July 15,2002

Corporate Accounting Scandals and Oversight

Note: Sen. Chuck Grassley, ranking member of the Committee on Finance, made thefollowing statement about the need for more oversight of corporate accounting and partiesresponsible for recent corporate accounting scandals. He made the statement when offering hisamendment to create a team of oversight auditors. He did not get consent to offer the amendment.

From the Congressional Record, Statement of Sen. Chuck Grassley

on Corporate Scandals and Oversight
Monday, July 15, 2002

Mr. GRASSLEY. Mr. President, I have five amendments I filed: (i) An amendment providingfor a team of oversight auditors, (ii) an amendment providing for prebankruptcy bonuses paid to topexecutives be pulled back into the bankrupt corporation's estate, (iii) an amendment providing theSecurities Exchange Commission with disgorgement remedies, (iv) an amendment providing thatauditors who sell tax shelter products cannot opine on the financial effects of the tax shelter deal;and, (v) last, an amendment providing whistleblower protection to the accountants and others whowant to disclose financial statement misconduct.

I am pleased, in regard to the last amendment I just announced about whistleblowers,Senators LEAHY and HATCH accepted that proposal as part of their amendment which has beenadopted.

I am not going to speak about the other four. I am just going to speak about one of those. Itis the first amendment I put on my list, an amendment providing for a team of oversight auditors.As I said, I congratulate my colleagues, Senators SARBANES and ENZI on their hard workin moving S. 2673 out of Committee and bringing the bill to the floor for further debate. The reformbill is a great step in the right direction for tackling some of the difficult accounting problems ourNation currently faces. Nevertheless, I believe the reform bill isn't quite tough enough on severalissues and should be strengthened further, consequently, the amendment.

In my view, the recent rash of accounting scandals did not result from incompetency or lackof rigorous training of accounting professionals. Neither has the problem lied principally withmisguided auditing standards known as GAAS or ill-considered accounting rules known as GAAP.

The WorldCom debacle, among others, further demonstrated that the problem does not restentirely with a company's external auditors--whose best efforts may not detect financialmisrepresentations if fraud is repeatedly covered up by corporate insiders or contrived to defeatestablished internal controls. Instead, each of the most recent corporate accounting scandals appearto have arisen from egregiously bad behavior of corporate insiders and internal accountants--withvarying degrees of complicity by those companies' external auditors.

Thus, as a matter of principle, I agree with the ``bad apples'' theory being offered by many.However, I believe addressing those bad apples requires additional oversight--and not just of acompany's external accountants but of the internal accounting function itself.

To that end, I further respond to the President's call for increased oversight and would liketo offer an amendment that would strengthen the provisions Sarbanes-Enzi bill by expanding thepowers of the oversight board to require the performance of ``spot audits.'' The underlying bill whichfocuses on monitoring external auditors would be amended to provide additional board oversight ofinternal corporate accounting.

Specifically, my amendment would charge the board with responsibility for conductingoversight audits or ``spot audits'' of public companies. The board would serve in a role analogousto the Internal Revenue Service or the Federal Bank Examiner. The IRS, for example, achievesvoluntary public compliance through review of a very limited number of federal tax returns eachyear. The IRS does not verify each and every tax return. Similarly, the Federal Bank Examinersporadically and randomly audits various banks throughout the country. Such ``spot auditing'' hasbeen an extremely effective oversight tool for the banking industry and one which has resulted inhigher levels of regulatory compliance. In similar fashion, I believe that accountants and corporateAmerica will prepare more carefully their financial statements if exposed to the risk of compliancereview by the board's oversight auditors.

Even in self-regulated form, the accounting industry has long recognized the need for asecond level of review. To that end, 24 years ago the ACIPA established the peer review process bywhich one accounting firm would review audit work of another accounting firm. For example,Deloitte & Touche was for many years the assigned peer reviewer of Arthur Andersen. Industry-wideself-checking on top of industry self-regulation seems ill-conceived and has been widely criticizedfor its effectiveness by lawmakers and the SEC.

