Killing Reform behind Closed Doors
Behind closed doors, reform legislation passed by Congress to clean up the mess in accounting, business, and politics is being undermined by lobbyists, legislators, and even regulators. The damage they are doing goes far beyond the economy. It is hurting American democracy and the belief that people can effect change in their society. It particularly reinforces the cynicism of the young. The best young people may decide to avoid business, afraid they wouldn't be able to retain their integrity in a world of aggressive accounting and conflict of interest. That would be a terrible loss. The current wave of reform can mitigate that by recommitting Corporate America to the truthfulness of financial numbers, the credibility of managers, and the basic honesty of the economic system as a whole. Politicians and lobbyists who collaborate in the back-door gutting of this reform will make America's road back to prosperity a long one.
Who are the culprits? Alas, accountants and their congressional water-carriers are the worst. Even a year after accounting scandals destroyed their professional reputation, many accountants still resist needed reform. Through their longtime supporter, GOP Representative Michael G. Oxley, chairman of the House Financial Services Committee, they are blocking efforts by the Securities & Exchange Commission to appoint a tough reformer, John H. Biggs, to head a new independent auditing oversight board. Oxley lent his name to the Sarbanes-Oxley Act of 2002 that set up the board in the first place, but now, under lobbyist pressure, he is trying to water down reform by undermining Biggs. Biggs is unacceptable to the accountants because he favors rotating corporate auditing firms every five to 10 years and separating consulting and auditing functions--two decent reforms that would curb obvious conflicts of interest. He deserves to be appointed.
But SEC Chairman Harvey L. Pitt is botching the job. Once a reluctant reformer, Pitt is increasingly an incompetent one. He first backed Biggs, getting both Federal Reserve Chairman Alan Greenspan and Treasury Secretary Paul H. O'Neill to approve his appointment. But then, under pressure, Pitt backed away from Biggs, protesting loudly that he never actually promised him the job. A shameful performance. Pitt has also offended his own staff and other SEC commissioners. He continues to meet privately with CEOs of companies under SEC investigation. This is no way to run the country's most important regulatory agency. New York State Attorney General Eliot Spitzer, with a fraction of the SEC's staff, has done as much to promote reform as Pitt.
But even the SEC looks good compared with the accounting industry's rule-maker, the Financial Accounting Standards Board. Even after the Enron debacle, FASB is permitting companies and banks to vote on accounting rules that directly affect their bottom lines. Just recently, a J.P. Morgan Chase & Co. executive cast the deciding vote that permitted firms that trade energy and financial contracts--including J.P. Morgan--to claim immediate profits based on speculative values they assign to their own deals using abstract mathematical models. This is a clear conflict of interest. What is the FASB thinking?
Congress is setting a bad example of reform. After years of public pressure to clean up campaign finance, Congress passed the McCain-Feingold Act that limited contributions. Both parties are now quietly vitiating the intent of that bill by opening huge loopholes in its implementation. How can politicians be entrusted to clean up Corporate America when they won't clean up their own house?
Backtracking on reform breeds cynicism in both young and old. We are now watching business and political leaders go through the motions of publicly responding to demands for reform only to subvert them later when no one is watching. America can, and must, do better.
Read a Letter to the Editor about this story.