Dave Eberhart, NewsMax.com
Monday, Aug. 5, 2002

"Accounting is being perverted. Auditors who want to retain their clients are under pressure not to stand in the way. Auditors and analysts are participants in a game of nods and winks…. I fear we are witnessing erosion in the quality of earnings, and therefore the quality of financial reporting.”

Sounding like a recent statement from a lawmaker anxious to jump aboard the fashionable let’s-get-tough-on-lying-executives bandwagon, these words were spoken in the now famous "numbers game” speech back in the fall of 1998 by then S.E.C. Chairman Arthur Levitt - years before Enron, WordCom, or Arthur Anderson would fix in the American lexicon.

Private citizen Levitt, now 71, hasn’t eased up, confiding recently that despite all the lusty saber rattling from the White House and the get-tough bills percolating on Capitol Hill, he entertains little hope for meaningful change in the profession.

Déjà Vu All Over Again

But why the doom and gloom from Levitt, perhaps the country’s guardian emeritus of fair markets? Part of the reason is best explained by Lynn Turner, who served under Levitt as the chief accountant at the S.E.C. Levitt served eight years as chairman.

There’s really nothing new or shocking about the current state of affairs as seen from the vantage of those in the trenches during the 90’s, Turner explained. In the six years preceding Enron, audit failures afflicting corporate America were already becoming too commonplace. Turner estimated that investors lost a hundred billion dollars owing to faulty, misleading, or fraudulent audits in that allegedly pre-crisis period.

Levitt, who was fighting his way down the road less traveled long before it became de rigueur, sees a familiar momentum in the business-culture-as-usual that will not shake out overnight.

In the spring of 2000, Levitt announced the SEC’s intention to draft new rules that would greatly restrict accountants’ ability to consult for the same companies they audited.

Levitt was quickly confronted by a brick wall of upset congressmen, who had been lobbied by the accountants to the tune of $12.6 million in 2000 alone, with Arthur Anderson leading the field in stepped-up political contributions by accountants, which totaled over $10 million in that same year.

The new rules died on the vine, leading the crusading Levitt to lament, "If there was ever an example where money and lobbying damaged the public interest, this was clearly it.”

Dearth of Enforcers, and a ‘Safe Harbor’

New laws providing jail time for dishonest executives or requiring CEO certification of financial statements aside, some see the real issue as not a lack of stiff regulation, but a lack of raw manpower to enforce what is already on the books.

"I think the law we have on the books is sufficient,” said Bart Sacher, a former SEC attorney. "But we don’t have enough prosecutors. The SEC does the best it can with the staff and resources it has been allotted.”

Yet others point to the little-touted fact that much of the down-and-dirty daily oversight of the securities industry has traditionally rested with the nation’s private bar. These private watchdogs, however, were dealt a blow in 1995.

In legislation championed by then-Speaker of the House Newt Gingrich as part of his so-called "Contract with America,” the playing ground was forever changed. To its industry proponents, the Private Securities Litigation Reform Act provided a way of screening the marginal shareholder suits from the serious.

"What we were after was trying to get rid of the frivolous, meritless cases,” said Mark Gitenstein, a lawyer and lobbyist who helped draft the legislation.

But the plaintiffs’ bar felt and feels to this day that the best tool to keep the markets honest – the angry shareholder suit – was crippled by the Reform Act, leaving much too much wiggle room for sharp business practice.

Top flight securities lawyer William Lerach said, "This law tied my hands, but more important is its serious and devastating impact on investors. We’re probably just catching a small amount of the deception that’s going on because of the punitive standards that have been set for pleading a case in the first place.”

In essence, the Reform Act requires that solid proof of fraud exists to support the original pleadings, doing away with what proponents would style legal "fishing expeditions.”

What’s more, the Reform Act provides for the so-called "safe harbor,” which protects companies from being sued when their forecasts go unrequited - as long as they have stated the magic buzzwords qualifying such forecasts as "forward-looking statements.”

Sounding a bit like a patent weight pill advisory, the other buzzwords are typically, "XYZ Company’s actual performance may be different.”

Some have taken to calling the safe harbor verbiage a "get-out-of-jail-free card.” Serious securities attorneys advise clients to carry a lamented card imprinted with these buzz words and use it like a "Miranda advisory” – not just in formal financials but every time they open their mouths in public.

In the meantime, the extensive Arthur Levitt fan club harkens back to those halcyon eight years when Levitt was at the SEC’s helm. They can’t help but say, "We told you so,” happily listing the titles of prescient speeches Levitt delivered long before the roof caved in: