When we're looking at Enron, are we seeing a particular company that's
gotten in trouble? Or is this a symptom of something larger in our economic
It's a symptom of something larger. It's beyond Enron; it's beyond Andersen.
It's embedded in the system at this time.
What's the problem?
Probably, the number one problem is there's just been a change in culture that
arose out of the go-go times of the 1990s. Some people call it greed. But I
think it is an issue where we got a lot of financial conflicts built into the
system, and people forgot, quite frankly, about the investors.
Do you mean most "people" in general, or company audit committees, or
corporate executives, or auditors? I guess one of the basic questions is, why
didn't the watchdogs bark? Why didn't we get a warning?
... I think, quite simply, everyone was looking out for their own pocketbook.
They were looking out for their own interests, and those interests were placed
ahead of the interest of the investors.
You mean they were making so much money by serving the companies?
I think in Enron's case -- and I certainly don't think they're the only case --
these companies became like the golden goose, and everyone was standing at the
door trying to get a golden egg. And we're not talking a few dollars, or a
thousand, or even hundreds of thousands of dollars here. In some of these
cases, people were paid millions or tens of millions of dollars for doing what
they were doing for the companies.
That obviously impacts their own pocketbook. You just have to trace the flow of
money, trace the cash. Eventually it runs from Enron back to these people.
You mean to Andersen, to the bond-rating agencies, to investment
Correct. It runs back to the professionals who they were dealing with:
auditors, attorneys, rating agencies, analysts, underwriters, many other
So what's the mindset in these companies? What's the mindset in Vinson &
Elkins, the law firm? What's the mindset in Andersen, the accounting firm?
What's the mindset in Goldman Sachs, or Merrill Lynch, the investment bankers,
when they're dealing with Enron?
Having been in one of these Big Five international accounting firms, I can tell
you that over the last 10, 15 years, the mindset has evolved from one of
looking out for the investor and placing their interest first -- because
[auditing] is truly a public function, a public franchise -- to one of, "We're
a great big international business, and business comes first. And that
translates into how much revenue, how much profitability can we get out of each
of these companies; not just Enron, but each of these audit clients."
And as we've seen, they all grew their consulting practice phenomenally during
the 1990s to accomplish that, and that has become what their business is. They
used to be principally auditing firms. Today they are a business firm, and the
CEOs and culture at the top of these firms is, "What can we do make our
business more profitable?"
What do you say to people in the accounting industry who say to us, "There's
really not a problem here; 99.5 percent of the audits in American companies are
Until October of last year, Enron was one of those 99.9 percent that [they
were] quoting as it was an OK audit. You know, Waste Management, until it blew
up in 1998 -- that was one of those 99.9 percent of the audits that was fine.
Quite frankly, we don't know how many audits are OK and how many audits are
The only time you see a bad audit is at that point in time that the company
gets in trouble. That's also the time when you finally realize that that bad
audit has cost those investors millions -- even billions -- of dollars; tens of
billions of dollars, in the case of Enron.
So this notion that everything is fine in the system just because you can't see
it is, quite frankly, totally off-base and just not correct. It is nothing more
than spin doctoring, if you will.
What's at stake? Why should we, as ordinary investors, care about all these
intricacies of accounting and auditing, and whether functions are split and how
the rules are written?
No one wants to invest in a company if they can't tell if that company is doing
well, or not doing well. It'd be like going to the craps table in Vegas and
laying a bet down. We don't want to do that with our future retirements, with
our savings, the kids' education. ...
Because of that, we need to know that we can get good numbers as investors;
rely upon them, and have a high probability that we are making an informed
decision, rather than by playing by the seat of our pants and going blind on
where we're investing our money.
Essentially, what you're saying is the credibility of our markets is at
The numbers are the foundation of our markets. If you can't have trust and
confidence in the numbers, there is not trust in the markets. And, quite
frankly, eventually, over time, the investors will find a safer place to put
their money. ...
