http://www.hillnews.com/012302/audit.shtm13 senators pressured SEC to abandon proposed audit rule
By Alexander Bolton
Thirteen senators pressured Arthur Levitt, then-chairman of the Securities and Exchange Commission (SEC), to abandon a proposed rule that would have barred accounting firms from doing both auditing and consulting work for the same client, The Hill has learned.
Their actions take on new relevance in light of the collapse of the Enron Corporation. Critics contend that the company’s auditor, Arthur Andersen, was severely compromised by its simultaneous $27 million consulting contract with Enron.
Nearly every one of the lawmakers, except for Sen. Phil Gramm (R-Texas), warned that the agency would lose funding if Levitt went ahead with his effort, according to former SEC officials with intimate knowledge of the events. Nearly all the senators benefited from campaign contributions from the accounting industry, which opposed the change.
Levitt’s proposal, put forth toward the end of the Clinton administration, elicited stern letters from 11 members of the Senate Banking Committee, who were joined by two other senators in lobbying against it.
Some of the attacks on the proposal were direct, but others phrased their opposition in terms of needing more time to study it.
Letters opposing the proposal were sent to Levitt by Sens. Charles Schumer (D-N.Y.), Robert Bennett (R-Utah), Evan Bayh (D-Ind.), Gramm, Richard Shelby (R-Ala.), Robert Torricelli (D-N.J.), former Sen. Rod Grams (R-Minn.), Wayne Allard (R-Colo.), Jim Bunning (R-Ky.), Chuck Hagel (R-Neb.) and Rick Santorum (R-Pa.). Of that group, only Torricelli does not sit on the banking panel.
In addition, Sens. Ron Wyden (D-Ore.) and Mike Enzi (R-Wyo.), another Banking Committee member, voiced their opposition to the former chairman’s actions.
Spokespersons for Schumer, Bayh, Gramm, Torricelli, Allard, Enzi, Shelby and Hagel said their bosses never threatened the commission’s funding. Spokesmen for Allard and Bayh disputed that their bosses opposed the rule, asserting that they were merely raising prudent questions on legislation that would have had a significant impact on the accounting industry. The other senators failed to return telephoned requests for comment.
Torricelli’s spokeswoman said her boss’s letter did not express any opposition but only asked for a longer comment period.
Mike Bennett, Allard’s chief of staff, said his boss only asked for a delay in implementation to allow for hearings on the proposal. He added that such requests are commonplace and fall squarely within the oversight responsibilities of Congress.
Josh Kardon, Wyden’s chief of staff, said Levitt asked to meet with his boss and that his office did not have any record of sending a letter or official position to the SEC.
However, lawmakers often prefer to sidetrack laws and regulations through delays and other procedural strategies, rather than confront them head on.
Sources formerly with the SEC say Schumer, Bennett, Shelby, Gramm and Enzi led the opposition to Levitt’s proposal — opposition that eventually resorted to threats of funding freezes.
“It was very clear,” said one of Levitt’s former aides, “if someone needed a group of senators to support a rider [cutting SEC funding] they would have been supported.”
Lawmakers called up Levitt and asked why he was pushing for stricter conflict-of-interest regulations and let him know there was talk on Capitol Hill about attaching such a rider to an appropriations bill.
“We constantly heard from people from up on the Hill that there would be an attempt that accounting firms were trying to find someone to attach a rider onto the appropriations bill,” said another SEC source familiar with the lobbying effort. “At that point our funding bill had not been passed. The rider would have precluded the SEC from spending any money on the [so-called] auditor independence.”
To eliminate the conflicts of interest in the accounting industry, Levitt proposed that accounting firms, including Arthur Andersen, should not be allowed to provide both auditing services and consulting services to the same client.
“We want the auditor to be essentially a fair and objective umpire,” said Columbia Law Professor John Coffee, one of the country’s leading experts in securities and accounting law. “You can’t be both an umpire and salesman at the same time.”
Coffee said an auditor’s job is to restrain a chief financial officer of a company from adopting overly aggressive or unsound accounting practices, such as those that led to the collapse of Enron.
