MALONEY ENDORSES COMPREHENSIVE INVESTOR PROTECTION ACT

Feb 28, 2002 Issues: Corporate Governance, Financial Services

WASHINGTON, D.C. - A statement from Rep. Maloney:
"We are here this morning because Congress has a responsibility to restore the confidence of the public in our financial system. America is the wealthiest country with the strongest economy on earth but the most important reason our financial markets are preeminent in the world is trust. The Enron scandal has shattered this trust, exposing a spider web of conflicts among analysts, accountants, consultants, company executives and board members.

Clearly the vast majority of the professionals working in the accounting and financial services industry are hard working, honest people and I commend the initial steps the accounting and securities industries have taken in recent weeks to eliminate conflicts. However, I believe separations between the different functions these professionals perform need to be permanent and statutory.

While Enron has highlighted a specific circumstance where lucrative consulting fees may have influenced accountants working for the same firm, a joint study by professors from MIT, Michigan State, and Stanford that is cited in this week's Business Week demonstrates that the problem is widespread. After studying 3,000 proxy statements from 2001, they concluded that companies that use their auditors as consultants tend to manage earnings - including moving debt off the books into partnerships. Furthermore, the more a company pays for consulting compared with what it pays for auditing - the more likely it is to manage earnings.

I believe Ranking Member John LaFalce's adequately addresses this conflict by separating accountants and consultants and creating a strong public regulator for the accounting industry. The disclosures of public companies are only worth as much as the reputations of the accountants who verify them. To restore the prestige of the title "Certified Public Accountant" the industry regulator must independent, powerful and self-funded.

Finally, the legislation also targets analysts who often face conflicts similar to their accounting colleagues. While I would advise investors to always be skeptical of recommendations from analysts employed by investment banks booking fees on the very companies the analysts cover, this legislation prohibits analyst compensation from being tied to investment bank fees.

I commend Ranking Member LaFalce for providing the leadership to introduce this legislation. I probably have a conflict in doing so, but I rate his legislation a 'strong buy'."

1 Business Week, March 4, 2002, "When Auditors Also Consult"; study by professors Richard Frankel, MIT; Marilyn Johnson, Michigan State University; Karen Nelson, Stanford University.