What are we talking about here? Are we talking about numbers and accounting
practices that are specifically illegal? Are we talking about fraud? Or are we
talking about a huge gray area where maybe you can be doing things that are
technically legal, but that are greatly misleading to the mass of
I think we have all of those. Certainly, we have some people in the market that
are doing a good job, and I don't think we should taint everyone. But we've
also got too large a group who are either using aggressive accounting practices
to get around the rules, or bend the rules, get into the gray area. And then
we've got those that are just outright fraud, have not applied the rules right,
have broken them. You've got to put Enron in that category. So it runs the
gamut from one end of the spectrum to the other.
You mentioned a while ago that you had been working for one of the Big Five.
I want to take advantage of that experience. We hear the term "financial
engineering" all the time. What is financial engineering? It sounds a little
Financial engineering is probably a little bit more than "iffy." What
developed, really, in the mid-1980s, was this relationship between Wall Street
and the accounting firms, whereby, just as soon as the new rule came out -- for
example, what you have to show on your balance sheet as debt in some of these
transactions -- Wall Street and the accounting firms would get together and see
if they couldn't figure out how to get around the rules.
You mean to hide debt, but not break the law?
Yes. And so as soon as the accounting standard setters would issue a new
standard -- it would seem like before the ink even was able to dry -- Wall
Street and the accounting firms had found a way to get around the rule; not
break it, but yet certainly not comply with its intent, and hide things from
investors; things like what we've seen in some of the off-balance-sheet debt at
times, aggressive revenue recognition in other areas.
What we've heard a lot about Enron is that they had a lot of off-books
partnerships, where they hid debt and moved income around. And they basically
used that to disguise their real financial situation. How did that get done?
How does that get set up?
Enron's actually a pretty good case. In Enron's case, back in 1997, they were
running in trouble with their debt ratings. To avoid a problem with the company
and its balance sheet and investors at that time that might have tanked the
stock, they went out -- and it's now become clear -- they worked with their
accounting firms and Wall Street to create a new separate entity off to the
side of Enron; one that, while on paper they didn't control, in reality they
really did. ...
Ultimately, the way it was structured, the way it was engineered, there was no
question it was the cash -- and only the cash of Enron -- that were its assets
that would really go to pay that debt. So while it complied with the rules
because of what was written into the contracts, the bottom line was
economically they were going to have to pay those liabilities. But they never
showed up on the balance sheet, so investors never realized that.
Why does Enron want to do this? Why does Enron want to create these entities
that look as though they're independent, but they're really part of
Keep in mind again, in 1997, as we know, even the CFO of Enron has said as they
got down to the end of 1997, [that] the debt-rating agencies were looking at
downgrading their debt, saying this company wasn't as good. If that occurred,
then there'd be retribution in the marketplace. Values of stock would go down,
the value of options would go down, the executives clearly wouldn't be making
as much money.
And so what they wanted to do was keep that debt off the balance sheet. If they
brought new debt on the balance sheet, no doubt the rating agencies would
downgrade them. So by keeping it off the balance sheet, they were able to avoid
the downgrade by the rating agencies, and avoid some of the problems that they
would've had with keeping the price of the stock up in the marketplace.
So basically they wanted the company to look better than it actually was,
Without a doubt.
How did those off-books partnerships get set up? Do people meet in Wall
Street? Are there teams that get together? I mean, what happens?
If a company comes up and decides it wants to do some [financial engineering]
and keep it off balance sheet, quite often they will have a financial advisor.
That may very well be one of their underwriters, one of their investment
banking firms, one of the well-known Wall Street firms. They will get together
and it typically, it is in a room with the investment-banking firm there, the
CFO, the company management. They'll bring the auditors in, because you
certainly want to know how to account for it.
And everyone will kick around the table, "How do we accomplish this, our goal
as a company?" If I was still a CFO, it would be, "My goal as the CFO is to
borrow this money, turn around and keep it off my balance sheet and get it to
the lowest possible cost. You, the investment banker, you, my audit partner, I
need you guys to go figure out how to do it and come back and tell me how to do
Did you ever do that when you were working? What firm did you work
I was the CFO at Symbios. And at that point in time, we did do a number of
synthetic leases, but I thought it was wrong to keep them off the balance
sheet. Clearly, I could have structured them, kept them off the balance sheet.
