Congress deserves high marks for its unusually speedy passage of legislation aimed at cleaning up corporate governance and accounting practices. But it is time for many members of Congress, Democrats and Republicans alike, to acknowledge their own culpability in actively encouraging fraudulent and unethical behavior in Corporate America. The televised finger-wagging at CEOs comes from legislators who were only too willing to carry water for these chief executives just a few years ago. Members of Congress who were receiving hefty campaign contributions from accounting, finance, high tech, and other industries defanged attempts to curb the kind of egregious behavior that led directly to the Enron Corp. (ENRNQ) disaster. Congress should be held accountable for its own conflicts of interest and bad behavior.
In a new book, former Securities & Exchange Commissioner Arthur Levitt, does just that. Take on Wall Street: What Wall Street and Corporate America Don't Want You to Know. What You Can Do to Fight Back (excerpted in this issue) is a history of how Congress betrayed investors in the 1990s. Levitt, a lifelong Democrat, describes how Democratic Senator and Vice-Presidential candidate Joe Lieberman led the charge to block the SEC from enforcing an accounting rule to expense stock options. The accounting profession's own self-policing organization, the independent Financial Accounting Standards Board, had recommended it unanimously in 1993. Lieberman, together with Republican and New Democrat legislators, passed a Senate resolution saying the FASB stock option proposal would have "grave consequences for America's entrepreneurs." It stopped the SEC from enforcing the ruling, and FASB backed down, requiring only the disclosure of stock option grants in the footnotes of income statements. Reasonable people can disagree on the merits of expensing stock options. But the bully-boy tactics by Congress to block the SEC and the accounting profession's own independent board is unconscionable.
Congress is also responsible for encouraging the same conflicts of interest in the accounting industry that it recently outlawed under the Oxley-Sarbanes bill. In 1997, it blocked an attempt by the SEC and the AICPA (American Institute of Certified Public Accountants) to pass a rule banning auditors from doing most kinds of lucrative consulting work for the same companies they audited. Some 46 members of Congress from both parties sent letters to Levitt opposing the measure. Senate Banking Committee Chairman Phil Gramm warned Levitt that Congress was preparing an appropriations rider to stop the SEC from enforcing the rule. Enron Chairman Kenneth L. Lay also sent Levitt a letter saying that Enron's use of Andersen as both internal and external auditor was "valuable to the investing publicgiven the risks and complexities of Enron's business." Indeed. Of course, auditing its own work proved disastrous for Andersen, Enron, and investors.
For much of the '90s, Congress undermined the checks and balances that are so crucial to the well-being of the nation's economy. It sabotaged the self-policing activities of the accounting industry and blocked reforms that might have prevented the current wave of corporate scandal. It curbed the SEC's ability to do its job. It did favors for those who paid for them through campaign contributions. It was a bipartisan effort, and it shamed the institution. Congress is attempting to redeem itself, but redemption requires taking responsibility for past mistakes. On that, Congress is silent.