The new Public Company Accounting Oversight Board created by July’s Sarbanes-Oxley Act may have its five members a month ahead of the October 28 deadline mandated by the corporate accountability law, according to Bloomberg News.
Last week, Treasury Secretary Paul O’Neill said in Oregon that he had met with Federal Reserve chairman Alan Greenspan and Securities and Exchange Commission chairman Harvey Pitt in early August, and the trio had agreed to name the five members by late September.
The SEC has asked that names of board candidates be submitted to chief accountant Robert Herdman by September 2, Bloomberg reported. Once the board is selected, it will have another nine months to hire staff. Accounting firms will then have six months to register. That puts the board on course to be up and running by early 2004.
But now that the question of “when?” has largely been answered, the next question is “who?” Dow Jones Business News reports that none other than former Fed chair Paul Volcker is one of the leading candidates to chair the new board. Despite his unsuccessful attempt to save Arthur Andersen earlier this year, Volcker’s star has hardly dimmed, and he remains one of the most widely respected voices in the financial-services sector.
Dow Jones said the other names that are being batted about include John Bogle, the retired founder of the mutual fund giant Vanguard Inc.; John Biggs, chairman of the giant teachers’ pension fund, TIAA-CREF, and a former member of the defunct Public Oversight Board; and Mary Schapiro, vice chairman of the National Association of Securities Dealers.
Bloomberg reported that the board will set audit, quality control, ethics, and independence standards for preparing audits, and will inspect, investigate, and discipline firms and their accountants. The five members must serve on the board full-time and can’t be paid by an accounting firm except for payments from a retirement plan.
How to Avoid Another Enron
At least one of the Final Four accounting firms is not waiting around for the Public Company Accounting Oversight Board to get its house in order.
Deloitte & Touche chief executive officer James E. Copeland Jr., in a speech Friday before The City Club of Cleveland, outlined his vision for the future of the accounting profession in particular and the corporate world in general.
Copeland said: “All leaders in the capital markets have a responsibility to create a positive expectation—an expectation of ethical and technical excellence—within their organizations. Our profession and our firm must continually consider new ways that we can better protect the public interest. When you see the pain associated with any audit failure, it’s clear we must do better—and we will.”
Copeland also unveiled several Deloitte initiatives to build on internal practices that engender high professional standards, and reiterated his call for the creation of a National Financial Review Board—an independent body to probe the causes of corporate failures.
The first measure is the deployment of Deloitte corporate-compliance and ethics-services professionals to perform an extensive self-examination of the firm. Deloitte will also apply the Sarbanes-Oxley Act’s five-year rotation policy to all audit partners responsible for auditing major international subsidiaries.
In an interview with Dow Jones Business News following his speech, Copeland objected to the act’s call for Congress to study the implications of requiring companies to rotate their auditors. But he declined to answer questions about Deloitte’s auditing work for Adelphia Communications Corp., which filed for bankruptcy in June following the revelation of improper accounting practices at the Pennsylvania-based cable company.
CFO Certification Countdown
All but a handful of the CFOs and CEOs required to certify their financial statements by August 14 appear to have done so on time. The companies that failed to submit their certifications or had their certifications rejected by the SEC were the usual suspects: the scandal-ridden Enron Corp., WorldCom Inc., and Adelphia Communications Corp.
Dow Jones Business News said that the SEC also continued to withhold judgment on a dozen or so companies that filed certifications last week, including AOL Time Warner, Bristol-Myers Squibb, Cendant, Mirant, Nicor, and Reliant Energy. All of these companies have been the subject of recent SEC inquiries.
Dow Jones reported that the SEC’s withholding of approval for those companies suggests the agency is taking a hard look before approving their certifications, a process that could go on for some time.
The hardball stance also seems to be behind the agency’s decision to hold off on approving the certifications from Alaska Air Group’s CFO and CEO. The Seattle-based parent of Alaska Airlines announced several accounting-policy changes in July, partly as a result of dropping Arthur Andersen LLP as its auditor, Dow Jones reported. As a result of the changes, company executives said they would be restating results, producing “slightly lower” earnings for the first two quarters of 2001 but “modestly better” results for the quarter ended June 30 this year.
While Alaska Air Group certified its results, except for the items underlying the restatement, last week, the agency put the carrier’s certification in the same pile with Enron and WorldCom, which on the SEC Web site is the “All Others” column.
But late Friday afternoon, the company issued a prepared statement that suggested that management is dissatisfied with the SEC’s reluctance to OK the certification statements. “Top officers of Alaska Air Group have complied with Securities and Exchange Commission requirements to certify the company’s past financial results,” the statement said.
The Germans Want an Exemption
Some of Germany’s industrial giants whose shares trade in U.S. markets, including DaimlerChrysler AG and Siemens AG, have written to the SEC asking that their firms not be required to comply with the new certification rule.
A spokesman for the German industry association, BDI, told Bloomberg News: “Of course the Americans are justified in introducing new stock exchange standards. But they shouldn’t meddle in the internal workings of companies that aren’t based in the U.S.”
One of the biggest complaints German executives have concerns the differences between the single board of directors used by most U.S. companies and the two-pronged corporate-governance structure used by German firms, which consists of a management board and a supervisory board.
The SEC also now requires that all members of the audit committee be independent members of the board. But this provision may run afoul of German laws that call for supervisory boards to include representatives from labor unions.
While the German private sector may be dissatisfied with the new Sarbanes-Oxley Act and the flood of new dictates issuing forth from the SEC, government officials in Germany would welcome a financial-statement certification rule enacted in their country.
Juergen Kromphardt, a member of the panel of economic advisers, told Bloomberg News that “a clear rule would be desirable, if not overdue, to remind CEOs of their responsibility.”