But we didn't. We put them all on the balance sheet, and it never caused me any
problem and, really, made us make better management decisions. Because knowing
that debt was on the balance sheet, the management team could not ignore it.
... When you take these things and take them off the balance sheet, people
start playing games in their mind that it's no longer their debt.
Well, what about in your accounting practice? You worked at Coopers &
Lybrand. What kind of things were being done when you were working on Wall
Street for an accounting firm? I don't mean specific cases, but the
All the Big Five accounting firms have a group of accountants kind of like a
financial services group, and that group of accountants works with Wall Street.
In my prior life, we actually had a retainer arrangement with each of the major
Wall Street investment banking firms under which we would help them financially
engineer or structure hypothetical transactions for finding financing, keeping
it off balance sheet, making companies look better than, quite frankly, they
You mean doing the kinds of things that Enron and Andersen did?
So there's a whole system that does this?
There is a system that turns around and does it. Without a doubt.
And all the big accounting firms have that?
Yes. Every one of the big accounting firms has such a group.
And all the big investment banks have that group?
Yes, investment-banking groups -- in fact, they make good money trying to
figure out how to structure these transactions.
So, in Enron, we haven't just stumbled into something that may have
happened. We've run into something that is a fairly common practice?
This is day-to-day business operations in accounting firms and on Wall Street.
There is nothing extraordinary, nothing unusual in that respect with respect to
So is it credible to you that anybody at Andersen -- or in any accounting
firm -- would say, "We didn't know what was going on?" It sounds like they were
in on the takeoff.
If you go back to the special investigative committee report on Enron, they
talk about in there how the auditing firm Andersen was paid $5.7 million to
consult on these off-balance-sheet vehicles. Certainly, they were familiar with
them. They were aware that they existed. In fact, they're even disclosed to
some extent in the footnotes to the financial statements. So, in this case, the
watchdog can't sit back and say, "We weren't even aware of them," because they
were out there.
Speaking of the watchdog knowing or not knowing, in recent weeks it's come
to light that there was a debate within Andersen. You have this guy Carl Bass,
who's in the Professional Services Group, who's a technician who's looking over
the books. And he's saying to David Duncan, the engagement partner of Andersen,
"Listen, some of those things that Enron is doing are not proper. They don't
match accounting standards. You should stop doing them."
And then it turns out that David Duncan, at the request of Enron, goes to
the higher management of Andersen and said, "Would you get Carl Bass out of the
way? Would you move him out of here?" evidently because he was raising
difficult questions. I'd like to get your sense of what was going on inside of
Andersen, from your experience, at that point. What are we seeing? What's the
What you really see when you see the tug-of-war, if you will, between David
Duncan and the other partners in the Houston office and the national office of
Andersen, and the Carl Basses and the other ones there is that the partners
down on Enron are viewing their client as the management team of Enron, the Ken
Lays, the Jeff Skillings, the Andy Fastows. In their mind, that's who their
client is. ... The client is the investor. You've got to keep that in mind. The
client is not the management team. ...
That sounds like the guts of the problem.
It is, without a doubt, the guts of the problem -- this tug-of-war between
either the investor is your client, or is management the master that you need
to serve? It's the same issue that you get into when you look at, "Am I, an
auditor, doing a public-interest function? Or am I an accounting firm that's
really a business?" And I need to grow my consulting side. And, of course, when
I do consulting, my job is to make management look as good as possible -- a
conflict between the two that you just cannot avoid.
Has that always been there? Or has it gotten worse?
It's gotten much worse since the mid-1970s, when Congress got concerned as the
consulting practice in the accounting firms initially just started to grow. At
that point in time, accounting firms were principally a firm who did audits.
Maybe 70 percent of the revenues from the audit side of the practice, 20
percent from tax, and maybe 5 percent to 10 percent coming from consulting
Those firms have now basically transformed themselves where, by the time we got
down towards the end of the 1990s as we were in to the market uptick, as
they've been able to provide a lot more consulting to their clients, we found
that the auditing practice had gone down to a third or less of the total
venues. And that was definitely having an impact on the culture and how the
management of these firms, how the leadership of the firms and in the
profession viewed their jobs. ...
