Opening Statements of Committee Members
Opening Statement of Chairman Paul S. Sarbanes (D-MD)
Hearing on "Accounting and Investor Protection Issues Raised
by Enron and Other Public Companies:
Oversight of the Accounting Profession, Audit Quality and Independence,
and Formulation of Accounting Principles."
10:00 a.m., Wednesday, March 6, 2002 - Dirksen 538
Today, the Committee continues its examination of auditing standards and independence,
corporate financial reporting, and investor protection. As almost all of our previous witnesses
have pointed out, Enron is but one example of underlying weaknesses within our system. As the
Wall Street Journal noted yesterday:
"It's hard to deny that the boom of the 1990s produced some faster and looser behavior
by business. John Goble, the former head of Vanguard, recently pointed out that U.S.
companies restated their earnings 607 times in the past three years, more than in the entire
previous decade. Granted a company's income statement isn't everything, but it ought to
be more than fiction."(1)
Accounting abuses and lagging standard-setting are not new problems. Neither are
attempts to solve those problems through private studies.
- The debate about purchase vs. pooling for business combinations in the 1960s led
ultimately to creation of the Financial Accounting Foundation - Financial
Accounting Standards Board structure, after a report written by a group headed by
former SEC Commissioner Francis Wheat.
- the Commission on Auditors' Responsibilities, headed by former SEC Chairman
Manny Cohen, was created in 1977, after the Penn Central failure and the Equity
Funding and foreign bribery scandals of the 1970s. Its job - in words that are still
appropriate - was to:
"develop recommendations regarding the appropriate
responsibilities of independent auditors ... [and] consider whether a
gap may exist between what the public expects or needs and what
auditors can and should reasonably expect to accomplish."
- The failures at Penn Square Bank, Continental Illinois, Drysdale
Government Securities, and Baldwin United, among others, in the 1980s
led to creation of a National Commission on Fraudulent Financial
Practices, led by former SEC Commissioner James Treadway, in 1986,
amid industry claims of "a crisis in public confidence."
- An SEC request that the Public Oversight Board "examine whether recent
changes in the audit process serve and protect the interests of investors"
led to creation in 1998 of the Panel on Audit Effectiveness, led by Shaun
O'Malley, former Chair of Price Waterhouse. The "O' Malley Report"
was issued in August 2000.
Unfortunately, only a fraction of the recommendations made by the Cohen, Treadway,
and O'Malley reports have been adopted.
This morning's witnesses are all veterans of or commentators on one or more of the efforts I have just described. They bring the perspective of their long experience to our deliberations.
On our first panel,
- Lee Seidler was the Deputy Chairman of and accepted the responsibility for
leading the Cohen Commission after Manny Cohen's death.
- Shaun O'Malley, as I have just mentioned, led the most recent study of audit
- Arthur Wyatt produced "A Critical Study of Accounting for Business
Combinations," that and his conclusions started the reaction that produced the
On our second panel:
- Abraham Briloff, the Emanuel Saxe Distinguished Professor Emeritus at Baruch
College of the City University of New York, is a long-time student of accounting
- Bevis Longstreth was a member of the O'Malley Panel and a member from 1981-84 of the Securities and Exchange Commission (to which he was twice appointed
by President Reagan).
I look forward to hearing our witnesses.
1. "Andersen Agonistes," WSJ p. A-16, March 5, 2002.