This morning, the Committee will conduct the eighth in a series of hearings on accounting and investor protection issues raised by the problems of Enron Corp. and other public companies. Today’s hearing will focus on issues raised by the oversight and regulation of the accounting profession, corporate governance and stock analyst conflicts of interest.
These issues are hardly obscure, and they predate the Enron collapse. Nearly twenty years ago the Supreme Court observed that "By certifying the public reports that collectively depict a corporation's financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public. This ‘public watchdog’ function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust." United States v. Arthur Young & Co., 465 U.S. 805 (1984).
The charter of the Public Oversight Board (POB) provides the following: "The POB shall oversee the audit and independence standard-setting, peer review, quality control and monitoring bodies relating to . . . [the SEC Practice Section], which is composed of accounting firms that audit the financial statements of some 17,000 public corporations that file reports with the SEC] member firms, in order to represent the public interest on all matters that may affect public confidence in the integrity, reliability and credibility of the audit process."
There is a sobering comparison to be made between that charter statement and the Resolution of Dissolution that the POB approved unanimously on January 20, 2002, after voting to disband. The Resolution reads, in part: "After due consideration of the importance of effective self-regulation . . . but with recognition of the obstacles to achieving this goal which have been encountered in recent years, and given the proposal of the SEC in consultation with the AICPA and the SEC Practice Section Executive Committee, without input from the Public Oversight Board, to reorganize the self-regulatory structure, the POB intends to terminate its existence."
We look forward to learning about the experiences of the POB with the major accounting firms and the SEC as well as to hearing the recommendations of the POB members regarding the regulation of accountants.
In previous hearings, several witnesses testified about corporate governance issues. For example, former SEC Chairman Rod Hills testified that "Congress may wish also to require that . . . Audit committees be solely responsible for the retention of accounting firms and be responsible for the fees paid them." In 1999, the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees put forth ten recommendations to strengthen the independence, improve operations and enhance accountability of the audit committee. The Committee will hear testimony from the Co-Chairman of this Committee.
Finally, our third area of inquiry today is the potential for conflicts of interest in the advice that stock analysts give to investors. In many cases, an analyst may recommend buying stocks that an investors would otherwise not have been aware of, and the recommendation carries significant weight. If investors are to have confidence in the integrity of the markets, they must have confidence that recommendations are not colored by conflicts of interest. And analysts must have confidence that they can make recommendations, including negative recommendations when those are called for, in good faith and on the basis of their best professional judgement, without facing retaliatory actions from their employers. Unfortunately, in recent years there have been growing concerns, expressed in the press, that in some instances conflicts of interest do in fact influence the recommendations that analysts give. Prior witnesses have testified to this Committee that those conflicts should be reduced.
I would like to recognize our first panel of witnesses, Charles A. Bowsher and Aulana L. Peters.
Mr. Bowsher joined the POB in 1997 and has served as its Chairman since 1999. Previously, he served a s Comptroller General of the United States and was with the GAO from 1981-1996. He was a partner at Arthur Andersen & Co., working for that firm from 1971-1981, and was Assistant Secretary of the Navy-Financial Management from 1967-1971. He is a member of the Accounting Hall of Fame.
Ms. Peters is a Member of the POB and a partner in Gibson, Dunn & Crutcher, a law firm she joined in 1973. From 1984 to 1988, Ms. Peters served as a Commissioner of the Securities and Exchange Commission. She has served on the Financial Accounting Standards Advisory Council to the Financial Accounting Standards Board and the Board of Directors for the American Institute of Certified Public Accountants.
They are joined at the table by Alan B. Levenson, counsel to the POB, who is a senior partner at the firm of Fulbright & Jaworski and former Director of the SEC’s Division of Corporation Finance.
I would like to recognize our second panel of witnesses:
L. William Seidman, the President and CEO, Cerebyte, Inc. and Chief Commentator, CNBC-TV. Mr. Seidman served as Chairman of the Federal Deposit Insurance Corporation from 1985-1991 and as Chairman of the Resolution Trust Corporation. He was Chairman of the accounting firm of Seidman & Seidman
John C. Whitehead is Chairman of AEA Investors, Inc. He served as Deputy Secretary of State from 1985-1989. He was Co-Chairman and Senior Partner, Goldman Sachs & Co, where he worked from 1947-1984. He is a Former Director and Chairman of the Securities Industry Association and a Former Director of the New York Stock Exchange. He Co-Chaired the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees.
Michael Mayo is Managing Director, Prudential Securities, Inc. and Head of Financial Services Research Group. Previously, from 1997 - 2001, he directed the bank research group at Credit Suisse First Boston. Prior to that, he served in a similar capacity with Lehman Brothers for three years and with UBS Securities for two years. He has been among the top 3 Institutional Investor "All Star" stock analysts for the past five years.
Thank you for being with us today. We look forward to your testimony.