Better Business

GWEN IFILL:

Joining me are Joseph Grundfest, a former commissioner at the Securities & Exchange Commission. He is now a professor of law and business at Stanford University. Carolyn Woo, dean of the Mendoza College of Business at the University of Notre Dame. And Damon Silvers, associate general counsel at the AFL- CIO.

Dean Woo, well, we just heard Secretary O'Neill say that one of the things the maintain President was trying to accomplish today was to spell out wrongs more clearly, spell out what is wrong more clearly. What did you think of the President's speech?

CAROLYN WOO, Dean, College of Business, University of Notre Dame: I thought it was effective and that it was relevant. I think there are two parts of the problem. One is wrongdoing, and that pertains to people. The other part is about loophole in the systems. I think the President's speech gets at wrongdoing and holding people responsible and creating incentives and penalties and defining wrongdoing and the consequences much more clearly.

GWEN IFILL:

Mr. Silvers?

DAMON SILVERS, AFL-CIO:

Well, I think that what the dean just said about relevance is the key question. The President gave, I think, a fine speech in terms of setting a tone, a speech that would of very welcomed last October after the Enron revelations began. But today there are a set of specific reform proposals that would truly fix the conflicts of interest that have plagued corporate America and hurt tens of thousands, hundreds of thousands of workers. And the President sidestepped each and every one of the key issues in front of him and in front of our government in Washington today. And high did so, frankly, because his administration does not want to choose between the public's outrage and the need for reform and the very large campaign contributions they've received from the people who have benefited from the conflict of interests. He is hoping he can avoid doing so.

GWEN IFILL:

Professor Grundfest, was there enough specificity in the speech today?

JOSEPH GRUNDFEST, Stanford University:

Well, for a lawyer, there is never enough specificity. But I think the general tone of the message is fairly clear. The main focus of the President's message was that there is going to be greater enforcement. The SEC is getting an extra $100 million. A special task force is being created. And the fact of the matter is, if you can't a catch crook, you cannot penalize a crook. With any luck, these will be important first steps in increasing the efforts throughout the economy.

GWEN IFILL:

Professor Grundfest, how much of what the President proposed today do you think he can accomplish? Some of it requires Congress, some of it can he can do himself, some of it he's just calling on companies to do themselves.

JOSEPH GRUNDFEST:

Well, I think there are really four different levels that are involved here. First there are steps taken by executive order and the President's already taken several of those. Second, there are steps that can be taken by the Securities & Exchange Commission and Harvey Pitt, I think, perhaps isn't getting enough credit for some of the very aggressive steps that he has taken in the recent months. Third, there are steps that are going to require cooperation with Congress, and those are matters that obviously are going to have to be negotiated between the administration and Capitol Hill. And, fourth, there are steps that can be taken by corporations themselves and with respect to those steps, a great deal may well depend upon how forward thinking many corporations are with respect to their own vision of responsibility towards the economy and the country.

GWEN IFILL:

Dean Woo, let's try to walk through some of these steps one by one. First the part about CEO's and management and the way they manage their own companies that we just heard Secretary O'Neill alluding to. Controlling compensation, freezing payments when a company is under investigation and doubling prison sentences for people found guilty of fraud. Tell us what's your take on that.

CAROLYN WOO:

I think the majority of CEO's and corporate officers and directors would welcome this set of recommendations. I think right now we are in a period where people feel like they can't tell the honest ones from the dishonest ones. And honestly, I really feel many CEO's try to do the right job. This set of recommendations are not very different than what good CEO's want to stand by anyway, that when they sign their report, that the reputation and their honesty is behind it; if there is wrongdoing and money, which is earned in a wrong way, that they don't deserve it.

So I just want to say I think this set of recommendations helps corporate America. It does not restrain corporate America. And also I want to say that reform takes a very long time to happen, systems reform. We could be boiled down in all sorts of debates. I think this set of measures actually had a lot of teeth. If you ask and poll corporate CEO's whether there was impact in the statement, I would bet that the majority would say they heard a very, very strong message.

GWEN IFILL:

You believe it is the government's role to be enforcing this message?

CAROLYN WOO:

I think at the end– oh, yes definitely. I think that we have the laws on the books, most of them. And I think enforcement particularly of white-collar crime has been sort of under– undertaken. It has not been strong enough. I think this is a strong message that the SEC needs to be reinforced in going after that.

GWEN IFILL:

Mr. Silvers, let's talk about some of that white collar crime — accountants and auditors. What in the President's remarks today spoke to the question of whether accountants and auditors have been doing their jobs correctly?

DAMON SILVERS:

Well, he alluded to his belief that there ought to be clear standards about auditors and audit standards. And it's sort of ironic because the day before he was saying he thought there was a lot of gray there and he got kind of tangled up in it ten years ago. The issue with auditors though is a conflict of interest. Auditors do consulting work for companies — high profit margin consulting work. And they warp their audit behavior in order to attract the consulting work.

