[Congressional Record Volume 148, Number 93 (Thursday, July 11, 2002)]
[Senate]
[Pages S6598-S6599]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                   LAPSES IN CORPORATE RESPONSIBILITY

  Ms. COLLINS. Madam President, as every Member of this Chamber knows 
and, more importantly, as every American investor knows, we have 
recently witnessed lapses in corporate responsibility unlike anything 
that has occurred during the past 70 years. It is our role to determine 
why this has happened and what can be done to prevent it from 
continuing to happen. I rise to offer some thoughts, as well as to lend 
my support, to the accounting reform legislation now on the Senate 
floor.
  Several years ago, Federal Reserve Chairman Alan Greenspan 
characterized the latter stages of the great bull market of the 1990s 
as irrational exuberance. Although stock prices rose for a few years 
after that statement, they ultimately collided with economic reality 
and embarked upon an extended decline. It now appears that that 
irrational exuberance was being sustained in some instances by improper 
accounting. Put differently, one way of satisfying the insatiable 
appetite of some for ever-increasing corporate profits, as well as for 
rich compensation packages, was to cook the books. Many, although not 
all, of the recent alleged abuses have occurred in what has been the 
hot sectors of our economy.
  Electric deregulation, the development of the Internet, new medical 
treatments, and the spread of broadband are all thought to hold 
enormous prospect for future growth. Unfortunately, for some of the 
companies in those areas the growth in accounting creativity 
outstripped the growth in business fundamentals. I make this point 
because I think it contains a lesson for those of us in Congress, as 
well as for Federal and State regulators.
  During my years as a financial regulator in my home State of Maine, 
the advice we gave to investors, to the point where it began to sound 
like a broken record, was that if it seems too good to be true, it 
almost certainly is. The comparable message for those of us with 
oversight responsibility is that if one is not vigilant during the 
boom, when things seem too good to be true, cleaning up after the bust 
will be far more difficult.
  During my first 4 years in the Senate, I was privileged to serve as 
the chairman of the Senate Permanent Subcommittee on Investigations. 
During that time, I held more investigations into fraud and abuse in 
our securities markets than on any other subject, despite the fact we 
were in the midst of a roaring bull market. Indeed, the roaring bull 
market made those investigations seem all the more necessary.
  More recently, Senator Levin and I teamed up in an investigation of 
Enron Corporation, an investigation that is ongoing. In fact, we just 
released our first report on the failures of the Enron board of 
directors to exercise its fiduciary responsibilities. We found that too 
many of the Enron directors acted as rubber stamps rather than as 
watchdogs.
  In short, the principal lesson of recent events for those of us in 
Congress may be the need to remember the importance of vigorous 
oversight and tough enforcement during the good times as well as the 
bad.
  Let me now turn my attention to the conflicts of interest faced by 
some accountants, brokers, and corporate directors. American capitalism 
relies heavily on the fiduciary duty concept to protect those who 
entrust their money to large and often distant corporations. 
Accountants have a duty to investors to ensure the accuracy of 
financial statements. Directors have a duty to make certain that 
managers act in the best interest of the corporation, and stockholders 
have a duty to give advice that will best serve their client's needs. I 
believe that this structure is fundamentally sound, but I also believe 
we have allowed these trust relationships to be seriously eroded by 
conflicts of interest.

  Confidence in our capital markets depends upon accurate and fair 
financial statements. To achieve that objective, we follow a maxim that 
President Reagan put forth in another context; namely, ``trust but 
verify.'' We trust corporate managers to give us honest financial 
statements but, just in case, we look to accountants to verify the 
numbers. Too often in the recent past accountants have let us down, 
principally because, in my view, conflicts of interest have undermined 
their fundamental fiduciary duty to investors. The source of this 
problem is that some accountants can depend on those whose books they 
examine not only for their auditing jobs but much more worrisome for 
lucrative consulting contracts.
  In some ways, the situation for brokers can be even worse, because 
they frequently have a personal, as well as an institutional, 
relationship with those to whom they owe a duty. As the recent Merrill 
Lynch settlement demonstrated, when the same individuals are involved 
in giving advice to retail customers and securing underwriting business 
from the corporations they are supposed to be objectively rating, it is 
the investor who losses. Again, the fiduciary duty concept is not 
inherently flawed. Rather, it has been eroded by conflicting interests 
that cannot comfortably coexist.
  The third component of what might be called the fiduciary duty triad 
is the corporate board. Frequently owing their positions to those whose 
activities they are to monitor, some board members suffer from the 
appearance, and in some cases the reality, of conflicts of interest. In 
my view, given

