Chairman Sarbanes, thank you for holding today's hearing concerning the accounting and investor protection issues raised by Enron and other public companies. I would also like to thank the distinguished panel of former SEC chairmen for agreeing to discuss this matter with us today.
The Enron bankruptcy is a national scandal, one with terrible human and financial cost. We in Congress are faced with the task of figuring out what went wrong, whether current laws are adequate, and the role that greater enforcement of existing laws might play. The collapse of such a large, publicly-traded corporation raises a host of issues related to auditing, financial reporting, pension fund management, corporate governance, and federal regulation. We must explore every avenue to ensure that all Americans, big and small investors alike, have the information and the confidence they need to invest in our economy.
The panel before us today is particularly well qualified to speak about what role the SEC could or should play to ensure that more situations like Enron do not occur. In an ideal world, I would hope that Enron was an isolated incident. However, a number of other similar situations appear to be cropping up daily. And, I have a real concern that these problems may indicate system-wide problems related to the accounting industry.
Just last week, this Committee heard testimony from federal banking investigators on the failure of Superior Bank of Hinsdale, Illinois, a failure that may cost the FDIC in the neighborhood of $500 million. At the heart of the institution's failure was inaccurate valuation of residual interests in securitizations. Superior's auditor, a nationally recognized accounting firm, failed to unearth obvious problems that ultimately led to the failure of the institution.
Another recent high profile bankruptcy involved the telecommunications firm Global Crossing. Last Friday, it was reported that the FBI would investigate the firm's accounting practices.
Clearly, accounting irregularities can have far reaching effects. Consider last week's massive sell-off in the stock market. The sole reason cited by analysts for this sell-off was investor concern over accounting practices. And no wonder - our markets function only when investors have the information they need to evaluate the health of a business. And if the disclosures are incomplete or incorrect, investors, even the most sophisticated, can't make good decisions.
Aside from accounting issues, another area of special concern to me is the conduct of securities analysts and their impact on the market. In the case of Enron, we saw analysts turn a blind eye to emerging problems, possibly due to conflicts of interest because of affiliations with investment banking operations. Clearly, the Chinese wall that should have provided an environment of independence for analysts did not function in many instances. Incredibly, some analysts continue to rate Enron a "strong buy."
[The issues we are talking about can often have far reaching and sometimes unanticipated consequences. Take, for example, Enron's effect on the surety bond market, which pushed K-Mart into bankruptcy. Enron utilized surety bonds to insure the proper execution of energy and other types of forward contracts. When Enron failed, many of the companies involved in issuing these types of bonds got out of the market, causing remaining issuers to raise their fees significantly. This, in turn, put pressure on companies like K-Mart, which use surety bonds to insure large inventory orders. The unraveling of the surety bond market was the last straw for K-mart, forcing them into bankruptcy.]
The SEC must be aggressive in enforcing our securities laws and in keeping our markets the most transparent in the world. I am deeply concerned that the SEC has not been given the resources to maintain a sufficient and stable human resource base to fulfill its mission. Over 1,000 SEC employees -- more than one-third of the agency's staff -- has quit over the past three years, largely due to the low pay scale at the SEC compared to other financial regulators and the private sector. As any businessperson knows, that kind of turnover has a clear impact on any institution's ability to operate effectively.
Just before Christmas, the Senate passed H.R. 1088, the Investor and Capital Markets Fee Relief Act, which President Bush signed into law on January 16. In addition to reducing securities transaction and registration fees, which essentially amounted to an unfair tax on American investors and businesses, the law authorized the SEC to bring the pay of its employees in line with the higher pay schedules of other federal financial regulators.
I was profoundly disappointed to find out that the President's budget failed to include additional amounts for SEC salaries for fiscal 2003. It is no overstatement to say that a strong SEC is an integral part of our Homeland Security. And money should be made available to ensure that the guardians of our markets are not paid less than those minding our banks. It is my hope that we can engage in a dialogue with the Executive branch to address the pay parity issue and create an environment at the SEC that enables employees to contribute to the economic security of our nation.
In closing, I would like to note that Mr. Levitt was ahead of his time by attempting to address many of these issues during his SEC tenure. At the time, I supported Mr. Levitt's proposal to create strict guidelines governing the consulting role of a company's auditors, and I am pleased that the private sector and my colleagues are coming to understand the wisdom of that proposal. I also understand that a study was initiated to determine whether the peer review process employed by auditors was appropriate and effective. Clearly, though, more needs to be done.
I thank the witnesses for their extensive and thoughtful written testimony, and I once again thank you, Mr. Chairman, for scheduling this hearing.