Over the past 25 years, a Big Five accounting firm has never issued a qualified report againstanother Big Five accounting firm at the end of any peer review despite the subsequent discovery ofnumerous irregularities including numerous conflicts of interest from stock ownership in auditclients. This recognized need for a second level of review is longstanding although the mechanismoriginally established by the accounting industry seems to have proven largely inadequate.

Some may ask why the board should be granted powers which may be exercised currentlyby the SEC. The answer is simply resources. Providing an effective mechanism for spot checkingthe books of various issuers requires a dedicated audit staff to carry out those purposes. Havingresources dedicated to a regulatory review process would allow the oversight board to take aproactive approach in reviewing for accounting irregularities and take the SEC out of a purelyreactive posture with respect to corporate accounting fraud. The SEC has done a great job ofinvestigating corporate scandals once detected. Unfortunately, by the time many of the recentscandals were discovered, things had progressed too far. We were unable to salvage the companiesand the life savings of thousands of employees and shareholders. I believe the oversight auditorwould provide a deterrent to committing fraud when coupled with tougher criminal sanctions. Ifurther believe that earlier detection could prevent the absolute destruction of companies in whichfraud remains uncovered for too long a period of time.

I note that the concept of an oversight auditor within the public oversight board was rejectedin the accounting reform proposal offered by the SEC and Harvey Pitt on June 20. The draftemphad that the SEC's vision of a newly created public oversight board reassured corporateAmerica that the newly-created oversight board would require the cooperation of auditedcorporations ``only to the extent necessary to further ..... reviews or proceedings regarding the [auditcorporation's] accountant.'' The draft further promised that the new oversight board would notconduct ``roving investigations'' of audited corporations nor would the board sanction thosecorporations. It occurs to me that by shifting exclusive focus and responsibility to accounting firms,we ignore the underlying behavior of corporate wrongdoers who have principal responsibility for fairand accurate financial reporting to corporate shareholders.

Under my proposal, the newly created oversight board would be charged with reviewing thefinancial statements of issuers and focusing its resources on highest-risk audit areas and questionableaccounting practices of which it is aware from the SEC Division of Enforcement or other sourcessuch as whistleblowers under provisions I heartily supported.

Upon discovery, the board would refer findings of possible accounting or auditing irregularityto the Division of Enforcement with respect to issuers or other appropriate federal and stateenforcement officials such as the President's newly-created Fraud Task Force within the Departmentof Justice. This referral mechanism would ensure that those agencies continue to have primaryauthority and responsibility for conducting comprehensive corporate investigations of possiblewrongdoing. The oversight board, of course, would have authority to conduct investigations ofpossible wrongdoing with respect to the involvement of accounting firms within its jurisdiction.

That is a basic summary of what this amendment would accomplish. I urge my colleaguesto support establishment of an oversight auditor as a means of improving the compliance ofcorporate issuers and their external accounting firms and detecting irregularities at a much earlierpoint in the system when a shareholder value remains salvageable.

It seems to me that my amendment comes down to just a simple case of common sense. AsI think proven so many times before, auditors need to be audited in the same way the IRS does it fortax returns and in the same way bank examiners do it in the case of bank audits. If auditors knowtheir work will itself be audited, they will think twice about looking the other way on shady deals,as we have seen.

My amendment would put some very specific teeth in the Sarbanes-Enzi bill.

At this point, I was hoping the Senator from Texas was going to be here because I have doneso much for him on a lot of Finance Committee bills. I'm referring to tax bills, including the recentCARE bill and the recent energy bill. I have helped him with so many amendments that he wanted.

I was sure he would be willing to help me get unanimous consent to get my amendment up,particularly in light of the fact that last week I was assured when it wasn't on the list that it wouldbe on the list. Then I came back and found that it meant being last on the list.Now we are getting down to the end. I would like to have what I consider kind of acommitment, although it probably is not an ironclad commitment, that I be on the list, and,obviously, I would be able to get a vote on my amendment.

