Barney Less Than Frank About Auditor Reform

By Francine • Jan 22nd, 2011 • Category: Food for Thought

This article was originally published at GoingConcern.com on May 26, 2010.

What do you get when you mix public pressure, lobbyist money and legislators that think doing anything is better than finally doing the right thing?

Not one provision of either current House or Senate financial regulatory reform legislation touches the accounting industry.

The media has played up the problem of big bad banks, irresponsible ratings agencies and dastardly derivatives. The resultant regulatory reform is, therefore, a goulash of band aids, string, and electrical tape fixing boo-boos, tying together supposed causes to fix perceived effects, and potentially muzzling banks’ ability to manage risk in the future.

Congressman Barney Frank spoke at the Compliance Week Annual Conference yesterday and the New York Times said he moved the market on his remarks about banks’ derivatives trading.

Mr. Frank, who is chairman of the House Financial Services Committee, said he would push to insert amendments that would go beyond what he was able to pass in the House, like requiring that margin money be posted on over-the-counter derivatives trades. He was supportive of parts of the Senate bill concerning derivatives, but that there was some “ambiguity in the language…” Earlier on Tuesday, Mr. Frank was quoted as saying the Senate measure to split off derivatives trading desk “goes too far.”

When asked at Compliance Week about issues of interest to the accounting industry Barney Frank disappointed me.

“[He] expects that there will be the small filer exemption from SOX, probably around $70 million. [I disagree with any exemption.]

He expects there will be some proxy access rules, but it sounds like it’s still a point of contention. They will keep “say on pay.” [No binding vote on auditor appointment.]

There was a question slipped in by the moderator about whether or not we’re paying enough attention to the big public accounting firms. Are we afraid to go after them because there are only four of them? (I wonder who wanted that question asked?)

If the Supreme Court overturns PCAOB, Congress will create a new one with the boundaries dictated by the Supreme Court.” [No detail provided.]”

To the question about fears of going after the accounting firms, Rep. Frank rambled on about McCarthyism, the Inquisition and not spending time looking back – that’s what courts and prosecutors are for, he said.  I suspect the industry’s lobbyists and their campaign contributions have whispered in his ear. Employees of KPMG, PwC and Deloitte are among his top 25 contributors in 2009-2010 period. In the 2008 election year, all of the Big 4 made it to Rep. Frank’s top 20 contributors list.

One thing Rep. Frank did mention as remotely possible, raising my hopes, is some variation of the Specter bill to repeal a 2007 Supreme Court decision known as Stoneridge that makes it considerably more difficult to hold third-parties like accounting firms legally culpable for fraudulent schemes. The Specter bill itself is dead, given the Senator’s defeat in a recent primary.  However, Senator Ted Kaufman told me yesterday that it’s unlikely we will see anyone take up the issue of repealing Stoneridge at this time.

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9 Responses »

  1. [...] since the PSLRA bars private actions for aiding and abetting a fraud and, Grant emphasized to me, “Congress has not yet seen fit to amend this law to give private parties the same rights to hold third parties liable for fraud as the SEC [...]

  2. [...] abetting a fraud. Stuart Grant, the attorney for the AIG shareholders, told me in September:, “Congress has not yet seen fit to amend this law to give private parties the same rights to hold third parties liable for fraud as the SEC [...]

  3. [...] This post was mentioned on Twitter by Francine McKenna and Ron Feiertag, Thomas Fox. Thomas Fox said: RT @retheauditors: Barney Less Than Frank About Auditor Reform http://j.mp/fOBnDm (Live from the archives but still timely.) [...]

  4. Very interesting. Good old Barneey. His name may be “Frank”, but his actions are not. In late 2008, I sent the Congressman an E-mail outlining the shortcomings of the audit profession, primarily the Big Four. I received no reponse.

    In March 2009, Mr. frank camee to Houston for a breakfast meeting with Democratic leaders. That got my attention, so I paid my 35 bucks and wandered down to the meting. After Barney spoke to the enthousiastic crowd, I cornered him. I told him that I had sent him an E-mail, but had not received a reply. He ansered that he did not read E-mails that did not come from his constituents;however, he inquired abut why I had written to him. I explained my concerns about the problems with auditors and he immediately grabbed a piece of paper and wrote down his private fax nujmber. He handed it to me and asked that I fax him the information that I had previously tried to send to him. I thanked him and buttered him up for his fine work in Congress and left the meeting full of hopes for some action from dear old Barney Franks.

    As soon as I returned home, I fired off a fax to the congressman. That was in March 2009. In July or August, I told a friend of mine who knew Barney’s chief of staff about the situtuation and she promised to contact Barney’s office for me.

    A few days later, I received a phone call from the chief of staff. He stated that they had never received my fax and asked that I resend it. which I did.

    That was in the summer of 2009. It is now January of 2011 and I am still waiting to receive even a confirmation
    from Mr. Frank. Me thinksI never will.

    Bareny Frank has some explaining to do when it comes to the sub prime mortgage scandal. As I understand it, he had a role in pressuring Fannie Mae and Fredie Mac to lower their lending standards, which led to the tragic sub prime mortgage scandal.

    I suppose I should have expected that Barney would ignore me since I am not one of his campaign contributors. But, I at least contribute to the Democratic Party. Nuf’ said.

  5. Very interesting piece. I once asked a question of Barney at a meeting of the American Accounting Association where he spoke about the financial crisis and pending Dodd-Frank Financial Reform Act. My question was whether the level of ethics in business and the accounting profession concerned him and what was Congress doing to stem the tide given the role of the accounting profession in frauds that have been investigated by Congress four times in the past 30 years (Metcalf; Dingell-Wyden; S&Ls; and Enron-WorldCom). His answer was to point to the Dodd-Frank bill as Congresses response. I then asked if regulatory reform was the same as trying to change the ethical culture in business by, for example, mandating ethics audits. He side-stepped the issue and went on to the next question. My impression of Barney is he is well prepared to answer the questions that he prepared for but otherwise has a problem adequately addressing the specifics of a question. As for the ethics question I asked, he seemed totally unprepared to even acknowledge there are such problems in business even after all we have been through. Somehow the concept of an ethics audit needs to grow legs. Some CPA firms undertake such an engagement at the client’s behest. Perhaps it can be incorporated into the SOX Section 404 requirement of an internal control assessment by management and auditor review and independent opinion on such controls. This would send the message that the profession takes having an ethical culture in business seriously. In a sense, it would set an ethical tone at the top. The audit has to go beyond existing standards in the profession such as the COSO framework. It should be looked at by the Public Company Accounting Oversight Board.

  6. [...] was wide ranging and opinions expressed off-the-record.  The meeting happened on the same day as Representative Barney Frank’s speech to the Compliance Week conference and we talked about his remarks.  I expressed my disappointment with several things especially [...]

  7. [...] you think auditors should be immune from liability or accountability for their malpractice and aiding and abetting fraud, you’ve bought the “too few to fail” argument. You’ve abandoned the expectation of a [...]

  8. [...] be immune from liability or accountability for their malpractice and when they’re guilty of aiding and abetting [...]

  9. [...] be immune from liability or accountability for their malpractice and when they’re guilty of aiding and abetting fraud? That’s the “safe harbor” proposals some advocate. But in reality it’s moral [...]

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