[[Page S6599]]

their part-time status and their dependence on management for 
information, the role of the independent directors, perhaps even more 
than the role of accountants or those of brokers, needs more scrutiny.
  In our recent report on the role of the Enron board of directors in 
the corporation's failure, the Permanent Subcommittee on Investigations 
found that the board ignored countless warning signs of wrongdoing. In 
some cases, the board actually approved highly irregular, off-the-books 
partnerships that masked the company's true liabilities. The board's 
audit committee failed miserably to ensure the independence of the 
company's auditor, allowing Andersen to provide internal audit and 
consulting services while at the same time serving as Enron's outside 
auditor. In other words, in some ways, Andersen was auditing itself.
  Finally, directors blessed financial deals that created conflicts of 
interest for the top executives of Enron Corporation. Such conflicts of 
interest are rotting the pillars supporting an essential element of 
capitalism, and that is the ability of investors to rely on those to 
whom they entrust their money.
  Excising that rot requires two steps. First, we must redefine the 
roles of the accountant, the broker, and the board member. We must make 
it absolutely clear that their undiluted responsibility is to the 
investor.
  Second, we must enforce those obligations with tough sanctions, such 
as those we approved yesterday, that will deter those who would breach 
these fiduciary duties. This leads logically to the role of the 
Government regulator. I do not see regulation replacing the fiduciary 
roles I have described for the simple reason that having Government 
verify every number in every financial statement would create a nation 
of regulators. The more effective role for the regulator is to make 
certain that others honor their obligations and to take swift and 
meaningful action when they do not.
  I know from personal experience as a regulator in Maine that this is 
no easy task, and it is our responsibility to ensure that the 
regulators who carry it out have the necessary authority and the 
financial resources to do the job.
  I am pleased the bill before us today incorporates provisions from 
legislation that I have introduced that will allow the Securities and 
Exchange Commission to discipline those brokers and investment advisers 
who have been barred by State regulators from operating within that 
State. As a result, the SEC will have the option of giving nationwide 
effect to the bans imposed by individual States, thus protecting 
citizens nationwide from dishonest or unethical brokers without having 
to undertake separate investigations. This is especially important 
because as we learned in my subcommittee's hearings on fraud in the 
microcap stock market, it is very easy for small-time crooks to move 
out of one State and into another, setting up shop and defrauding 
investors all over again.
  The reforms needed to restore trust in our capital markets will 
require tough, effective action by government and self-regulatory 
organizations. I call on our Nation's business schools to examine the 
ethical and professional training they provide to corporate managers, 
accountants, brokers, and board members. The concept of a free market 
is one that is free from government direction but not free from the 
duty to act ethically, honestly, and competently. If our corporate 
leaders lack integrity, no amount of regulation will preserve our 
economy. How effectively we are conveying this message strikes me as 
well within the unique expertise of those running our business schools 
and training our future corporate leaders.
  Congress, the SEC, State regulators, the exchanges, and perhaps even 
our educational institutions can help solve our current problem. 
Nowhere is the obligation to act greater than on Wall Street and in our 
corporate boardrooms. The American people are justifiably outraged by 
the breakdown in corporate ethics. This is not thievery by those 
lacking the resources to buy food and medicine, this is thievery by 
those with the resources to buy Picassos and Porsches. As a people, we 
do not begrudge others who earn their success, but we will not tolerate 
those whose success rests on breaching ethical and legal obligations.
  We must also recognize that although not often mentioned, this 
problem has ramifications for our standing in the world community at a 
time when others are waging war on the American system. Our most 
successful exports since the end of World War II have been our 
political democracy and our free markets. Indeed, as China 
demonstrates, our economic views have prevailed even when our political 
ideals have yet to take root. Having persuaded the rest of the world of 
the vitality and the creativity of free markets, it would be tragic if 
we lost our way just when our economic values are gaining widespread 
acceptance.
  A particularly ironic aspect of the current situation and one that 
would have Marx and Lenin spinning in their graves: Russia is taking 
steps to strengthen its system of corporate governance at a time when 
ours appears to be crumbling. While we need not worry that Moscow will 
replace New York as the world's financial center, it is not 
unreasonable to be concerned about how other nations judge our response 
to our current problems. Indeed, the rise in the euro and the drop of 
the dollar are disconcerting indications of their view to date. This is 
just one more reason we must act swiftly to put our house in order.
  Recent corporate misdeeds have caused great harm, costing our economy 
and our shareholders billions of dollars and many people their 
retirement savings as well as their jobs. The impact on investor-
employees who have lost both their jobs and their retirement savings 
has been especially cruel, and those responsible have forgotten that, 
because capitalism can survive only if people believe they can trust 
strangers with their money. Honesty and fair dealing are the lifeblood 
of our economic system.
  It would also be unfair to paint with too broad a brush. We should 
take care not to condemn the many executives who do honor their 
obligations to their employees and their shareholders. Indeed, it is 
partly for their benefit as well as for the benefit of all Americans 
that we must restore confidence in our corporate sector.
  In 1997, in my first statement on the floor of the Senate, I quoted 
the following observation from Winston Churchill: ``Some see private 
enterprise as a predatory target to be shot, others as a cow to be 
milked, but few see it as a sturdy horse pulling the wagon.''

  I added that I do see private enterprise as that sturdy horse, and in 
the wagon it is pulling are the jobs of our constituents. I continue to 
hold that view. But we must recognize that the wagon has some loose 
wheels. It is our responsibility to the American people to make sure 
they are tightened and to institute the reforms that are needed to 
restore faith in corporate America.
  I yield the floor.
  The ACTING PRESIDENT pro tempore. The Senator from Nebraska.

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