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When Regulatory Relief Really Means Relaxing Standards of Transparency and Integrity

The Committee on Capital Markets Regulation released its interim report this week. According an article in USA Today entitled Group: Sarbanes-Oxley needs to loosen up” written by Greg Farrell and published on November 29, 2006:


“…the study was funded by the Starr Foundation, a group headed by former AIG chairman Maurice "Hank" Greenberg, and a philanthropist who didn't want to be named.”


Floyd Norris commenting in his New York Times blog “Notions on High and Low Finance” wrote in a post entitled “Who Paid for the Anti-Regulation Report?”



“The report of the Committee on Capital Markets Regulation…has a distinct anti-regulation tinge, arguing that excessive regulation is hurting the United States competitively.”


I wrote the following comment in Mr. Norris’s blog:



Perhaps a more appropriate name for the “Committee on Capital Markets Regulation” would be the “Political Action Committee on Reduction of Standards for the Integrity of our Capital Markets.”



Members of this Committee under the guise of seeking regulatory relief from burdensome rules are seeking to relax standards of transparency and integrity which are vital to our financial markets. Need I remind you the about the disastrous results of loosening educational standards in America a generation ago?



If this Committee whose purpose is to help capitalism by promoting transparency and integrity in our capital markets wishes to lift itself of the “Political Action Committee” designation, it should start by making full disclosure of its funding sources at the very least.



Many of the solutions offered in the report are downright defeatist. Rather than seeking liability protection for external auditors and outside directors, the report does not address the basic issues that cause these litigations to occur – auditor and outside director negligence.



The Committee recommends “risk based approach” to regulation and audits. However, we have an education system that does not adequately prepare our Certified Public Accountants to be sufficiently judgment oriented in their professional responsibilities. That is why we have an audit process that is nothing more that “fill in the blanks” and “check the boxes.”



Most CPAs will never take a single specific college level course in fraud, internal controls, securities law, and many other crucial subjects prior to graduation. After graduation and obtaining a CPA license the American Institute of Certified Public Accountants only “recommends” but does not require that 10% of annual continuing education courses be taken in the subject of fraud – hardly enough.



Audits are over used as training grounds for relatively inexperienced, under skilled, and under trained staffers who are not adequately supervised by more knowledgeable senior accountants.



We have outside directors who can still have stock options and own stock in the company of the Board’s they serve on.



Many of these Board Members have very nice resumes. However, they have no experience in the company’s industries whose Board they serve on. They have no relevant experience and education to fulfill their role of effective Board Members. In fact, their sole reason for being appointed as Board Members with their nice looking but irrelevant resumes is purely “window dressing.”



The external auditors are supposed to be monitored by the Audit Committee of the Board of Directors. In practice such Audit Committees are no better prepared (if not worse) to handle their responsibilities than the external auditors they oversee.



Many Audit Committee members receive compensation in stock options or own company stock of the Board they serve on which provides a disincentive to effective independent oversight and can affect their objectivity and professional skepticism.



In addition, many members of Audit Committees have no formal accounting, auditing, internal control, and fraud education or backgrounds. Their requisite education, skills, training, and experience required to fulfill their responsibilities are lacking.



The convergence of “ill trained” auditors and “window dressed” Audit Committees creates ineffective oversight of the financial integrity of companies and provides a “perfect storm” for more massive frauds to come.



My message to the Committee on Capital Markets Regulation and the readers here is that transparency and financial integrity while difficult is necessary and achievable.



Companies obtaining capital from public markets have a fiduciary duty not only to their shareholders but to the integrity of our great capitalist free market economic system to invest resources in good internal controls and oversight to provide comfort as to the transparency and integrity of their financial reports.



The accounting profession talks about an “expectations gap” regarding the public perception of what audits are supposed to achieve. Most problems arising today involve material fraud which has nothing to do with such an excuse.



I challenge the accounting profession to self evaluate and improve itself and move away from the defeatist attitude of looking to cut your losses. With educational reforms you can capably perform your tasks and reduce your risks.


The SEC should revise corporate governance rules regarding the qualifications of Board Members (especially Audit Committee Members) and not permit such members to own stock, receive stock options, and receive earnings based compensation in the company of the Board they serve on.

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