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JIM LEHRER: Now, some analysis of today’s Senate action and the corporate scandals, from two former chairmen of the Securities & Exchange Commission. Arthur Levitt was in charge of the SEC during the Clinton years. Richard Breeden ran the agency in the first Bush administration. I spoke with them earlier this evening.
JIM LEHRER: Mr. Breeden, is the Senate doing the right thing on accounting reform?
RICHARD BREEDEN: I think absolutely. This is… the Sarbanes legislation is a good step forward. It sets up a structure that will give us the chance for meaningful oversight of the accounting industry, and I think we’ve needed that for a long time.
JIM LEHRER: Mr. Levitt, do you agree?
ARTHUR LEVITT: Yes, I do. I think the bill is a substantial step forward, not that it will address all the issues, but I think it is the right thing to happen at this time.
JIM LEHRER: What’s the most important thing it will do, Mr. Levitt?
ARTHUR LEVITT: I think it will establish an oversight mechanism, not self- regulation, but an oversight mechanism of the accounting profession, a profession that has lost credibility with the public. We need to restore credibility and the sanctity of the numbers that are reported to them.
JIM LEHRER: Mr. Breeden, what about the additional requirements that corporate executives, both CEO’s and chief financial officers, be held criminally liable if they certify financial statements that are not correct? Is that a good thing as well.?
RICHARD BREEDEN: Well, Jim, the criminal process here is an important one in dealing with cases of fraud. Clearly, when people have an opportunity to make tens or hundreds of millions of dollars by wrongdoing, then a simple SEC injunction not to do it again is not enough of a deterrent. So the criminal process and criminal exposure is terribly important in dealing with cases of fraud.
We do have to be careful and make sure that in cases that are not fraud, but deal with honest issues of judgment, in accounting reporting matters, that we not go too far in subjecting people to criminal liabilities without clear criminal intent. But I think the Senate is on the right track here– both the President and the Senate– in trying to frame up something that will give us a good, healthy criminal deterrent, but be mindful of going too far.
JIM LEHRER: Mr. Levitt, how important do you think the criminal deterrent is in cleaning this thing up?
ARTHUR LEVITT: I think it has some symbolic importance. I think what is significantly more important is, for the first time, separating certain kinds of consulting services from the audit process. That has long been both a perceptual and actual impediment to the kind of independence that the audit should have, and once again, it’s a question of public confidence in the system.
JIM LEHRER: What about little things, Mr. Levitt, like that are in this bill, in the Senate bill, like no in-house corporate loans to executives? Are things like that important as well, by law?
ARTHUR LEVITT: I think it’s useful. But I do think there are things that are not in the bill that I wish they were, like accounting… expensing stock options, like restoring, aiding, and abetting. And what that means, essentially, is if a lawyer or accountant told the people at Enron or WorldCom that if they cooked up this scheme, private rights of action could not prevail. You couldn’t sue those lawyers or accountants, and that’s wrong. They should be held liable under regulation 10-B-5 for aiding and abetting.
JIM LEHRER: And that… this new legislation does not accommodate that?
ARTHUR LEVITT: No, it doesn’t. A case before the Supreme Court, the Central Bank of Denver in 1994, took it away from both the commission and private rights of action. The Congress restored it to the commission. I testified at that time that it should be restored to the public, to individual investors, to have the right to sue if lawyers or accountants aided and abetted fraud.
JIM LEHRER: Mr. Breeden, you agree that should be put back into the law and made real?
RICHARD BREEDEN: I think I differ with my friend Arthur on that subject for two reasons: One, I think that the… first of all, Jim, I think it’s important to recognize, this is a… we can all identify things that ought to be in this bill, but I don’t think we should have the perfect become the enemy of the good. This is an extremely good piece of legislation. This is going to substantially advance the public’s interest in safe and honest markets, and I think that the most important interest right now is to get this legislation passed, deal with the much narrower bill on the House side so it contains many similarities in an overall approach, and try and get something on the President’s desk so the SEC can get busy putting it in place to protect the public.
The issue of how far to go in preventing strike suits but not going too far and narrowing the scope of legitimate private litigation is another very important subject, but it would bog this bill down. It would risk bogging this bill down in an awful lot of controversy, and might stop something that is otherwise very, very important and very badly needed.
ARTHUR LEVITT: Jim, I agree with Richard on that, but there is one point that I think should be emphasized, and that is the bill calls for much greater funding for the SEC. I believe that the request made by the commission for $100 million and the grant made by the President is woefully inadequate to fund increased salaries, something called “pay parity” to stem the loss of personnel that has crippled the commission in recent years, and to provide for seasoned, experienced litigators to bring cases. That’s what’s desperately needed and that funding is in this bill, and I think that is of criminal critical importance.
JIM LEHRER: Do you agree with that, Mr. Breeden?
RICHARD BREEDEN: Jim, I’d like to second that. You are looking at a Republican and a Democrat who, between us, I guess, have had almost 12 years at the commission, and the single thing that is most clear to me is that the commission has been under-funded and under- resourced for decades, literally. And when you have a corporate crime wave, let’s put some more cops on the beat. The commission needs substantially more funding. The $100 million proposed by the administration doesn’t come close to being adequate, and so I think that the levels proposed in the Senate bill are very important to putting a meaningful deterrent in place and a meaningful investigative capability at the commission.
JIM LEHRER: Mr. Breeden, start with you, and then to Mr. Levitt. Are both of you prepared to say that had you had more resources during your tenure as chairman of the SEC that some of these things could have been found out ahead of time? We wouldn’t all be discovering this today if you had more resources, if the SEC had been a stronger agency?
