[Congressional Record (Bound Edition), Volume 148 (2002), Part 1]
[Senate]
[Pages 49-50]
[From the U.S. Government Publishing Office, www.gpo.gov]




                           ACCOUNTING REFORM

  Mr. CORZINE. Mr. President, I very much appreciate the opportunity to 
work with Senator Dodd on something that I think is vital to the 
American public, vital to the functioning of our financial markets and 
the health of the economy generally. Just as electoral reform is 
important, and I congratulate yourself and the Senator from Missouri 
and others who are leading us in that fight, I hope we can get the same 
kind of bipartisan focus on something that I think will make a 
difference to the functioning of our economy and our financial markets 
and the protection of investors that we are suggesting in the bill we 
are introducing today.
  It is also unique on this side of the table to work with Senator 
Dodd. I remember, as a former businessperson, testifying in Congress. 
Senator Dodd always asked the toughest, meanest questions of folks with 
ideas they wanted to suggest. He was always spot-on with regard to 
their strengths and weaknesses. It is a great honor to work with him in 
the effort to protect American investors by strengthening the 
regulation of our accounting profession.
  The dramatic and sudden collapse of the Enron Corporation has shined 
a spotlight on the critical importance of auditors, the accounting 
function, in the operation of our economy. Enron's collapse has left 
thousands without a job and, maybe more important for many, without a 
chance for a meaningful retirement program that we worked so hard and 
long to provide.
  It has been an economic disaster for pensioners, individual 
investors, and even institutional investors who relied upon the 
accounting statements, earnings statements, balance sheets, and 
analyses that flowed from that. Frankly, a lot of people think this 
came right out of the blue. A year ago this was the company with the 
seventh largest revenue in the country. Today it is bankrupt. It did 
catch people by surprise.
  Now it appears that for years Enron engaged in a variety of 
questionable and certainly gray accounting practices--not the most 
transparent to the world--to hide debt and inflate its earnings so they 
would have the ability to position their stock at a higher value over 
time. We all took the hook. Yet Enron's auditors blessed these 
arrangements and raised no serious red flags for investors, even though 
they had some questions in their own minds. It is now obvious those 
individual auditors failed, and I think failed miserably, in making 
some judgments about what should have been published at the time.
  Unfortunately, the failure of the auditors in the Enron case is not 
unique. We have seen several examples, highly public examples, of 
questionable accounting practices leading to serious problems in the 
statements of financial condition of companies across the country over 
the last few years. There has been a failure to blow the whistle when 
that should have occurred. In fact, we have seen a regular pattern that 
has developed of earnings restatements by some of the finest companies 
and corporations in America.
  That in and of itself gives cause for concern, since people make 
judgments about what it is they are going to do in the investment world 
based on their interpretation of balance sheets and income statements 
that are presented at a given point in time. That is how they make 
future judgments. Clearly, some of those judgments in history were 
wrong because the restatement of earnings indicates there were 
differences in fact.
  I think we need to be much more careful in this whole process. There 
is a whole series of detailed issues that I think need to be 
addressed--maybe not by Congress but in a much more fast-footed FASB, 
or Financial Accounting Standard Board, than we have had.
  Based on my experience in the real world--or the financial world; I 
don't know whether that's the real world--I can point to several 
possible explanations for these accounting failures. One is the serious 
increase in the complexity of these financial arrangements generally. 
The issue of derivatives and off-balance-sheet financing and the matter 
of notional amounts versus revenue standards--all of those things are 
very complicated in and of themselves. But there is an inadequacy, I 
believe, in our existing accounting structure to really scrutinize 
these and get to the nub of how they are reported on a timely basis.
  Another problem is accounting firms increasingly are facing extreme 
pressures to find other sources of revenue, which often means 
generating new forms of revenue from the same businesses they audit. 
This, obviously, can create conflicts in reality and certainly in 
appearance. And I think they undermine the independence required of 
auditors as we go forward.
  Another problem is that our regulatory structure, in my view, has 
been inadequate. It has relied far too heavily on self-regulation by 
the industry. That is a little bit like, what? Having the fox watch the 
hen house. Certainly I think it deals with an appearance issue that the 
public has a right to have us ventilate as we go through this debate. I 
think we need to do something about it.
  Another problem is the integrity of the process for setting 
accounting standards. I talked about this before and whether that 
process has been compromised or certainly complicated by the nature of 
how that process takes place. In some cases, as I heard Senator Dodd 
talk about, the fault may lie right here in this body, in the Congress. 
Certainly there is the appearance of political pressure getting wrapped 
up in how FASB, the Financial Accounting Standards Board, sets its 
rules.
  These are true professionals who work very hard to try to get to 
setting down rules that will work in the accounting world. But these 
are complicated issues. And then sometimes people enter in from the 
political process and stop it, halt it, and we have not seen the kind 
of progress for the kind and nature of complexity that has developed in 
the financial world.
  The bill Senator Dodd and I are proposing is a significant first step 
towards addressing the problems I have outlined in the accounting 
profession. It includes tough new provisions to ensure the independence 
of auditors and restrict their ability to provide nonaudit services 
that inevitably create conflicts of interest. Whether that comes when 
you are working with the company or you separate it, I think we have 
some real reasons for debate on that. But I think we will work very 
hard to make sure people have confidence that we are auditors and we 
are working on functioning with a given company to present the data in 
a way that works a lot more like what the former SEC Chairman, Arthur 
Levitt, would suggest.
  Also, our bill strengthens the Securities and Exchange Commission to 
put them in a better position to deal with the accounting industry on a 
real-time basis. I heard Senator Dodd talk about 20 or 25 accountants 
for the largest economy in the history of the world. A 10-trillion-
dollar account economy, and we have 25 accountants sitting over in a 
building across the street trying to figure out whether we are 
reporting accurately for all these companies. Just on the surface of 
it, it does not meet the standard of common sense.
  We propose to double the size of the SEC's accounting staff. I think 
we need to seriously review what resources are necessary to deal with 
these problems so the public can have confidence with regard to what is 
going on in our accounting statements across the country.
  In addition, the bill would help close the revolving door between 
auditors and their clients which also creates real conflicts of 
interest. We have set up rules in other parts of our economy for people 
who work in a particular area. An example is, if a person works in the 
Energy Department, they cannot go to work for an energy company an