While I was at the [SEC], time and time again we saw situations where the
auditors had actually identified the problems, knew about the problems. So it
wasn't a question of management fraud, where it was a cover-up and they didn't
become aware of the problem. I mean, it was right there, smack-dab in front of
them. And yet they turned around and said yes and gave the clean bill of health
to the public.
One of the things we heard about Waste Management was that there actually
was what they called a "treaty" between the accounting firm, which was Andersen
in this case, and the management of Waste Management. Andersen wrote a long
document of all the things that needed to be cleaned up in Waste Management's
accounting, in their financial statements, and they were supposed to fix them
over a period of three or four years. The accounting firm never informed the
audit committee of the board; it was strictly between management and the
accounting firm, and the things never got fixed. I don't understand. How does
You've got an audit partner, an auditing firm -- and not only in the Waste
Management case; again, we saw it in cases like WR Grace and others -- where
the auditors honestly believe the management team is their client. It's not the
board of directors. It's the management team. The management team pays their
fee. They know it's the management team that will give them -- or not give them
-- additional consulting revenues.
The partner knows that, to the extent that he builds a practice, that impacts
his compensation, because his compensation is built in part on how much he's
able to sell in consulting. He knows consulting grows for him faster than just
the audit fee.
So again, following the cash, the auditor is beholden to the management team.
His job -- especially once you start doing consulting -- is to make that
management team look as good as possible. You don't make the management team
look as good as possible when the audit partner turns around, runs to the board
of directors and says, "Look at all these problems with these people."
He also has in the back of his or her mind that if he goes and tells the audit
committee, or tells the board of directors, about all the problems that are
going on, that, quite frankly, that management team, given the power they have
in some of these companies, they would very well just do away with them. And if
they're here today and gone tomorrow as the auditor for a firm, within their
own firms I've seen situations where the audit partners, when they lost a big
client like that, were here today and gone tomorrow, as well. ...
So the watchdog doesn't bark, because they could wind up biting
Let me ask you -- when you look at Andersen, do you see patterns of behavior
that go from one case to another, that go from Sunbeam to Waste Management to
I think without a doubt we see a pattern of behavior across a variety of
clients in the case of Andersen -- and keep in mind I don't think this is just
an Andersen issue; I think this is a profession-wide issue -- where people have
made decisions, not based upon the interest of investors, but are making
decisions based upon whether or not they further their own business interest
and the business of the partnership. Which, in turn, will further the interest,
at least financially, the interest of the individual partners. ...
If a company like Andersen is both fined by the SEC and hit by large
stockholder suits in a case like Waste Management or Sunbeam, why does it then
go ahead and get involved in the same kinds of problems in Enron?
What you're really seeing, again, is -- despite the fact of paying out tens, if
not hundreds, of millions, having your reputation damaged by being charged with
fraud, as it was in Waste Management, paying millions out to the government
regulator -- despite that, the number one priority in these firms, as you can
see, is growing the practice, growing the business, maximizing revenues and
take-home pay for the partners. ...
What's it going to take to get a message through? What's it going to take to
get auditing firms back to the business of serving the investors, as opposed to
the corporate management?
I think it's going to take a number of changes in the system -- not only to the
auditing firms, but in how firms view their relationship with investors, how
they view their relationship to the board of directors and to the audit
committees [to] perhaps take off some of the pressure on those auditors.
Phenomenal pressure, pressure that most people would cave under, I think, when
they get into some of these debates, like with an Andy Fastow at Enron. We've
got to relieve some of that pressure from the system. The only way we get those
fixes made is to make some very basic, very important and necessary fundamental
changes in how we operate this profession.
Does it take having top managers, top auditors going to jail, the way Ivan
Boesky did, or Milken?
