New York (April 4, 2003) - As corporate governance and internal controls undergo an overhaul following the passage of Sarbanes-Oxley, a high-profile slate of regulators, accounting professionals and attorneys counseled corporate directors on the changing roles of audit committees and how to sidestep potential fraud hazards in financial reporting and disclosure.
“How in the WorldCom did we get here?” joked Charles Niemeier, acting chairman of the Public Company Accounting Oversight Board. “The truth is WorldCom and Enron were not anomalies. They unfortunately were logical conclusions to an old problem. Once a company deviates from financial reporting reality it spirals out of control. Your inflated numbers now become the ‘floor’ for the next quarter.”
Niemeier was one of several professionals presenting at a day-long “boot camp” for corporate directors, co-sponsored by Baruch College’s Center for Financial Integrity and Colorado State’s Center for Quality Financial Reporting.
“Sarbanes-Oxley was a great start,” Niemeier said. “However, even if you have the best auditors in the world but management’s corrupt, and bankers are working with them to get around numbers, then you’re still going to have problems. You can’t blame it all on consulting services either. You could eliminate all consulting services and that won’t necessarily get rid of the problem.”
Niemeier promised that the accounting oversight board created as a result of the passage of Sarbanes-Oxley, would act quickly in cases of accounting fraud.
Despite the privacy section within Sarbanes-Oxley where firms are given up to one year to correct problems, in the matter of fraud discovery Niemeier said, “All bets are off! There will be zero tolerance in matters of financial integrity.”
Although Sarbanes-Oxley did not imbue the PCAOB with subpoena power, Niemeier pointed out that firms can be “de-registered” as well as registered in cases of non-compliance.
“We’ll use that power,” Niemeier promised.
The body currently has a staff of 25, but in 18 months, expects to number between 250-300 with satellite offices in cities such as Atlanta, Chicago, Dallas and Houston. The PCAOB is in the process of hiring some 100 accountants.
Niemeier said the board would probably require a $50 million to $70 million annual budget. He added that the board is developing a Web-based registration system for SEC firms and promised a rapid investigation process.
Former SEC chief accountant Lynn Turner, now an accounting professor at Colorado State University, applauded the promise of rapid investigations and subsequent enforcement, recalling that during his tenure at the financial watchdog it often took up to three years before an enforcement case went to trial.
Securities and Exchange Commission chairman William Donaldson will reportedly make a selection for a permanent chairman of the PCAOB this month. Published reports have put Niemeier on the short list.
Former Comptroller General and Public Oversight board chairman Charles Bowsher, who, as head of the General Accounting Office witnessed many of the modern-day financial collapses such as the Savings and Loan crises and Chrysler bailout, said the common thread behind each downfall was “weak internal controls.”
D. Bevis Longstreth, a retired partner at the law firm of Debevoise & Plimpton, demonstrated how auditors can push numbers and “test the outer boundaries of business assumption.”
As an example, he highlighted the pension-plan growth assumptions implemented at Verizon, which actually lost $4.7 billion in its pension plan, but by employing a 9.35 annual growth assumption was actually able to report a $2.5 billion gain. “Only in the darkest reaches of the footnotes in the annual report could you find that,” said Longstreth.
Other presenters at the conference included former U.S. attorney Mary Jo White, and Edward S. Knight, executive vice president and general counsel for Nasdaq.
-- Bill Carlino
