," concluded Flanagan.

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