I think when you turn around and go into a 7-11 store and rob the store for a
couple a hundred bucks, you go to jail. When you've got auditors who have
turned around and watched top management teams basically rob from their
shareholders by failing to tell them clearly what's going on and, yet, still
taking the investors' money into that company, and the auditor stands by the
wayside, knowing that the numbers aren't right, aiding and abetting the
management team -- quite frankly, I don't see a difference. ...
Has that happened in recent years in any notable case?
In recent years, we have not seen auditors go to jail. I think the most recent
case was in the mid-1980s, where an auditor actually took a bribe to allow the
numbers to go out wrong. But aside from that, no. We have not seen that type of
punishment come to anyone in the auditing profession. ...
The accounting industry has operated under a system of self-regulation,
frankly, since the SEC was set up. Has self-regulation worked in the accounting
Self-regulation has not, is not, and certainly at this point in time, given
fundamental changes in business today, self-regulation is not going to work.
The financial conflicts are too great. The fact is that we've had a
consolidation of these firms from eight firms down into six and five - and now
we're looking at probably the final four. With respect to the firms, [there
have been] big, fundamental changes in competition and the drive to keep things
What's taken over is the consolidation of consolidation and power and a change
in the attitude of the firms as they made this transformation from being
principally an auditing firm, driven by what made an audit right, to a firm
that has become much bigger in consulting and providing other services to a
company. What's critical to getting that piece of the business is now having a
much bigger effect on what makes these firms successful; and as a result, how
the CEOs of those four or five firms operate that business.
Now, SEC Chairman Pitt has come up with a number of proposals for fixing the
problem and reform. What's your assessment of what Chairman Pitt is proposing?
Are his proposals adequate? Will they do the kinds of things that you think are
necessary to shape up and restore the integrity of the accounting and auditing
Chairman Pitt's proposals, first and foremost, fall way short from what almost
every single investor group has asked for. He's clearly set aside the concerns
and interests of investors -- falls way short of what they're asking for, falls
short of what even the president's ten-point plan includes in it. And it falls
way short -- it's almost like a Grand Canyon chasm -- between what Congress is
looking at doing and the necessary reforms and what Chairman Pitt has
I agree with every one of those groups, and I think Chairman Pitt's proposal,
while it's a start, quite frankly it's almost in fact a nonstarter, because it
really doesn't accomplish much.
In your estimation, what's missing from Chairman Pitt's reform proposal?
In his reform, he falls way short on improving the independence of the
auditors. He creates a regulatory oversight body that brings the accounting
profession into it. It's not an all-public-interest board, which is what we
have today. So it's a step backwards in that regard.
It doesn't have an effective disciplinary or investigation provision. He
doesn't give the new body the ability to force investigations through getting
testimony and getting documents that they're going to need. It's not given the
statutory [authority] to turn around and do that.
The new body that Chairman Pitt would propose doesn't even have the ability to
set their own rules with respect to what auditors should be required to do, or
the quality of their audits. He's going to leave all of that in the hands of
the profession. And as we've seen from the last 25 years, as we've seen from
the $200 billion in losses investors have already suffered, quite frankly, that
dog just doesn't hunt.
Let me just get this straight. How much would you say investors have lost
through corporate restatements?
If you go back and look over the last half-dozen years, give or take a year, up
to the point of about a year ago, investors had lost probably close to a $100
billion -- suffered those type of losses from these situations like Cendant,
Waste Management, Sunbeam, Microstrategies, Rite Aid, Lucent, Xerox -- a litany
of them. Investors had already suffered losses that they were looking at in
terms of a $100 billion.
Then along comes Enron. The loss on the market cap of Enron, just for the
common stockholders, was around $63 billion. The total loss when you add in the
debt and all is gonna be twice the losses that this country suffered on 9/11.
Phenomenal. Six times the losses from the hurricane damage to Florida on
Hurricane Andrew. This is a phenomenal number.
And we add on now every day. Global Crossing and others have come to the
forefront. Investors are now looking at losses probably coming close to $200
billion. This is the magnitude of what this country lost when taxpayers had to
bail out the savings and loan industry -- again, where the numbers weren't
A high price to pay.
It's a phenomenal price to pay. And in terms of the fact that our capital
markets today are the crown jewel -- a third of the wealth of the country at
the height of the market was tied up in that stock market.