At this point, I ask unanimous consent that the pending amendment be laid aside for thepurpose of taking up my amendment just described, which is amendment No. 4232.

The PRESIDING OFFICER. Is there objection?

Mr. ENZI. In light of the discussions, I have to object.

Mr. GRASSLEY. Was the President going to put my unanimous consent before the Senate?

The PRESIDING OFFICER. I did.

Mr. GRASSLEY. I did not hear the President do that.

The PRESIDING OFFICER. The Senator from Wyoming objects.

Mr. GRASSLEY. Mr. President, before I yield the floor, I would like to have just a shortdiscussion of something that bothers me. In the Senate we have a right to be, and a responsibility tobe, intellectually honest about these issues with which we are faced here.

I have heard so much during this debate--not so much during the debate, because thatwouldn't be fair, but more probably in news conferences held by Senators on the other side of theaisle – about the Democrats wishing to use Enron and WorldCom events very much as, I think,political issues. I think maybe the Democrats are hoping for a ``November storm'' in which oureconomy is weak and no progress is made on accounting reforms.

As this bill goes through the Senate, through conference, and comes back, I hope we willrealize that there is enough blame to go around. But, most importantly, I think it is wrong. Forinstance, the distinguished majority leader on ``Face the Nation'' recently attributed the current crisisto the alleged ``permissive'' attitude in the Bush administration towards business. I didn't see any``permissiveness'' in the President's speech last week. I don't think very many people did.

But I think we also need to remember, while a lot of this mischief was going on bycorporations, that during the decades of the 1990s and now in the 21st century there were 2 years inwhich Democrats controlled Congress. In those two years, we had a Republican President. That wasthe first Bush Presidency. There was a period of time when the Democrats controlled both Housesof Congress and the White House. That was 1993-1994. Then there were 6 years that Republicanscontrolled the Congress--1994-2000, and the Democrats controlled the Presidency. Then there were135 days last year that Congress was controlled by Republicans, and the President of the UnitedStates, but only 135 days out of a 12-year period of time, if you want to use the 1990s plus now. Andwhat has happened has happened on the watch of both Republicans and Democrats.

I think that to say a President has been President 18 months and this crisis before us isbecause of a ``permissive'' attitude in the Bush administration towards business just doesn't holdwater. I have a chart behind me. I hope I am very clear in making this more accurate than what I justsaid. The yellow is the 2 years of the Bush administration going back to 1994, and the other colorcovers the Clinton administration.

But let's forget about the Bush administration and the Clinton administration. Let's justrealize what the facts are. In the case of Enron, it became public in the year 2001, but the restatedearnings and the mischief went on all the way back to at least the beginning of 1997 because 1997,1998, 1999, 2000, and the first two quarters of 2001 were restated earnings.

Adelphia: Half of 1998, all of 1999, all of 2000--before they were public in 2001--butrestated earnings for all those.

Go down to Xerox. It was found by the end of the year 2000 everything that was done wrongin Xerox. The restated earnings of 1997, 1998, 1999, and 2000 came before there was ever aPresident George Bush.

There were restated earnings for Rite Aid for 1998, 1999, and 2000. You can go down thelist. What the chart says, better than I can say, is that it is not a permissive attitude by this Presidentthat has put us in this position. It is because of the lack of transparency that was implied in what theaccounting profession and audit committees and boards of directors, who ought to be watchingmanagement, were doing, and the Securities Exchange Commission under the spirit of the 1933 lawof what they should have been doing. I suppose there are a lot of others as well.

But now politics should be put to the side. We should not be making these statements. Weought to be correcting the situation so that people have confidence and so that the crooks who arerunning our corporations and doing these things that are evidenced here. When I say ``crooks runningour corporations,'' I mean the ones who would do this sort of thing to their stockholders and to thecountry and to the economy – so that they cannot get away with that in the future.

That is what this bill is all about. I complimented Senator Sarbanes and Senator Enzi aboutthis bill. I think it would have been improved with my amendment. But, quite obviously, that is notthe way the game is being played. So I am sorry that my amendment could not be put to a vote.