Enron Watchdog: Home

<< back to "Top Reforms Needed" -- 1 -- 2 -- 3 -- 4 -- 5 -- 6 -- 7 -- 8 -- 9 -- 10 >>

Why We Need To Create An Independent Regulatory Oversight Agency For Accounting Industry

Right now, no truly independent agency with the authority, power, or will to enforce penalties against illegal or unethical conduct watches the watchdogs. While the Public Oversight Board was a nominally independent private body that set standards for the industry's self-regulatory schemes, it was never truly independent - its funding came from the American Institute of Certified Public Accountants (AICPA) - the industry's powerful lobby group. According to testimony from a former POB member before the Senate Banking Committee in February, AICPA used its power of the purse to threaten the POB:

"What was often most frustrating was our lack of authority if we found something that we thought should be changed. While the major firms and the AICPA were outwardly cooperative when the SEC demanded action, they were unwilling to change in response to any significant POB initiative. At one point, the AICPA threatened to withhold funding from the POB, but was finally forced by the SEC into an unwilling marriage, documented by a new charter that gave us assurance of being able to pay our staff. No one will really miss us after March 31." -- John H. Biggs, Chairman and CEO, TIAA-CREF 27 Feb 2002, Senate Banking Committee http://banking.senate.gov/02_02hrg/022702/biggs.htm

(In January, the POB had voted itself out of existence as of March 31st, in a spat over the effectiveness of proposals by SEC Chairman Harvey Pitt to replace it.)

Investors need an independent board with the authority and the tools to police the accounting industry. The members of the POB may have considered themselves independent, but their funding was not, and they lacked authority to impose penalties or sanctions in any meaningful way.

According to the Consumer Federation of America, "the real authority over auditors lies with the SEC. It has the power to bar individuals and firms from auditing publicly traded companies. It also has authority to impose potentially substantial fines. In reality, however, the agency does not routinely review how auditors perform their audits, and instead delegates that responsibility to the AICPA and its Public Oversight Board." So, the watchdogs are watching themselves.

Furthermore, according to past agency officials, the SEC only has the resources to tackle the very worst cases of alleged accounting abuse, and it typically settles even those cases without an admission of wrongdoing. It took no action, for example, against a former Arthur Andersen managing partner whom the SEC said had allowed persistent misstatements on Waste Management's financial reports to go uncorrected. Similarly, a PriceWaterhouseCoopers partner ordered by the SEC in 1999 to cease and desist violating securities laws didn't even lose his position as lead partner on the audit in question.

Did AICPA ever take action? Not often, and not much, according to a major Washington Post investigation of the accounting industry. According to the Washington Post, AICPA took disciplinary action in fewer than a fifth of the cases in which the SEC imposed sanctions over the past decade. Even when AICPA determined that SEC-sanctioned accountants had committed violations, they closed the vast majority of ethics cases without disciplinary action or public disclosure.

A tough oversight board must have independent funding, independent public members not associated with the industry and the power to impose money penalties and other sanctions, including the authority to remove a license to practice accounting. Its powers should be mandated by Congress, not by the industry.

Further Reading On Auditor Independence And Oversight

Proposed Federal Legislation To Establish Accounting Independence and Oversight

<< back to "Top Reforms Needed" -- 1 -- 2 -- 3 -- 4 -- 5 -- 6 -- 7 -- 8 -- 9 -- 10 >>

EnronWatchdog.org is a project of the state PIRGs.