When you're exposing it to these type of losses, it is does real, real damage
to the country. It means companies can't get the capital they need to develop
new technology. They can't get the capital they need to build new plant, to
provide new job opportunities. In the case of companies like Enron and Waste
Management, you see the companies have to lay people off. They lose their
savings, not only for their future retirement; for their kids' education.
This is a phenomenal damage to the American public that needs to be resolved
before more damage occurs in the future. Without reform, there's no question
we'll see more damage inflicted. ...
What do you think was the impact on the corporate climate and the
performance of accounting and auditing firms and so forth of the 1995 "safe
harbor" law? Did it have any impact? Where did the SEC stand on the 1995 "safe
harbor" law when it was being debated?
At the time the 1995 tort reform act was being debated, we were in a situation
that was not healthy in this country where, quite frankly, there was probably
lawsuits being litigated that just didn't have a real basis for. Some people
called it "ambulance chasing," even on the part of some of the attorneys. That
wasn't healthy, and that cost investor money, because some companies had to pay
out money just to settle, even though the suits didn't have merit.
On the other hand, some of those suits were very good. There had been some bad
things done, and the companies and their management team should've been
The problem is that I think we turned around and made it much too tough for
investors to turn around and pursue their claims in court when they were
wronged by whoever. It might have been management, the auditors, whatever. What
we had before was too loose, made it much too easy for people to turn around
and pursue those. We've got to get it somewhere between being too tough and too
There have been things that have changed, whereby even if a professional aided
and abetted in the fraud that went on -- not necessarily because they did it
directly themselves, but stood by and watched it happen and could have done
something -- it is now unlawful to be able to go after people in those
I don't think the average investor is going to think that it's right that
people can stand by -- especially the professionals, the experts in these cases
-- can stand by and watch things happen, thereby aiding and abetting those
things occurring, and think that they should go without punishment. Neither do
Do you think the passage of the 1995 tort reform law affected the behavior
of accountants, of corporate boards, of corporate officers, of law firms, of
investment banks in any way; made them feel, "Well, we're not quite as
vulnerable as before?" or conversely, "We're more vulnerable?"
When you step back and look at the effects of the 1995 tort reform act, what
you see is accounting firms now who turn around and still don't like to be
sued. No one likes to be sued and without a doubt, it's in the back of all of
their minds. But probably what's at the forefront of their minds is the fact
that now there is, without a doubt, less litigation exposure. The chance of
getting sued has been reduced. People say, "Well, there's been more financial
fraud lawsuits." That's true, but it's because there's been more financial
But the auditing firms now view this, to some degree, as risk management. Not
an issue of, "Do I get the audit done right?" but, "I do tradeoffs between how
much audit work I'm going to do, versus how much risk do I have," or, "Exposure
to litigation, given that the passage of that 1995 act, actually reduced the
chances that someone's going to successfully sue me." That trade-off is not a
healthy situation in the profession right now.
Did you and others in the SEC want to have the SEC take a more vigorous
position to limit the reach of the 1995 tort law?
From my perspective, where I sat as chief accountant of the commission, I would
have liked to have had more tools and the ability to do more effective
discipline that was really meaningful, that really had more bite when, in fact,
we did see cases where the auditors had truly not engaged in professional
conduct. Our rules made it very difficult to reach out and touch, if you will,
the auditors, unless their conduct had gotten extremely reckless,
Given the limitations of the staff at the SEC, given the limitations of
funding, were private lawsuits to some extent an enforcement tool that was
There's no question that private lawsuits are a big part of the existing
deterrent in the country today. Private lawsuits probably have a much greater
impact, even [more] than the SEC, on the behavior of company executives and
When you left the SEC, did you have a backlog of fraud cases you were
investigating? And if so, how many? How serious was it?
At the time I left the SEC, we had a backlog of about 200 to 250 enforcement
cases of fraud that we were investigating. And some of those, I think, will
turn into major cases.
