MARGARET WARNER: I'm joined by Richard Breeden, former chairman of the Securities and Exchange Commission from 1989 to 1993. He then spent three years as a senior partner at the accounting firm Coopers & Lybrand. He now heads his own firm, which specializes in strategic consulting and corporate turnarounds. He also serves on the boards and audit committees of two publicly traded companies.
MARGARET WARNER: Welcome Mr. Breeden.
RICHARD BREEDEN, Former Chairman, Securities & Exchange Commission: Thank you, Margaret.
MARGARET WARNER: You're reaction to the step that Deloitte Touche and other firms have taken separating the consulting from the accounting businesses. Do you agree with Mr. Copeland that it's just an appearance fix?
RICHARD BREEDEN: I'd agree that appearance is a large portion of the debate that we're seeing right now, but appearances are very important -- as important, perhaps, as realities. It's critical that the public and investors all across this country believe that they can trust audits. When they get an unqualified opinion from an auditor on a company's financial statements and they invest their children's college education fund or their own retirement moneys or other investment funds in that company, they want to know that the auditor has not allowed anything else to get in the way of getting to the truth, getting the numbers accurate, and then telling the ultimate user of those financials: The investor.
MARGARET WARNER: What about the point that Mr. Copeland made which is - he said, look, accounting firms aren't independent because we depend on the fees paid by the clients whose books we review. In other words, is there any reason to think that had Enron not been a consulting client for Andersen that Andersen wouldn't have cared just as equally about holding on to t auditing business?
RICHARD BREEDEN: I think Mr. Copeland is entirely right about that. That is a part of this puzzle that doing away with consulting doesn't solve. There is still the fact that Arthur Andersen was receiving something north of $25 million each and every year in perpetuity unless they got fired. But typically, audits may last as long as 20 years, on average. So it's a long period of time in which the auditing firm and the client have a relationship. The size of that fee and the duration of the relationship mean that, sure, it's very important to the auditors to keep the client happy. Part of their job is client service. And they want to do a good job because of course most companies are honest and they need their auditor to help them do a good job disclosing their financials properly. So getting rid of consulting doesn't eliminate some of the pressures and as Mr. Copeland said we have to depend the integrity of auditing firms and their personnel.
MARGARET WARNER: All the publicly traded companies in the country, by law, as I understand it, have to have an outside audit every year.
RICHARD BREEDEN: Yes, that's right.
MARGARET WARNER: What percentage, do you think, of all these companies and their auditors have the conflicting situation where the auditing, the accounting firm is also doing consulting?
RICHARD BREEDEN: I don't know of any numbers to say how many. It's certainly common that audit clients have some level of consulting. For example, your auditor does the financial statements for you and also may provide tax services for you, help you prepare your tax returns. Technically, doing the tax work is not an audit. It's consulting, but most people would think of that as consulting that's closely related to the audit, that's very much tied into it. Consulting on the funding of employee benefit plans and other things are perhaps closer to an audit than going off and building somebody a $100 million computer software system.
MARGARET WARNER: You're going to testify on the Hill tomorrow. The accounting firms made it pretty clear that by doing this step voluntarily, they hope that will do it, that they won't have to do it. What would be your recommendation on that point, whether there needs to be a law on this?
RICHARD BREEDEN: Well, voluntary action is good and I applaud all the firms for responding in this area. Mr. Copeland made one very important point that I think all investors need to remember, and that is that the auditing profession is composed of hundreds of thousands of men and women across this country. In my three years at Coopers, if I learned anything, it is that those people work hard. And they are people of enormously high standards of integrity and they want to do to right. They want to get to right. We shouldn't allow the mistakes that have happened to be pushed under the rug but, on the other hand, we can't lose our sense of perspective here.
MARGARET WARNER: But I mean are you saying there should be legislation or there shouldn't?
RICHARD BREEDEN: Well, I think in this area legislation would probably prevent backsliding and Congress may decide that that is an important step to take.
MARGARET WARNER: Now is the problem just with the accountants or is there anything wrong with the very standards and principles that are applied... That are supposed to be applied? I'm particularly thinking of the way the accounting is done for these off-the-books partnerships. I mean was any of the deception or misleading nature of the Enron statements, was that perfectly legal even if it was misleading?
RICHARD BREEDEN: Well, that's the judgment that the ultimately some of the investigations that the SEC and the Justice Department may decide. Accounting principles of America are set by something called the Financial Accounting Standards Board. It's a private sector group. The government... Neither Congress nor the SEC sets accounting principles. The cookbook of what generally accepted accounting principles consist of is set in the private sector and then the SEC requires people to use it and provides some discipline. Over the last couple decades, those standards have gotten immensely complex. The complexity of the standards gives too much room for mischief in their application, particularly in the hands of companies that are pushing the edge of envelope very hard.
MARGARET WARNER: You mentioned earlier, and also Ray did in his interview, the sort of resolving do problem that there is now between the firm... the companies and the firms that are their accountants where an accountant will go to the firm and vice versa. Do you think that should be stopped?
RICHARD BREEDEN: I actually am in favor of some form of a legislative cooling- off period. Everyone in public service has that when they leave, and I think this is a healthy discipline. Both Lincoln Savings, the Charlie Keating failure back in the savings and loan days, and Enron one characteristic has been that a huge number of people brought over from the auditing form to the company. Again, it maybe makes the relationship a little too cozy. No one should say that people shouldn't have good job opportunities in the private sector but a year or two cooling is probably a good thing.
MARGARET WARNER: What else would you recommend to restore investors' faith that financial statements they rely on are, in fact, honest?
RICHARD BREEDEN: Well, we have a huge stake as a country in that perception. Investors need to know they can invest and investing is never without risk. There will always be companies that commit frauds that auditors, no matter how good, don't detect. And people have to be aware of that. That's the importance of diversification and doing as much homework as you can. But we need to know that the auditors will really leave no stone unturned in trying to get it right.
We need more comprehensive disclosure of things like SPE's, which are, as Mr. Copeland says, they are legitimate devices, but there's no law that says you can't disclose what is in your SPE instead of keeping it hidden under a tarp somewhere. So more comprehensive disclosure is a big thing, a faster disclosure, and trying to make sure that everybody involved in the process is holding high standards of ethics and integrity.
Things like when executives are selling stock, we discovered in Enron and Global Crossing, that there's a couple of loopholes that nobody intended that have allowed executives to sell the stock back to the company and not tell the market about that for a long period of time. That's a simple fix and it's something we should do.
Fixing the accounting and disclosure system, there's no magic bullet that will fix it. It's a delicate balance, a little bit like a Swiss watch. We have to work carefully to look at the problems that have happened, not be complacent about them. Make changes to speed up the flow of information and make sure it's accurate, but at the same time not get carried away with wrecking what is still the best auditing and disclosure system in the world.
MARGARET WARNER: Richard Breeden, thanks so much.