RICHARD BREEDEN: Well, I’m not going to say that every one of these things would have been discovered, but certainly some of these things, there would have been much better deterrence and some of these people would have been caught at an earlier stage. The SEC has had such limited resources in corporation finance that for corporations, public companies filing their 10-K’s, their annual reports, and quarterly reports… some companies get reviewed every three or four years, not every year or every other year. There’s only enough staff to sample the filings that are going on, rather than having a much more active level of oversight and accounting review. The SEC’s review has real teeth, and it is not going to catch everyone but it certainly puts disciplinary force in the field, and it’s just been inadequately staffed for years and years.
JIM LEHRER: Is that the same problem you had, Mr. Levitt?
ARTHUR LEVITT: You know what haunts me, Jim, is that when building seven went up September 11, the SEC office was destroyed, and with it, all of the records of that office. And the fact that those records were not duplicated anyplace else spoke to the technological primitiveness of the commission at that point. The commission desperately needs technology in order to be able to do their job. And these funds, if for no other reason, should be dedicated at least partially to bringing them up to date technologically. Yes, I agree with Richard about that, and clearly the commission could have done more and desperately needs this funding for personnel. They provided pay parity but they didn’t fund it and as a result, the commission has lost some of their best people, some of them to other agencies that pay a higher pay scale than the commission has been paying. We have suffered in a deregulatory legislative environment for the last 15 years.
RICHARD BREEDEN: Jim, just one other footnote: I think it’s important for the public to understand, we’re not talking about increases for the SEC that has to come out of tax dollars. The really sad thing is that the SEC has been running massive surpluses every year. It could fund all the enforcement that we need out of the fees it already generates from filings that are made, but Congress for years and years has been diverting some of the money that is raised at the SEC– hundreds of millions of dollars– and throwing that into general revenues to pay for other government programs.
JIM LEHRER: The Senate bill ends that, does it not?
RICHARD BREEDEN: It doesn’t end that. It just increases the appropriations. But, long run, the real answer is we need to leave the funds at the SEC where they’re generated, and unless they need to raise fees, Congress should have a power to look at it, but we need to go to a self-funding, very much as the federal reserve already has.
JIM LEHRER: Mr. Levitt, how do you read this continuing turmoil on Wall Street?
ARTHUR LEVITT: I think that, you know, it’s easy to blame it all on Congress or on the legislative failures of one kind or another, but I think what we’re seeing is a market reaching a level that it really belongs to be at. I think the exuberance… the over-exuberance of the market brought about distortions that are being adjusted now as markets always adjust them. The unfortunate aspect of this is that the individual investor is being badly hurt and badly abused, and the conflicts that exist in the market– the analyst conflicts, the brokerage firms conflicts– all of that is hurting the individual investor and it will be sometime, I believe, before they have sufficient confidence to come back into our markets.
JIM LEHRER: Do you agree, Mr. Breeden, with the confidence issue?
RICHARD BREEDEN: Confidence is something you work long and hard to build up, and when it’s shattered, it takes a long time to restore. I think ultimately confidence will be rebuilt, company by company, as companies look hard at their numbers, make sure that if they’ve been aggressive in accounting policies in ways that aren’t justifiable, that they get back to a more conservative approach, that they look hard at their governance practices– who’s on their boards, why they were appointed– what kind of possible conflicts they have, and move to better corporate governance approaches, getting rid of the conflicts that the accounting firms have had and having a real culture, which I hope to see develop among our accounting firms and going back to good hard knocks, tough auditing, auditors that really question companies’ numbers rather than rubber-stamping them. And all of these things have to come together, Jim, over a period of time where investors gain… regain confidences that the abuses of the bull market have dissipated, and the companies have gone back to much more conservative reporting practices.
JIM LEHRER: Mr. Levitt…
ARTHUR LEVITT: Jim, I wonder…
JIM LEHRER: Sure. Go ahead.
ARTHUR LEVITT: Jim, I wonder how many of our viewers know that the commission has operated without three commissioners for nearly a year now, and that is really unfortunate, that the work of the commission has been slowed by the failure of the political process to clear three nominees for these jobs.
JIM LEHRER: Let me ask you this, Mr. Levitt: Do you feel, based on your knowledge of this whole situation, that the worst of the abuses to be revealed is now behind us? Or do you have this uneasy feeling that there are other things out there in the woodwork somewhere?
ARTHUR LEVITT: It’s just a hunch, I think, that probably the future abuses that turn up– and there will be those– are not going to be quite as extensive as the ones we’ve seen but these are not just a bunch of bad apples. This is a result of a breakdown of ethical values in our business community that has taken place with increasing rapidity over recent years, and it’s something that we will not clean up in one fell swoop. There are other instances, but my guess is they probably won’t be of the magnitude of the ones that have already turned up.
JIM LEHRER: Mr. Breeden, what’s your best guess?
RICHARD BREEDEN: Well, hard to imagine, Jim, that an abuse can get much worse than what we saw in Enron, and some of the other cases have been pretty bad. I suspect that the number of companies that have had a massive fraud of that kind — multibillion dollar frauds– is probably a fairly small number. I hope there are not many more lurking out there, although we simply won’t know until this process shakes itself out.
But I think… I think beyond the cases of out-and-out fraud, that it’s likely we’re going to see hundreds of cases of companies that, as we’ve seen in the past, who come back and restate their numbers and certainly adjust some of the earnings that they have reported in the past; not necessarily because it was wrongdoing, but as people get forced to sign on the dotted line with exposure, I think a lot of companies may look to put their numbers on a more conservative footing, and ultimately, I think a lot of companies got very aggressive during these boom times, and across the board we’re going to see a move to greater conservatism, and long run, that’s a very good thing.
JIM LEHRER: Gentlemen, thank you both very much.