Tuesday, April 1, 2008

Toothless SEC

"U.S. securities regulators Monday charged Biovall Corp. and a handful of its current and former top executives with accounting fraud at the Canadian pharmaceutical company. Biovall agreed to pay $10 million to settle the matter without admitting or denying the claims, but the individuals are contesting the charges", my emphasis, WSJ, 25 March 2008.

"On March 11, amid rumors that Bear Stearns Co. [BS] was in trouble, the [SEC] Chairman, Christopher Cox said that he had 'comfort' with the amount of capital held by five of the largest investment banks, including [BS]. Treasury Secretary Henry Paulson, with the support of key Democrats, on Wednesday backed the idea of temporarily allowing the [Fed] to have an expanded role overseeing investment banks. ... Cox ... acknowledged that the traditional ways of measuring liqudity--having enough money on hand to handle transactions--need updating. ... Barbara Roper, director of investor protection at the Consumer Federation of America ... said ... 'If the SEC had been sending strong messages that [investment banks] needed to clean up their act, it would have been hard for the big investment banks to ignore them'," WSJ, 27 March 2008.

"Mopping up more of a 10-year-old accounting scandal, Xerox Corp. said it will pay $670 million to settle a securities lawsuit, while its former outside auditor, KPMG LLP, will pay $80 million. ... In April 2005, KPMG agreed to pay $22 million to settle SEC charges that it allowed Xerox to use improper accounting. KPMG settled the SEC charges without admitting or denying wrongdoing. The firm was censured, agreed to avoid future violations and promised to undertake a number of reforms, including establishing channels of communcation to allow whistle-blowers to express concerns on a confidential basis", my emphasis, WSJ, 28 March 2008.

Who needs the SEC? Well Walter Riccardi (WR), do you think this makes sense? Of course. Look at Biovall's treatment compared to that of the "PWC two", my 19 January 2008 post.

Who needs the SEC? Again?! Well WR, do you think the Xerox settlement makes sense? Of course, at least as much as Biovall's! KPMG's "whistle-blower" reform is less than timely. SAS 22, "Planning and Supervision", came out in March 1978, 30 years ago! It provides for "procedures to be followed when differences of opinion concerning accounting and auditing issues exist among firm personnel involved in the audit. Such procedures should enable an assistant to document his disagreement with the conclusions reached if, after appropriate consultation, he believes it necessary to disassociate himself from the resolution of the matter", source: AU 311.14. Imagine, in 30 years no one in KPMG's management read that paragraph from Generally Accepted Auditing Standards. Well Michael Olson, what will you do about this? I know, beat up a few more obscure CPA firms and thump your chest like a Silverback Gorilla.

I disagree with Roper. As long as the SEC is subordinate to Hank Paulson's Treasury, there is nothing the SEC can do to effectively regulate investment banks. They KNOW, when push comes to shove they will receive a Fed bailout, hence why not make risky investments? As long as you can privatize gains and socialize losses, why not? If Cox had any integrity at all, he would appear in front of Congress and say this simple truth. Then resign, on the floor of Congress. Of course if he did, what would be his post-SEC employment prospects?


Anonymous said...

As toothless and ineffective as the SEC is, the PTB still want them out of the way so they don't have to continue to make those pesky public filings.

I was thinking about the bond market bubble you were writing about in a previous post. You could be right. After looking at a chart of TYX, I don't see how it could go much lower. It may bounce along the bottom, or we may get a new sheriff. Time will tell.

Independent Accountant said...

Killing the SEC is part of the Paulson "reform" package. As toothless as it is, it still stands in Paulson's way so his plan to protect the banks at the public's expense must gut what little is left of the SEC.