Congress Must Pass Strong Checks on Corporate Malfeasance

Chatsworth Community News
August 2002

CONGRESS MUST PASS STRONG CHECKS ON CORPORATE MALFEASANCE
by Congressman Brad Sherman

When President Bush addressed Wall Street and the nation about corporate accountability, we heard big rhetoric. What we need is legislation, not a lecture. We need policy, not a pep talk. However, my fear is that little will be done; and then, with audacity that would make Arthur Andersen's David Duncan blush, the Congress will announce that the problem is solved.

There are many ideas on how to strengthen the system. Some of these ideas have been considered, while others have not. They all deserve additional attention.

For starters, the top one thousand companies should be audited every six months instead of every year. This would only modestly increase audit cost. The world operates more than twice as fast as it did when the 1933 Securities Act was adopted, and investors should not have to wait for over a year for audited financial statements. Of course we need audits we can rely on.

By only one vote, the House Financial Services Committee rejected a measure instructing the Securities and Exchange Commission (SEC) to review the filings of the top one thousand companies, and demand clarification where necessary. The SEC had not read Enron's financial statements for four years allowing them to cover up with unintelligible footnotes.

WorldCom is another client of Arthur Andersen, and this is not a coincidence. Arthur Andersen was the only one of the major accounting firms in which total authority to sign an audit opinion was vested in the engagement partner - the person responsible for golfing with the client, and keeping the client happy, and getting the audit bill paid. At Arthur Andersen, the technical quality review department operated on a "don't ask, don't tell" basis - where they only heard those questions that the engagement partner felt like asking - and the engagement partner was free to ignore the answers.

Well over a month ago, I put forward an amendment that would ban the "Arthur Andersen" structure of an auditing firm. The measure would have required the technical review department to sign off on any audit of a publicly traded corporation. While that amendment was defeated on pretty much a party-line vote, I am going to continue to push my proposals and others that would bring meaningful reform.