[[Page 50]]

hour and a half after they leave their job.
  I think it raises serious issues involving conflicts of interest when 
people go through a revolving door format going from being auditors to 
auditees. I think we need to look at those issues to make sure we have 
confidence that the chief financial officers, and others who have 
worked with the accounting firms, are truly being challenged 
independently by the accounting function. It is important.
  As a former CEO, it was good to know that people could come in and 
say: You have these kinds of problems you need to check out. That is 
where the independent auditor performs an enormous service, aside from 
the financial statements. When that gets compromised because people are 
so close to one another, I think you run risks of setting up dangerous 
precedents on how decisions are taken within the audit function.
  Finally, our bill would strengthen the independence of the Financial 
Accounting Standards Board--I have talked about this; so has Senator 
Dodd--which sets the accounting standards. We would do this by 
establishing a steady funding source and demanding greater timeliness 
of action by the FASB. This is truly one of the issues that needs to be 
addressed.
  We need to get on with a lot of the specific issues that have been 
addressed and have been tied up in knots for literally years and 
decades inside the Financial Accounting Standards Board. I think we can 
make a big difference in the functioning of our accounting system if we 
make sure we provide the resources to allow them to do their job 
appropriately.
  I believe these proposals will go a long way toward strengthening the 
accounting profession and protecting the integrity of the markets and 
protecting, ultimately, the investors and the retirees who are 
dependent on the information they derive from these accounting 
statements.
  It is absolutely essential we have this debate, this discussion, and 
that we are intent on making sure we get to a secure system and that 
this not be a political issue. This is about making sure our financial 
markets work effectively.
  I look forward to working with my senior colleague from Connecticut 
who has done such an outstanding job on a whole host of these issues. 
We are working to gain the public's trust. One way to do that is to 
make sure independent auditors are exactly that--independent.
  I think we need to respond. I hope we can do that quickly. We need to 
do it thoughtfully because we do not want to cause more problems than 
we fix. It is one of those things where making sure it is done right is 
very important because we are tinkering with the fundamentals of our 
economy. But we need to have good accounting statements to make sure 
people can make decisions on their investments in a way that is 
sensible and true to the facts as they stand.
  I appreciate very much this opportunity to work with Senator Dodd.
  Mr. DODD. Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. NELSON of Florida. Mr. President, I ask unanimous consent that 
the order for the quorum call be rescinded.
  The PRESIDING OFFICER (Mr. Reid). Without objection, it is so 
ordered.
  Mr. NELSON of Florida. Mr. President, I ask unanimous consent to 
speak for up to 5 minutes.
  The PRESIDING OFFICER. The Senator from Florida may proceed.

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