A: No, I don't think so. The only aspect of Enron we're focused on is what happened to investors and whether the proper compliance with all our securities laws and rules applied. Q: What do you make of Enron's auditors, [Arthur Andersen LLP]?
A: I can't comment on anything specific about who, if anyone, is responsible. What I can comment on is that, while our staff is doing a complete and thorough and expeditious investigation, we have to focus on assuring people that the problems of Enron won't likely reoccur. We have a whole agenda of items that will hopefully minimize the likelihood of any similar events.
First, we want to supplement our existing periodic disclosure system with a [more] current disclosure system. Second, we want to ensure the ability of companies to make affirmative disclosures about unquestionably material events, as well as trend information. We believe modern technology will enable us to use that as an overlay on periodic reports, so that nobody will have to give up anything that they already have. Third, we believe that financial reports need to be put in plain English so that investors can look at a financial statement and tell readily what a company's financial status is. Again, the more detailed financial statements would also be available. But our goal is to create a system of financial reports that nonexperts can read, digest, and understand.
We are going to take steps to strengthen the role of audit committees. We believe that it is appropriate for audit committees affirmatively to review with management, and also with outside auditors, the three, four, or five critical accounting principles that have the greatest impact on the company's financial posture. It's not now a duty.
We also think that there's a need for a comprehensive and transparent system of professional self-regulation by the audit profession -- something that heads of the five major accounting firms and the AICPA [American Institute of Certified Public Accountants] endorsed last week.
We think it's better for investors if we can prevent these problems before they arise. We'll never be able to prevent all of them. But those that we can't prevent, we will have to handle them after the fact forcefully and vigorously.Q: You want to build a new model of financial reporting -- but this looks like a case where the auditors didn't get the GAAP [generally accepted accounting principles] right.
A: I can't comment on whether GAAP was correct or not [in Enron's case]. There was a restatement, and restatements are taken when the original accounting was wrong or mistaken. But the demise we have seen is attributable to much more than any $500 million or so restatement. This was like a run on the bank.Q: Do you plan any steps for guidance or clarification for auditors for this fiscal year?
A: We put out a release for guidance on the use of pro forma [earnings statements]. It talked about what happens when companies deviate from GAAP and ways in which the deviation can create a false or misleading impression. We expect to put out a release [issued Dec. 12 and available at www.sec.gov/pdf/33-8040.pdf] that will alert companies, audit committees, and outside auditors to a number of the approaches that should be taken at yearend to make certain that the proper accounting principles have been selected -- and to make certain that there has been full and fair disclosure of how they were applied. With respect to other issues [such as related-party transactions], I'm reasonably confident we're going to be studying the situation.Q: Last year, your predecessor [former SEC Chairman Arthur Levitt Jr.] fought unsuccessfully to separate the Big Five's auditing from consulting in the name of auditor independence. Enron paid Andersen $25 million for its audit, but also $27 million for consulting. Does that raise independence questions?
A: Independence is very important to the audit function. But the problems that exist are really not a function of independence questions. They go to the integrity and structure of internal control systems and the audit process itself. Is the audit done professionally and competently? Independence is kind of off to the side.
In 1933, Congress made a decision to have auditors be in the private sector and allow them to charge fees for their audit work. And once you've done that, anyone who wants to be cynical would say, with or without consulting work, that firms dependent on audit fees might not perform as professionally as might be desired. But we know that's not so. To a firm like Arthur Andersen, as significant as the dollars are, they don't make a significant ripple in their overall financial structure-whether it's $27 million or $25 million.Q: Obviously Enron did not turn itself in-so this will not be a test case of your Seaboard doctrine [giving credit to companies that cooperate with SEC investigations].
A: It does not make sense for me to comment on any aspect of what will or will not happen with Enron. I will say that the release we put out on the benefits of cooperation pointed out that even if a company cooperated completely and superbly, there were cases in which a company might well receive no credit for cooperation. We also referred to the fact that getting a pass was expected to be a rare occurrence.Q: You came into office as part of a Republican Administration, which many people think is inclined to favor corporate interests. Your first speech promised the accountants a friendlier SEC, and you've offered lighter sanctions to companies that cooperate. Do investors have any reason to feel less secure because of the directions you're taking?
A: If the question is vigorous enforcement in cases of financial fraud, we are at least as committed to vigorous enforcement as has ever been the case. Indeed, the new director of enforcement was the deputy director under Mr. Levitt, and I appointed him as director. So if I were uninterested in a vigorous approach, I would have found someone else to appoint.
We are now seeing the Enron situation. It is a tragedy. I grieve for the investors who have lost their life savings, the employees. But Enron occurred in a system in which all of the emphasis was on after-the-fact enforcement.
After-the-fact enforcement is absolutely critical. If people do not believe there is a sanction for misconduct, they will be encouraged to cut corners. But it stands to reason that preventing a problem before it arises has to be better for investors than being limited solely to going after the problem after it's arisen.
We're not changing after-the-fact enforcement. But what we're trying to do is help companies and auditors get it right, up front. My message was, is, and will be: If you violate the law, you will pay for it, and we will be aggressive. But if you are truly concerned about getting it right, we will help you. And we will try to protect investors in more than one way.Q: The other profession that has not covered itself with glory is Wall Street's analysts.
A: Again without commenting on what specifically occurred in the Enron situation -- I think that analysts have to know why they're recommending a company, and have to understand its true financial position. It's one thing if analysts are deceived by sharp operators. But we cannot have a situation in which recommendations are made without a full understanding of the company's posture.
The public is entitled to know either that there are no conflicts of interest [between an analyst's research and banking roles], or precisely what conflicts there are. I believe that the securities industry will come up an effective program for dealing with that. If they don't, then we will make sure that investors are protected.