The American Spectator

The Investor

See If Joan Baez Can Write a Song
Enron and Arthur Andersen have thrown a major wrench into the plans of George W. Bush, SEC Chairman Harvey Pitt, the rest of the Big Five accounting firms, and Corporate America. They all thought that, by putting Arthur Levitt and Lynn Turner out to pasture, they could roll back Regulation FD (making corporations give individuals the same information as the analysts and institutions) and ease some other securities regulations.

Some brilliant, cynical individual, however, devised a plan worthy of an Oliver Stone movie: What if Arthur Andersen just disappeared? Everyone would feel good for being part of the lynching party, and dead men tell no tales. Everybody could go back to business as usual, maybe even pursuing that anti-regulation agenda.

This is already starting. Although the rest of the Big Five acted contrite as Enron was unraveling, they started splitting with Andersen when, to salvage its reputation, the firm began advocating some obviously overdue reforms of its business. The Justice Department helped out, indicting the whole firm rather than just the individuals it could tag with destruction of evidence. Corporate America is abetting, acting like Andersen is damaged goods. (Quentin Tarantino couldn't script a more outlandish turn than Waste Management dropping Andersen as its auditor. For twenty years, Waste has been one of the dirtiest corporations in America, and until 1997, Andersen was not only its auditor but also every CFO and CAO had been a former Andersen auditor. Andersen let Waste Management trample the accounting rules and inflate five years of net income by $1.5 billion.) The SEC is helping push Andersen over the brink, telling public companies that they can submit unaudited financial statements and spend sixty days shopping for another auditor. Finally, though its competitors could snap up Andersen and its book of business at a bargain price (and probably separate and resolve its legal problems) it would rather see Andersen twist in the wind.

If you don't think these players can be so cynical, look back at the Savings & Loan scandal. The understaffed federal regulators relied heavily on the S&Ls' audited financial statements. When both the audits and the S&Ls turned out to be worthless, the Resolution Trust Corporation sued the whole lot. Ernst & Young, auditors for Lincoln Savings & Loan, took the biggest hit, paying $400 million to settle with the government. Coinciding with the Clinton administration's failure to take advantage of majorities in both houses in 1992-94 -- and, like now, a situation where both parties have suckled from the industry's teat -- the accounting industry dodged further regulation, and had the chutzpah to push deregulation, culminating in the Private Securities Litigation Reform Act of 1995 and Congress's decision not to override a couple Supreme Court decisions limiting auditor liability.

Say Goodbye to the Bad Guy
There are two ways government can assist capital formation: make it easier to get capital and make it easier to give capital. Bush, Pitt & Co. were hoping for the former, minimizing disclosure requirements of corporate issuers and streamlining the IPO process. If Andersen can die a noisy death, history tells us they may succeed in pursuing their agenda.

That would be disastrous. This economy needs rules making it easier to give capital, not get it. The stock market has become terrified about how much it doesn't know about big corporations. Companies like Tyco International have exited the commercial-paper market and taken on more costly long-term debt because of investor uncertainty and the fear that debt markets may close. The individual investor is still smarting from paying $300 per share for MicroStrategy (an accounting scandal overseen by KPMG Peat Marwick) and $80 per share for Lucent Technologies (PriceWaterhouse Coopers rode shotgun on that turkey) and generally assuming everyone on Wall Street was good to their word. Unless an IPO involves a giant spin-off like Philip Morris selling Kraft stock, or demutualization of a big insurance company like Met Life, the public wants no part of it.

If we want a growing economy and a buoyant stock market, we need to make people feel good about casting their boats on the waters of our financial markets. If Arthur Andersen sleeps with the fishes, that will never happen.

topics:
Business, Supreme Court