RAY SUAREZ: From Enron to Global Crossing to WorldCom, the surge in corporate scandals this past year raised serious questions about how companies report their numbers and how their auditors review them. Congress answered in July, passing a corporate responsibility law that created a new body to regulate the accountants. It's called the Public Company Accounting Oversight board and its job is to set standards for ethics and conflicts of interest for auditors, discipline rule-breakers, and conduct yearly reviews of the nation's major accounting firms.
SPOKESMAN: We are not today a united body.
RAY SUAREZ: The new body is already embroiled in politics. On Friday its board was approved by the Securities and Exchange Commission but only after a contentious meeting that ended with a 3-2 vote along party lines. The vote approved William Webster the Republican-favored candidate as chairman of the new entity. Before directing the FBI and then the CIA, Webster was a federal judge and prosecutor. He has no accounting background. Commissioners chose Webster over John Biggs, the head of a New York pension fund who supported tough new regulations for accountants. At Friday's SEC meeting, Democratic commissioner Harvey Goldschmidt said chairman Harvey Pitt caves to the accounting industry's choice of Webster.
HARVEY GOLDSCHMID, Commissioner, Securities & Exchange Commission: For me it is simply a tragedy that the oversight board which had so much potential to restore investor trust will begin life under so dark and ugly a cloud.
RAY SUAREZ: Republican commissioner Cynthia Glassman gave a contrasting view.
CYNTHIA GLASSMAN: Nobody can quarrel with Judge Webster's qualifications or seriously assert given his background, reputation for integrity and history of public service that he will be anything but a strong leader and vigorous advocate on behalf of investors.
RAY SUAREZ: Pitt vehemently denied being pressured by industry. After the vote, he praised Webster, one of five board members.
HARVEY PITT: Presidents of both parties have wisely placed enormous trust in his ability to provide fair and tough law enforcement and to resolve complicated, factual and policy issues with dexterity and sagacity.
RAY SUAREZ: For his part Webster acknowledged he has limited experience in the field.
WILLIAM WEBSTER: I am not an accountant. I do not pretend to be an accountant. We have extensive accounting experience on our board, and we will function as a board.
RAY SUAREZ: The Webster pick outraged Democrats like Senator Paul Sarbanes. He crafted the bill creating the new board.
SEN. PAUL SARBANES: In the process of choosing this board, Chairman Pitt has, in effect, appeared to be bending to industry and political pressure.
RAY SUAREZ: By law, the new accounting oversight board is to be up and running by April 2003.
For more, we're joined by Joseph Grundfest, a former commissioner at the Securities & Exchange Commission. He is now a professor of law and business at Stanford University. And Nancy Smith, a former director of the SEC'S investor education office. She is founder of restorethetrust.com, an investor advocacy Web site.
Well, Joseph Grundfest, what do you make of the choice of William Webster to run the oversight board?
JOSEPH GRUNDFEST: Well, there's a tremendous amount to commend Judge Webster. I think it's important to recognize that the function of this new oversight board is in a large degree an enforcement function. Judge Webster has absolutely tremendous experience. He's helped clean up the teamsters union. If Judge Webster can handle the teamsters I think he can handle a bunch of guys with green eye shades. I think John Biggs is absolutely a wonderful person and the country is quite fortunate to have two such wonderful, qualified people willing to serve in this very difficult role.
RAY SUAREZ: Nancy Smith, what did you make of the selection and the confirmation of William Webster?
NANCY SMITH: I think that it was a sorry end to a very shameful process. I think that it was politicized. I think that Chairman Harvey Pitt had the opportunity to select better candidate, an individual who has battled for investors, who knows the facts, who would have hit the ground running, and be able to clean up this mess fast. Instead, we have William Webster who is a great official. He's a great public servant, but he doesn't know much about accounting.
RAY SUAREZ: Joseph Grundfest, it seems no one has a bad word to say about William Webster himself or cast any doubt about his integrity or the value of his past public service but they wonder about, as Nancy Smith suggested his running this very particularly charged board at this particular time.
JOSEPH GRUNDFEST: Well, thanks for asking that question because that amazes me as well. If you look carefully at the statute and if you ask, what's the function of this board and if you ask yourself what's the most important thing that this law has to do, this board has to enforce the law. It has to enforce the law aggressively. It has to enforce the law credibly. If you look at all the candidates and if you ask yourself, who's got the most experience this in law enforcement? Who knows how to be tough? Who has run investigations? There's one name with more experience than all the others.
That said, it's true that Judge Webster doesn't have as much accounting background, but there's a tremendous staff and it's also important to have a look at the other nominees that have been selected by the SEC, and it's really unfortunate that not enough people are talking about these four other people who are extraordinarily well versed in accounting matters and are going to do an absolutely impeccable job. It's a wonderful group viewed as a group and as a portfolio.
RAY SUAREZ: Well, take on both those points. First that because of the function of this oversight board, his lack of accounting, Mr. Webster's lack of accounting experience, isn't that important and backed by the particular members of the board who have also been confirmed, it matters even less.
