TCS Daily

Bully, Bully

By Duane D. Freese - March 15, 2002 12:00 AM

To avoid future Enron's , Tech Central Station Host James K. Glassman called on the House Financial Services Committee on Wednesday to "use its bully pulpit to exhort accountants, corporations and pension funds to act responsibly."

But the financial columnist and American Enterprise Institute scholar challenged assumptions underlying provisions in proposed legislation that would "substitute the economic judgment of regulators for that of investors, clients and managers."

Glassman testified at a hearing on H.R. 3763, The Corporate and Auditing Accountability, Responsibility and Transparency Act of 2002 on a panel with Marc E. Lackritz of the Securities Industries Association, Barry C. Melancon of the Securities Industry Association and Ted White of the California Public Employees' Retirement System CalPERS).

Glassman noted that CalPERS failed in its responsibility to fellow market participants when it failed to confront Enron's board or otherwise publicize concerns raised by CalPERS advisors about dubious partnership deals it was being offered by Enron executives.

"Instead, CalPERS continued to profit from dubious partnerships like JEDI (a partnership that returned more than $150 million in profits to the pension fund)," Glassman said.

Republican Christopher Shays of Connecticut, during questioning, picked up on that theme. He asked White why CalPERs officials did not expose the problems with the partnerships.

White said the issue was not his area, but that because CalPERS was an active involved owner, there may have been conflicts in its doing do.

"I suggest that CalPERS was driven by the fact it was making 22 percent and 62 percent on these partnerships," Shays said. CalPERS, he said, became part of the problem when it learned of the possible abuses "and then stayed silent."

In his testimony, White said CalPERS was a "leading advocate of effective corporate governance. We strongly believe as the owners of the corporations in which we invest, shareholders have both the right and the duty to hold corporate boards and managers accountable for their performance."

He also endorsed new rules that would bar accounting firms from doing both audit functions and accounting work and rotate auditors every view years. CalPERS requires rotation of auditors every five years by companies in which it invests.

Glassman, in his testimony, though, said the committee could play a more important role by using "its bully pulpit" to exhort pension funds, such as CalPERS, than by "concocting extensive new laws."

Glassman praised portions of H.R. 3973 as levelheaded, especially when compared with the proposed Comprehensive Investor Protection Act sponsored by the committee's ranking minority member John J. LaFalce.

He endorsed provisions that would provide real-time disclosure of stock sales by officers and directors, require those officers and directors face the same limitations on selling their stock as 401(k) plan participants, and make it illegal for corporate officers to influence auditors to make materially misleading statements.

He would even go further in some areas. For example, rather than two days for disclosing stock sales, he would shorten that provision to one hour.

But he attacked "the enthusiasm" for certain auditor "independence rules" as "misguided," especially the broad bans against accounting firms doing both auditing and consulting work for the same corporate client.

"The main reason that such respected companies as McDonald's, General Motors, DuPont and ExxonMobil use the same firms for both audit and non-audit work is not that this combination provides some kind of nefarious leverage but because a technology revolution has occurred in the infrastructure of American businesses," Glassman told the committee. "A thorough audit requires a thorough knowledge of the information-technology systems of a complex global corporation, and often the auditing firm is in the best position to provide such non-auditing services. Clearly, having one firm do both jobs lowers overall costs, and forcing companies to divide the job is economically inefficient. It will add expenses, lower profits and, inevitably, lower stock prices. That hurts investors; it doesn't help them."

No studies have found the dual work to pose any problem, which is why previous proposals to bar the practice have failed. Besides which, if a company wanted to "bribe" an accounting firm, it could "just pump up the fees for audit work," Glassman said. "Instead of $10 million for a typical large-company audit, why not slip the accountants an extra $5 million?"

Other proposed restrictions pose similar problems. In response to questions, Glassman said he opposes term limits for auditors, much as he does for Congress, because just when an auditor learns to do his job and understands a company's books, they'd be taken off the case.

Indeed, one thing Congress should do is to loosen some current rules. "The answer is not more numbers and legalese but more leeway for auditors and corporate executives to explain the true health of a company. ... Andersen should have been able to tell shareholders, "The books of Enron are consistent with GAAP (Generally Accepted Accounting Principles), but shareholders should be aware of the hundreds of off-balance-sheet entities that carry heavy liabilities," Glassman testified.

And the best thing for investors overall that Congress could do would be to eliminate the double taxation of dividends.

"An investor who sees dividends increasing every year can, properly, have confidence in a company. But dividends are taxed twice - both at the corporate and the personal level - and, mainly as a result, fewer public companies now pay dividends than ever in history and dividends represent a smaller and smaller proportion of total earnings." Glassman argued.
Glassman came under verbal assault from Democratic members of the committee for his position that the market has already exacted a bigger toll on Enron than any law Congress could pass.

Rep. Maxine Waters, D-Calif., who didn't hear Glassman's testimony, told Glassman he "ought to know better" and that "there ought to be meat inspection ... clean water ... separation of big banks and other financial institutions."

"No matter what you say," she said, "We should not allow people to be harmed." Waters then said what happened to Enron is why individuals should never be allowed to invest the money they pay now in Social Security for private accounts. She refused to allow Glassman an opportunity to respond.

But Republican Richard Baker, R-La., speaking next, said that while he favored some reforms, that the American financial markets were still the envy of the world. "And I do not favor locking most workers into a [Social Security system] that produces only a 2 or 3 percent lifetime return," Baker said.


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