Peter Clapman: From an investor perspective, I think there is going to be a greater focus on broader corporate-governance issues that emerge out of the Enron situation — how the board is functioning, whether it appears to investors that there's board independence, and committees that have the competence and the ability to do the job. How stock options are being used today — this is one of TIAA-CREF's key issues.
Laura Unger: I think we're seeing a convergence of several issues. One is the economic downturn. Another is the increased complexity of Corporate America. Another is the accountability of the industry, the professionals — the lawyers, the auditors, the corporate executives — and then below that, the investment community — the analysts, the underwriters, and the standard-setters. How can you improve everybody's accountability in this process, so that we have the most transparency of information and the most-liquid capital markets in the world, with integrity?
Cliff Griep: From a rating-agency perspective, the increased focus on disclosure and transparency is very meaningful. There's a presumption by many participants in the marketplace that because it has occasional access to confidential information, the ratings industry can serve a policing function. But the industry isn't set up that way. While we do have access to confidential information, our ability to get it is dependent on the willingness of the management to provide it. So clearly, anything that facilitates incremental disclosure and transparency will help the analytic community, not just the rating agencies.
Ed Nusbaum: My own view — I'm an auditor, so I'm a bit more skeptical — is there will always be people, companies, pushing to the edge of what's right. And that's in business, and it's in accounting, and it's in financial reporting, and in everything you do. So we have to have a series of mechanisms and controls in place to make sure that we produce a good set of financial information. If there's a silver lining to the Enron situation, it's that Enron gives us an opportunity to take a giant leap forward in many areas.
Complexity and Conflicts
Willens: Isn't that an inherent problem — the fact that, on the auditing side, you're supposed to be looking with a critical eye at the very entity that's paying you? It's the same on Wall Street. An analyst is supposedly looking critically, on behalf of the investor population, at the accounts and the statements of a company — from which we're all hoping to get investment-banking business.
Nusbaum: I think you're right. There are inherent conflicts of interest about business in general, and there is no easy solution.
Willens: To me, to separate consulting from auditing — assuming that that's something that ultimately gets implemented — is almost counterproductive. If you're going to have real reform, you have to attack the obvious conflict, that you're supposed to be examining the very entity that's paying for it.
A possible implication is that not only does the government have to federalize accounting standards, but you have to have a super SEC to enforce them.
Unger: Let me put it into perspective, in terms of the resources the SEC has to examine the filings. There are 17,000 public companies. We have 100 lawyers and 90 accountants reviewing those filings. We review each and every IPO in depth. There's a formula — a secret formula [Laughter] — for how we review the filings, the 10-K, 10-Qs, and 8-Ks. We can never have the sufficient resources to examine in depth each and every filing as it's made.
So we have self-regulation.
Unger: Exactly. And we have the discipline imposed by the market. And yes, we could use more resources. One of the provisions in Chairman Oxley's [Rep. Michael G. Oxley, chairman of the House Committee on Financial Services] bill is to increase our budget to $700 million from roughly $485 million. Also, the President recently signed the pay-parity legislation that will give the SEC staff the same pay scale as the other federal banking regulators. That funding is critical for us to attract the caliber of staff we need.
Hill: I'd like to go back to a couple of points from the perspective of my cyclical thesis. The conflict-of-interest and complexity issues are more than just a cyclical problem. There is a secular trend going on in both of those, and that's where we need more focus on changing things.
Complexity in...
Hill: The complexity of the transactions. If you were a superb professional analyst and Enron had not done anything illegal, you still couldn't analyze that company. With the complexity of derivatives and a company that has essentially morphed into a hedge fund, how do you analyze that?
When I raised this issue in December before the House Committee on Financial Services, I was asked, Well, what can you do about it? I said, Maybe it ought to be a different kind of security — where you've identified it as a high-risk situation that can't be analyzed the way a normal company could be, and therefore it's subject to some different kind of regulation. There would be an understanding that this was a different kind of animal.
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