There is a bill on the floor in the Senate this week that will shut that down, sponsored by Senator Sarbanes that has strong bipartisan support. What I was talking about earlier is that the President, who could lead here, who could point the way toward dealing with these conflicts is sidestepping the question of whether he supports this bill knowing that the House Republicans intend to eviscerate or block it in conference. If he stood up for ending auditor conflicts and for having a strong public oversight board over the audit industry, he would enable that bill, the Sarbanes bill, which has strong support from people like Paul Volcker, to pass. He sidestepped that issue while seeming to address it. And that, frankly, In my opinion, that is the fundamental dishonesty at the root of this speech.

GWEN IFILL:

Professor Grundfest, do you think that was necessary for the President to speak that specificity, that is, supporting a particular approach to speaking to white collar crime with auditors and analysts and brokers in conflicts of interest?

JOSEPH GRUNDFEST:

Well, you know, as a practical matter, Presidents have a long history in setting the direction and leaving the details in negotiation of legislation and regulatory action to a wide variety of people on Capitol Hill in the administrative agencies. Now with regard to the question of conflicts of interest in auditors, I certainly do understand the great difficulty that many people have with auditors also performing consulting services and I, too, share many of those concerns.

But the reality of matter is if one stops and examines the facts and thinks carefully about the situation, the issue is important but it's really still a side show because we had huge audit failures even before audit firms got into the consulting business and we can find situations where the judgment of professionals is seriously called into question even though they're not involved in any consulting activity. For example, some of the activities of the lawyers involved in the Enron matter have been called into question in a rather fundamental way. Yet none of them were providing any sort of information, technology consulting or other services other than legal services.

GWEN IFILL:

In the WorldCom matter what we say yesterday on Capitol Hill was an auditor actually saying he wasn't aware, even though he was in the inner circles of the company. You don't feel that it's the President's role to address those kinds of specific concerns which have been raised?

JOSEPH GRUNDFEST:

Well, I caught that testimony. I can tell you that was not a good day for the witness testifying. That wasn't a good day for the firm he used to work nor. And it wasn't a good day for the auditing profession. That was not to my mind an accurate characterization of the obligations that an auditor has towards a company. An auditor in my view has an affirmative obligation to root out the truth and not merely to accept any statement that any executive happens to give him as the gospel truth and not to be subject to test.

GWEN IFILL:

Dean Woo, let's talk about the Securities & Exchanges Commission for a moment. The President is proposing a $20 million increase for them to hire 100 new enforcement officers. Is that enough?

CAROLYN WOO:

I think it's $100 million and I think that is definitely a starting point, because I think we have under enforced the whole investigation and going after corporate crimes.

GWEN IFILL:

And what is it that the SEC is supposed to do here that it hasn't been empowered to do before?

CAROLYN WOO:

I think first of all they were very understaffed in terms of going after potential fraud and some of the misleading statements. And I think in addition to just adding personnel and adding money, we need to look into whether accounting standards are allowing us look at the real risk, to assess the real risk that investors and even employees have to take. So I think it is not just a matter of adding money and adding personnel but asking for a type of accountability to providing transparency and allowing people to really assess the risk associated with an investment.

GWEN IFILL:

And are the new laws requiring to do what you're suggesting here? Should there be an action from Congress or the President to make this a force of law?

CAROLYN WOO:

I would say going back to accounting standards, there needs to be a change in our approach. Accounting standards currently, for the U.S. in particular, are very much based on rules. And I would say in other parts of the world accounting standards are based more on principles. And the whole idea is not to check off four boxes and say it's okay. The whole idea is if there is a risk which is material, whether those four boxes of criteria are involved, we need to disclose those to the investors and to the public. So I think it requires a change in the overall approach and philosophy of what our accounting standards are supposed to accomplish.

GWEN IFILL:

Mr. Silvers, what about the approach and philosophy of the Securities & Exchange Commission. What should its role be here?

DAMON SILVERS:

The Securities & Exchange Commission is a wonderful agency with a rich heritage and a lot of them very good and well motivated people and it needs to lead. And, unfortunately Harvey Pitt, who is a very talented man, has fundamentally failed to lead on the key issues in front of us: On auditor independence, on auditor oversight, on separating the analysts from the investment bankers on Wall Street, honest advice to pension funds. So the SEC needs to lead. Now Harvey Pitt has done some good enforcement action. He moved very fast on WorldCom. I think he has shown he knows how to do enforcement.

What he hasn't shown is the other role of the SEC, which is to be a policy, which is to make the rules, to flesh out the bare bones that our securities laws are with the rules that deal with the complexities of our evolving business life. That's why all this congressional action is needed. I will just give one example I think encapsulates what is wrong here and why both the Commission and the President's speech are not going to fix this problem.

We have analysts on Wall Street who are giving people advice, giving workers advice. I just talked with some people here who took advice from analysts and bought some stocks. The analysts as Elliott Spitzer in New York showed, were sort of really pursuing the investment banking agenda of the firms. It has been known by everyone I think who is familiar with this that we need to decouple analyst compensation from investment banking performance on Wall Street. Harvey Pitt refuses to do it. The President refuses to do it. And we'll continue to have corrupt analysis until we get it done.

GWEN IFILL:

That will have to be the last word. Thank you all very much for joining us.