What was very concerning about it was there was all of a sudden becoming a
growth in the number of cases that we were seeing not against small companies,
but against the household names. You'd see names start to pop up like Xerox,
like Lucent, like Rite Aid, where people know these companies; they're big
companies. That was something that was concerning, because not only was it
little penny stock people that were causing the problems; but now it was great
big companies. And when you have these great big companies, given the massive
amount of market value that they have, the chances for major damage to
investors in the marketplace grows exponentially. And that was very troubling.
To date, we've not seen much of that backlog worked off. I think that's in part
because of staffing. The SEC just doesn't have the resources to do it and,
unfortunately, some of those major cases will never be brought to action
because the SEC hasn't got the resources to do 200, 250 cases. ...
Talk to me about the fight with the accountants. What was that like? Why was
the Levitt effort to separate accounting and consulting important? And what was
the battle like?
... In the cases that we had seen and what was going on with them, like Waste
Management, it had become clear to us that the auditors were not as independent
as they should be. And it was becoming a growing trend. At the same time, we'd
seen a growing trend in the number of financial restatements, 85 percent of
which came out of actions other than the SEC. We'd never seen them before
they'd showed up in the paper. So we were very concerned about the trend.
Given that, we decided that we couldn't wait any longer, that we needed to go
try to do that fix. We'd actually talked to the accounting firms for quite a
period of time even before we proposed the rule, trying to get the firms in
agreement on a plan that might address the issues. When we couldn't get them to
agree to anything -- and, in fact, there was a violent split amongst the
profession about what the fix could be -- then we decided we had to act on our
What kind of fight did you get into?
It was easily described as a 15-round, knockdown, drag-out-to-the-final-bell
type of fight. It was the accounting firms using the power of their money,
using the power of their Washington, D.C., lobbies, heavy lobbying in Congress
-- and using that to try to get Congress at every turn to oppose what we were
trying to accomplish. And that was very difficult. ...
It basically took everything we had, every resource within the commission, to
avoid having Congress actually cut off our appropriations so we could do no
more reform. And that forced us into watering down quite a bit the final
reforms that were eventually passed. ...
I guess you weren't at the SEC at the time of the big stock option fight in
the early 1990s.
Where do you stand on whether or not stock options should be expensed on the
balance sheet, and why?
I've been an executive in a major international corporation where we granted
stock options. Certainly stock options, I think, are good, and should be used.
But they are equally subject to abuse. And economically, there's no question I
was giving a value something significant to my employees. I think the financial
statements clearly need to reflect that. ...
At the same time, one of the things that is concerning to me is you've got
these stock option plans in companies where they've opposed letting the
shareholders, the people who own the business, vote on them. It's phenomenal to
me that a management team, who is supposed to be serving investors, aren't even
willing let the investors vote on stock option plans, where the management team
is able to give away 15 percent, 20 percent of the company. That is just not
good corporate governance. We have to address that. ...
Why do you think Sen. Lieberman, who has been outspoken in this spring of
the need for reform, has been such an adamant foe of expensing stock
I think those who have been so strong in their opposition to stock options just
aren't dealing with economic reality. There's no question but what these things
have value. If they didn't have value, heck, we wouldn't be giving out so many
of them to everyone. And to turn around and say that, "Let's not show that
number to investors," is no different -- absolutely no different -- than
turning around and saying, "Let's not show investors the debt. Let's keep it
off the balance sheet."
So when a congressman turns around and tells me, "Let's put all the debt on the
balance sheet, but leave all the stock option expense out," in the back of my
mind, I can only assume that there's someone else out there with money that's
influencing their decisions. ...
You get the feeling that there's an insiders' game and an outsiders' game.
The insiders all understand what's going on here, and it's only the general
public -- which got heavily involved in the market in the 1990s -- it's in the
dark. Is that a level playing field?
We need a lot more sunlight on the system, so that the public can see what's
going on. And that would be good, because if the accounting profession is
scared to operate in the public domain, out in the sunlight so people can see
everything that's going on, then, quite frankly, that should tell you something
-- that there's something wrong. The accounting firms should recognize it; the
public should understand it. And Congress, probably along with the SEC, needs
to make reforms. ...
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