NANCY SMITH: Well, I just disagree with Mr. Grundfest on this point. I don't think enforcement is the key issue. It's going to be how are they going to set auditing standards? What we've had is a massive failure of audits. People have lost millions, billions of dollars. Investors are looking at their life savings shrink because of these bad audits. The accountants did not go in, they did not warn the public, they did not do their job. They helped and let corporate management cook the books so it's not just about enforcement. It's also about taking hold of this process and changing those standards. And a big question for this board will be, will they set those auditing standards? Will they clean up the auditing process? Or will they delegate that to the industry? That's going to be one of the first tests for this new board and whether or not they're serious.
Sure, there are other people on this board who have some qualifications, but you have to remember this board wasn't presented to the SEC. Harvey Goldschmidt did not even know who was going to be on this board until the morning of the vote. I think this was a cramdown on the Democrats. It was a party-line vote. And what happened here is just -- it's nothing short of outrageous. The accounting industry got their way. They prevented Biggs from stepping in and running this board and getting down to business very quick, and I think that the Republicans in the house who led the charge against Biggs and the Bush administration said, you know what? I don't think people are looking at this issue very closely any more.
RAY SUAREZ: Let me get Mr. Grundfest's response.
JOSEPH GRUNDFEST: Yes, I'll disagree with part of what Ms. Smith has said and then agree with another part. The part I'll disagree with has to do with the auditing standards. The terrible meltdown we've experienced in the United States has been the result primarily of a violation of standards that have been on the books for decades. Better enforcement is what's needed. We're going to go through this process and we're going to discover that we've had the laws on the books that were necessary to prevent this terrible set of circumstances that we've experienced and the problem has been that those rules have not been enforced. That's why from my perspective-- and I certainly respect the point of view of other people-- it makes sense to enforce the laws that we have and to enforce them much more effectively than we have to this point.
With regard to the process, I'll agree with Ms. Smith. I don't think it was handled well at all. Any time that we even have to have a segment of this sort on a show of this sort about the process, it suggests that things certainly could and should have been handled better.
RAY SUAREZ: Is there some symbolic importance beyond the charge of this new board written in the regs, in the law... in the new law, a point that goes beyond the enforcement power that helps restore investor confidence even before they begin a single major investigation? Joseph Grundfest.
JOSEPH GRUNDFEST: Confidence is an intangible. I think this board does begin to assert an extent with a bit of a cloud over its head. I think it's going to be the job of this board to prove that it deserves the confidence of the American people, of the American investing public. And given the quality of the individuals on this board, I have high confidence that they will be able to rise to that challenge.
NANCY SMITH: Well, I think it's just a shame. I think they had a perfect opportunity to appoint somebody who... the Wall Street Journal editorial board was supporting Mr. Biggs and his appointment. And so were a host of other people spanning the spectrum from conservatives to liberals and investor advocates were urging that Biggs be appointed to this board. It's just very strange and very upsetting that in the end the people who get appointed to this board are the ones that the accounting industry says is okay. That doesn't sit well with investors. Investors are the big losers at the end of the day throughout this whole process.
I think that the Bush administration and the leadership in the House, the Republican leadership in the House, they never supported a strong oversight accounting board. In fact, the legislation in the House was very weak. They had a very puny board that they put together to solve this problem and President Bush supported that until the 11th hour when he had to support the Sarbanes bill because, of course, we had daily on our... on the nightly news programs, on the front page of our newspapers, we're hearing about these terrible scandals and their effect on investors. The minute that focus shifts, the minute those stories now are on the business pages instead of the front pages, they are gaining what they could not get in terms of the legislation. And that is by controlling the appointment process on this board and not getting in a strong reformer like John Biggs. And they're counting on the fact that investors won't notice this and that they're not going to be angry about it. I'm sure their polls probably show that it's not going to affect the election. That gave them the ability to move ahead in that direction.
RAY SUAREZ: Joseph Grundfest, right after the scandals broke, the first draft of the new budget for the SEC Included a very large rise in its money to spend on investigators on staff, but then in the final form a lot of money was stripped out and yet at the same time we're asking the SEC to do more things. Do they have the money they need?
JOSEPH GRUNDFEST: They need more money. The White House has recently proposed that the SEC'S budget be cut back by about $200 million below the level contemplated in Sarbanes-Oxley. I think the evidence is clear that if we're going to give the SEC the responsibility to clean up the markets and prevent the sorts of frauds that we've incurred to this point, what we need is more cops on the beat. We need litigators who can actually go to court against some of the largest law firms in the United States, against some of the smartest lawyers in the United States who are hired to represent these defendants, and we need the litigators representing the American people and the SEC and the small investor to have the wherewithal necessary to win. I strongly support fully funding the SEC, and it's the stronger enforcement effort that we really need to clean up this mess. More rules, more regulations-- maybe they'll help; maybe they'll get in the way. The one thing we know will help is very aggressive enforcement that targets individual responsibility for wrongdoing. That's what we need.
RICHARD ARMITAGE: And very, very briefly, Nancy Smith, does it look like there's a shot in political terms at getting back a share of that $208 million that the White House would like to take away from the SEC budget?
NANCY SMITH: After they proposed that they heard an uproar from people. They did within days say that they're going to add to that budget. Just recently Mitch Daniels said if Harvey Pitt says he needs that money, we're going to give it to him. You have to ask yourself why did they do that?
RAY SUAREZ: Nancy Smith, Joseph Grundfest, thank you both.