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Robert Howell does not have a feel for the real world (“Future Shock,” March). I mean the world where: (1) companies pay a fortune for Sarbanes-Oxley compliance; (2) formerly helpful, team-playing independent accountants have become adversaries; (3) large, private companies, instead of going public and growing (thus hiring more people), choose to remain private; and (4) we have criminalized many reasonably motivated “judgment calls,” instead favoring safe, conservative, close-to-the-vest decisions.
Does he really think that this will keep the next generation of scammers from coming along? Wall Street charlatans have always found their way into the public’s pockets. Sad, but true. The new law was a knee-jerk reaction.
Robert G. Breier
Coral Gables, Florida
Robert Howell replies:
There is no question that the Section 404 implementation process has been very expensive. So, too, were the huge losses experienced by the shareholders and employees of the “poster children” of corporate abuse and the overall loss of public confidence in the capital markets. Two-thousand and four was a start-up year. Most start-ups involve additional expense. I would expect costs to decline, in time, as processes for control get embedded in the firms.
There has certainly been a shift in the relationship between client firms’ executives and audit firms’ partners and staff. So, too, has there been a significant shift in this relationship over the past 20 years, and not terribly complimentary to the auditors, from one where the auditors had the last say to one where the auditors, in many cases, were too compliant. The pendulum may have swung back too far, but it sure had to swing back.
There may be some companies for which staying or going private is appropriate. Most large companies, needing access to the capital markets, will find a way to fulfill the requirements of Sarbox both effectively and efficiently, such that their costs of compliance will be minimized. If Sarbox serves as a hurdle for young, immature companies going public too early, as we often saw at the height of the dot-com bubble, I might argue that this is an additional unintended favorable consequence of the act.
I do not believe judgment calls have been criminalized. Financial statements are founded on a plethora of judgments, supported by historical data, reasonable future estimates, and GAAP. Over the past 10 to 15 years we have seen what might be described as “judgment creep,” often driven by the desire to achieve a quarterly estimate of earnings. Crossing the line, resulting in fraudulent financial statements, warrants stiff penalties.
Nor do I believe that all abuses will be avoided, for all times. I do believe that Sarbox will cause executives and their companies to carefully consider the accounting practices they rely on and the financial reports and other statements they release. Those are good consequences of the act.
Illegal and Irresponsible
In your article “A Love-Hate Relationship” (Spotlight, March), you stated: “In November 2003, the Department of Justice sent a letter to the Fed urging the bank regulator to exempt all large corporate relationships from antitying regulations on the grounds that banks’ market power is insufficient for tying to be anticompetitive.”
I wrote the Anti-Tying Provision [of the 1970 Bank Holding Company Act] when I served as a young lawyer with the Senate Banking Committee. The Antitrust Division’s comments to the Fed contained recommendations that are illegal and irresponsible. If the Fed were to adopt those recommendations, in whole or in part, the Fed’s actions would be struck down by one or more courts as being illegal and exceeding its powers.
I am a registered Independent, but voted for both Bushes and for Ronald Reagan. However, the [DoJ] Antitrust Division’s comments were some of the worst I’ve seen since my days on Capitol Hill. Whoever wrote them should be fired.
Timothy D. Naegele
Attorney at Law
Timothy D. Naegele & Associates
Los Angeles and Washington, D.C.
Opinions on Pittsburgh
I read with great interest your article “Big City Blues” (February), as it pertains to my city—Pittsburgh.
I wish the writer had taken the time to discuss the story with me. I read with incredulity the comment of Pittsburgh’s outgoing finance director, Ellen McLean, asserting that the financial woes of the city were primarily due to unions and the city council. McLean states, “During every primary, the city council just showers the unions with everything they’ve been complaining about.”
That is sheer nonsense. The city council does not directly or indirectly bargain with city unions—McLean’s office does. Additionally, the mayor’s office is under a federal grand-jury investigation for doing just that—providing an 8.63 percent pay raise and other costly benefits to the firefighters’ union during his primary race in 2001. Mayor Murphy received the union’s key endorsements and won by a razor-thin, 350-vote margin.
Ms. McLean’s parting shot was the hallmark of this administration’s credo for the past 11 years: ‘It’s not my fault; I’m only in charge of the overall management of the city.” The administration doubled the city’s debt ($50 million to $1.2 billion) and pursued a corporate subsidy program masquerading as economic development.
You may wish to send the writer back for a closer look at the record. It would not match up at all with the representations of Ms. McLean.
Member of Council
City of Pittsburgh
Going with the Bad Boy
I found your article “Thumbscrew, 2.0” (Techwatch, February) very interesting. After experiences with a market-leading CRM vendor at a former employer, I decided that Microsoft, the perceived “bad boy” in the marketplace, might actually be one of the better vendors. My favorite example is the concept of a company having serious data structure flaws that remain in its 10th year of sales, the apparent reason being that as the symptoms appear, their customers will be forced to call in their consultants to fix the data issues that have resulted. Why pay your employees to fix a system when it would decrease future revenues?
I am starting a software company, and have rejected both user license fees and a dependence on consulting revenues in our financial model. (I suppose it’s only possible because we are privately held!)
Due to a reporting error, the April cover story about contracting industries (“The Turning Point“) failed to explain that Blockbuster Inc. launched a highly publicized trial run of a video-on-demand joint venture with Enron Broadband Services, a division of Enron Corp., in July 2000. The trial was suspended after eight months, and Blockbuster has not reentered the VOD marketplace since that time. CFO regrets the error.