The top executive at Big Five accounting firm Deloitte & Touche has called for a number of reforms to improve the capital markets and the auditing profession.
“Today, we stand at a crossroads for the U.S. capital markets. As a result of events at Enron and Andersen, we have what we hope is a once-in-a-lifetime opportunity for comprehensive, lasting reform,” said James E. Copeland Jr., the chief executive of Deloitte & Touche and its global organization, Deloitte Touche Tohmatsu, speaking Monday to the Detroit Economic Club.
Noting there must be a “higher standard of accountability,” Copeland called for the creation of an organization similar to the National Transportation Safety Board to investigate business failures.
The NTSB and the process it follows help restore public confidence, said Copeland in his speech. “After an airline disaster, for example, the NTSB conducts an exhaustive, independent investigation to piece together the events that led to catastrophe,” he explained. “From its analysis, the NTSB recommends changes in policies and procedures to help prevent another disaster from happening for the same reasons.”
Following the NTSB model, Copeland believes President Bush should create—by executive order if need be—a similar board to investigate business and financial failures.
Under Copeland’s plan, the board’s members would represent a number of critical federal regulatory agencies, including the Securities and Exchange Commission, the Comptroller of the Currency, and the Federal Reserve Bank. “A relatively small permanent staff would have deep expertise in a range of competencies,” he added. Investigative teams would be drawn on an ad hoc basis from private industry. The size of the teams would depend on the scope and complexity of the financial failure.
“The board should have the power to demand cooperation with investigations,” said Copeland. “It could levy monetary penalties for failure to do so. If criminal activity were suspected, the board would turn control of the criminal aspects of the investigation over to the Justice Department. Professional misbehavior could be referred to disciplinary bodies.”
Like the NTSB, this financial oversight board would release its findings to the public. It would also make recommendations to Congress and regulators for changes when necessary.
“Compared to the uncoordinated, costly, and often counterproductive manner in which financial failures are currently investigated, an NTSB-like organization would represent a real step toward rebuilding the confidence in our capital markets,” added Copeland.
Of course, it’s not clear if such a board would actually prevent future financial failures—or merely explain current ones. Even Copeland conceded no board could prevent all corporate meltdowns. “While all of us carefully consider each other’s well-intended recommendations to reform our capital-market system in general and my own profession in particular, we should remember one simple fact: when all of the systems and controls and regulations and laws have been put in place, success or failure will boil down to one thing—personal integrity, or the lack of it.”
Nevertheless, Copeland does support the creation of a new accounting regulatory body, dominated by people from outside the profession. That board would oversee the profession, perform quality reviews of the practices of public-company auditors, and discipline auditors and their firms when appropriate. Last week, the House of Representatives passed a bill that would create such an entity.