How personally liable do you hold the CEOs–and especially the CFOs–for the fraudulent activity that we’ve seen?
It can’t happen without the CFO. But what I find hysterical is the idea that the CEO didn’t know. The notion that Bernie Ebbers [CEO of WorldCom] didn’t know what [CFO Scott] Sullivan was doing is laughable. What strikes me as unfair, though, is that CFOs get so little out of it compared with CEOs. They are paid less, their options are less lucrative, and, frankly, they don’t sell [stock] the way that a CEO sells. In fact, when I investigate a situation, if I find significant sales by a CFO, that is a tremendous red flag.
How widespread do you think these scandals will get?
It really can’t get worse than this, can it? I love financial history, and often talk about 1929. And while I don’t want to predict anything like that, the rot then went on for years and years, and ultimately resulted in a buyer’s strike in terms of equities.
Do you believe the scandals and restatements will continue to be sector-based?
We just happen to be highly focused on energy and telecom at the moment. Watch next for the bad loans at the banks. Consumers and some companies are not going to be able to pay their debts. So we’ll see a cycle where the banks’ financial statements fall apart. What about pension accounting? How many companies are doing their pension accounting based on 8 or 9 percent annual returns? The chickens are going to come home to roost on that one someday, and companies will have to put tons of money into those plans, meaning they will have overstated their earnings for many years before that. Dishonest accounting cuts across all business sectors in time.
What do you think are the worst accounting abuses?
For the most part, we’ve focused on bogus revenue recognition. But I think companies also mess with the amortization and depreciation rates of their assets, and there’s no question that the mergers-and-acquisitions boom gave companies an opportunity to bury all kinds of things in one-time charges.
Are there any easy fixes?
If the SEC really wanted to clean up accounting, they’d make companies, in their quarterly results, reveal the five largest reserve adjustments that they made.
What’s the status of the Enron case?
The case is tied up in a procedural phase whereby the consolidated complaint [is reviewed]. The defendants have all come forward and said the complaint isn’t specific enough or the complaint is too long or one thing or another. So the judge will have to decide if it is sufficient, and she’ll do that very shortly.
Those defendants–Jeff Skilling, Andy Fastow, et al.–claim they have protections under the 1995 Private Securities Litigation Reform Act.
Absolutely. There’s no question that the 1995 act made it much more difficult for victims of securities fraud to adequately plead their case. It provides all kinds of protections against joint and several liability. Its safe-harbor provision provides immunity from false forecasts under some circumstances. And the defendants in Enron are invoking every single one of those protections. I don’t think they will be successful. But a lot of people have been able to hide behind the ’95 act, including Bernie Ebbers and WorldCom in a case we filed in 2001 that was thrown out in March. Had that case been allowed to go forward, I don’t think the scandal would have been nearly as bad.