Tyco Board Members May Get Tossed
FT.com reported that several directors of Tyco International Ltd. want most board members to quit to help restore investor confidence in the troubled conglomerate.
The housecleaning is the brainchild of Lord Ashcroft, the British entrepreneur and Tyco director. FT.com reported that Ashcroft proposed last week that he and 8 other members of the 11-member board resign. The only exceptions would be Edward Breen, who became chief executive three weeks ago, and John Krol, former head of DuPont, who Breen appointed to the board earlier this month.
According to FT.com, other directors favor the plan, although some board members are opposed, claiming that they have done nothing wrong. Ashcroft is said to be sympathetic to assertions by fellow directors that they have done nothing wrong, since payments arranged by former CEO Dennis Kozlowski were kept secret deliberately. But he believes members of Tyco’s audit and compensation committees may have become complacent.
Where Are the Enron Indictments?
It’s fast becoming one of the most popular parlor games in legal circles: when will Enron’s infamous troika of Ken Lay, Jeff Skilling, and Andrew Fastow be paraded before TV and newspaper cameras for their “perp walk”? Or will the threesome get off scot-free?
Now the questions have been openly asked by Sen. Byron Dorgan (D-N.Dak.), who chairs the Senate Commerce Subcommittee on Consumer Affairs. In a letter addressed to Attorney General John Ashcroft last Friday, Dorgan asked “why no action has been taken against those who were responsible for the illegal activities at the Houston-based Enron Corporation.”
Dorgan also wrote: “We know the Enron scandal is about document shredding, manipulating financial records, cheating investors, self enrichment of executives, and more. There is already so much information on the public record about wrongdoing in this matter, I hope we can count on there being an aggressive investigation underway that will bring to justice those who have broken the law.”
The senator is hardly the first person to ask this question, and his letter referred indirectly to the speed that prosecutors have employed against other corporate suspects, such as Arthur Andersen, WorldCom, and Adelphia Communications. But as the Wall Street Journal noted recently, the Enron case is far more complex than most of the other accounting scandals. The Associated Press reported on Friday that the Justice Department’s task force has been at work since January preparing its case against Enron.
Still, as long as Lay et al. remain free citizens, the rumor mill is working overtime and speculating that Lay’s longtime financial support of President Bush and Enron’s executives’ close links to Vice President Cheney’s Energy Task Force may be buying them a Get Out of Jail Free Card.
The latest Enron headlines also included an item that can only be fairly described as a new definition of the word chutzpah. Bloomberg News reported that Enron’s former law firm, Vinson & Elkins of Houston, is promoting on its Web site a legal team that is “well-versed” in helping clients choose offshore entities to achieve “off-balance-sheet treatment” of transactions for accounting purposes.
Bloomberg reported that as part of its credentials, the law firm is citing the work it did for Enron, once its largest client, which hid debt in such partnerships. The legal eagles at Vinson & Elkins have already caught heat from members of Congress, who complained in the Enron hearings earlier this year that the lawyers should have disclosed Enron’s questionable use of the offshore partnerships.
Perhaps the partners at Vinson & Elkins haven’t been following the recent news out of Washington. For example, the recent speech by SEC chairman Pitt before the American Bar Association, in which he announced that it’s in the legal profession’s best interests to work with the SEC to remedy deficiencies in the current system.
Vinson & Elkins, for its part, is wholly unapologetic. “We have nothing to lie low about,” Harry Reasoner, the partner who has been lead spokesman about the firm’s ties to Enron, told Bloomberg.
Texas to Andersen: Yer Out!
Of course, life is far from normal for other Enron business partners; namely, Arthur Andersen. In a bit of news that should be filed under the category “Kicking the Dead Armadillo by the Side of the Highway,” the now all-but-defunct accounting firm had its state license revoked by the Texas State Board of Public Accountancy.
According to the Associated Press, K. Michael Conaway, the board’s presiding officer, said, “Although it is tragic that a firm with Andersen’s proud history in Texas should be brought so low, the firm’s actions in the Enron case clearly warrant this result. Any time you have a firm that is so prestigious and that important to a profession that can no longer legally practice in Texas, that is a sad day for everyone involved.”
The AP also reported that the lawyer who represented Andersen in its case before the state board, Richard Forrest, said the Chicago-based accounting and auditing firm was no longer practicing accounting in Texas. The company had agreed to the revocation and a $1,000 fine, the maximum the state board could fine the company.
The Texas regulators said the revocation marks the first time a large national firm’s accounting license has been revoked by any state.
Andersen had told the SEC after the verdict that it would cease auditing public companies by August 31.
Former CFO Faces Eight Years Behind Bars
The sad, final chapter in a tech-company scandal from an earlier era concluded last week when an Oakland, California, jury convicted Steve Allan, former CFO of Media Vision Technology, of five felony counts of fraud. According to The San Jose Mercury News, Allan’s trial was Silicon Valley’s longest-running stock fraud scandal.
Allan will be sentenced on December 6, and he faces eight years in prison. The Mercury News reported that other company executives cut deals with prosecutors and testified against Allan, who was charged with being the mastermind of a scheme that cost investors as much as $100 million.
In his defense, Allan accused the other executives of hatching the scheme and misleading him about the true state of the company’s finances.
On the same day that it reported the Allan verdict, The Mercury News noted in an unrelated story that, because of the two-year-old economic downturn, Silicon Valley’s confidence has been shaken like never before. “Business delegations that once came from countries all over the world, to admire and take notes on the Silicon Valley miracle, don’t come knocking,” the newspaper reported.
What’s worse, even many people who live in or near the region that is generally regarded as the center of the high-tech universe blame executives from computer and Internet companies for misleading them about the riches that could be had from the New Economy.