Last year, Arthur Andersen received $25 million from Enron for auditing services while raking in an additional $27 million for consulting services.
“[The auditor] is very promised in doing that if he is also trying to sell the CFO [chief financial officer] a $20 million software consulting contract,” he said.
Those lobbying against Levitt warned that Rep. Henry Bonilla (R-Texas) planned to sponsor the rider that would have frozen the funds the commission needed to implement its rule.
In a letter dated Oct. 25, 2000, Levitt alerted Rep. John Dingell (Mich.), the ranking Democrat on the House Commerce Committee, to his concerns.
“I have heard from several sources that Congressman Henry Bonilla (R-Texas) intends to attach a rider to the Labor, Health and Human Services, and Education Appropriation bill that would delay the commission’s ability to adopt an auditor independence rule for six months,” Levitt wrote.
Dingell, Edolphus Towns, (D-N.Y.), and Ed Markey (D-Mass.) then warned the House Appropriations Committee that lawmakers might attempt to exert influence on SEC rulemaking through the appropriations process.
“Yesterday, we received a letter from SEC Chairman Arthur Levitt, warning us about an attempt to put a rider on the pending Labor-HHS appropriations conference report to interfere with the SEC’s ongoing rulemaking proceeding on auditor independence,” they wrote in a letter to Reps. Bill Young (R-Fla.) and David Obey (D-Wis.), the chairman and ranking member, respectively, of the appropriations panel.
Though no lawmaker took action to cut SEC funding, Levitt ultimately relented and the SEC adopted only a modest tightening of the conflict of interest rule, according to Coffee. Instead of requiring that accounting companies provide only one service per client, the SEC ruled that companies must merely disclose how much they receive in auditing and consulting fees from each client.
Barbara Roper, the director of investor protection at the Consumer Federation of America, who supported Levitt’s original rule, said many considered Gramm, then the chairman of the banking panel, the lawmaker most likely to hamstring the SEC.
But a source familiar with the battle between the former SEC chairman and Congress said Levitt and Gramm had a good relationship. Gramm said he would not lead efforts to cut funding or otherwise hamper the agency but did not offer to help either.
“He said I can do my best but I can’t promise anything, if you go down that path you have to pay the consequences,” said the source, paraphrasing Gramm’s message.
Larry Neal, Gramm’s spokesman, said that his boss opposed Levitt’s original proposal because “he was concerned that it was too harsh. It could break up companies.” Neal insisted, however, that Gramm told Levitt that he would make every effort to make sure Congress did not interfere in the rule-making process.
Schumer, Bennett and Bayh sent Levitt two letters on the subject in 2000. In one dated July 28 of that year, the three senators, along with others on the Banking Committee, such as Gramm, Allard, Bunning and Santorum, expressed concern about the impact of the rule.
They also requested that its comment period be extended into February the following year, according to Roper, who summarized the letter in a memo to her boss, retired Sen. Howard Metzenbaum (D-Ohio). Metzenbaum now serves as chairman of the Consumer Federation of America.
Extending the comment period for the regulation would have likely defeated its implementation because Levitt had announced he would resign his post before the end of the comment period.
On July 21 of 2000, Torricelli also sent a letter to Levitt arguing that the SEC’s comment period was inadequate.
Deborah Deshong, spokeswomen for Torricelli, denied he had threatened to freeze funding and said that it would be “totally inappropriate” to do so.
Schumer has received $386,000 from the accounting industry since the beginning of 1995, according to the Center for Responsive Politics, a nonpartisan organization that tracks campaign finance. In the last seven years, the industry has also given over $87,000 to Bennett, over $90,000 to Bayh, over $245,000 to Gramm, over $80,000 to Allard, over $71,000 to Bunning, over $90,000 to Santorum and over $121,000 to Torricelli.
Levitt’s rule also faced strong opposition in the House.
On the House side, Reps. Billy Tauzin (R-La.) and Michael Oxley (R-Ohio), then senior members of the House Commerce Committee, strongly opposed Levitt.
Tauzin sent three letters to Levitt in 2000 and Oxley sent two. They both complained that the SEC’s 75-day comment period was not sufficient for the conflict-of-interest rule.
