Watching Corporate Auditors

July 18, 2010

When Enron and WorldCom collapsed after years of uninterrupted flowing audits by accounting firms, Congress enacted the Sarbanes-Oxley Act.  The act created a non-profit commission to regulate auditors.  The Supreme Court has upheld the constitutionality of the Act.

In Free Enterprise Fund v. Public Accounting Oversight Board, the Enterprise Fund attacked the constitutionality of the act on the basis that the board’s setup violated the separation of powers doctrine by giving executive responsibilities to officials beyond presidential control.  The Supreme Court ruled board members were too insulated from removal by the president.  However, instead of throwing out the board or of invalidating the Sarbanes-Oxley Act, the Court struck down only that part of the Act that provided the Securities and Exchange Commission needs good cause to remove board members.  Therefore, the Court ruled, the S.E.C. may remove board members at will, i.e., without regard to good cause.

“The consequence is that the Board to function as before, but its members may be removed at will by Commissioners,” Chief Justice John Roberts wrote.  He was joined by Justices Antonin Scalia, Clarence Thomas, Anthony Kennedy, and Samuel Alito in a 5-4 decision.

The opinion focused on the “unitary executive” theory that proposes Congress should not have the power to protect agencies responsible for executing the law from presidential control.  In this case, the S.E.C., not the president, could remove members of the board and only for cause.  The president can remove S.E.C. commissioners, but only for cause.  The Court ruled that double insulation violated the principle of separation of powers.

“The constitution that makes the president accountable to the people for executing the laws also gives him the power to do so.  That power includes, as a general matter, the authority to remove those who assist him in carrying out his duties.  Without such power, the president could not be held fully accountable for discharging his own responsibilities; the buck would stop somewhere else,” wrote Justice Roberts in the majority opinion.

A dissent written by Justice John Paul Stevens said supervision of the accounting board “violates no separation-of-power principles.”  The dissent went on.   “I still see no way to avoid sweeping hundreds, perhaps thousands of high-level government officials within the scope of the court’s holding, putting their job security and their administrative actions and decisions constitutionally at risk.”  The dissent said among them were the leadership of the Nuclear Regulatory Commission, the Social Security Administration, administrative law judges and military officers.

The Board, although established by Congress, is not a government agency.  It does not have to follow pay schedules, so board members are paid $500,000 a year.

The Sarbanes-Oxley Act requires any auditor who audits a company that sells securities on the public market in the United States be registered.  Some foreign firms are included when they are involved in auditing foreign branches of American firms or audit foreign firms that list securities in the United States.  Certain countries have not consented to allow inspections of auditing firms located in their countries, including China, the European Union and Switzerland.  The board has been able to perform joint inspections in some countries of the European Union, but these ceased last year when sharing information became a problem.  Congress may need to amend the law to allow document sharing with foreign boards.  The financial regulation bill just passed by a joint Senate-House committee provides expansion of the requirement for auditing to include accounting firms which audit registered brokers, regardless whether the firm has public clients.

When the Act was passed, complaints abounded about the expense of companies assessing their management controls and that auditors give their opinion about those controls.  This sentiment has shifted now, thanks to reduction of the costs of the audits by the board.  Many corporate executives believe the benefits of compliance were greater than the costs.

Does White Collar Crime Pay for the Big Guys?

November 15, 2008

Following the World Trade Center attacks of 9/11, the F.B.I. focused all its energies on terrorism. It shifted 1,800 agents, about one third of all its agents in criminal programs to terrorism and intelligence duties. That has left the Bureau without resources to investigate white-collar crime, such as those suspected from the recent Wall Street melt-down.

Billions of dollars have been lost from Fannie Mae and Freddie Mac, and the F.B.I. is the logical agency to investigate. Since 2004, F.B.I. officials have warned that mortgage fraud posed a looming threat, and the Bureau has been asking for more money to increase the available agents. But no new agents were authorized.

Department of Justice statistics show the number of criminal cases that the F.B.I. has presented to federal prosecutors over the last 7 years, including white collar crimes and all other types of cases including drug cases and violent crimes, has dropped 26 per cent, from 11,029 cases to 8,187 cases.

The Department of Justice data includes cases not only from the F.B.I. but also from other agencies like the Secret Service and Postal Service, show the diminution of focus on financial crimes. Prosecutions of fraud from 2000 to 2005 against financial institutions dropped 48 percent, securities fraud cases dropped 17 percent, and insurance fraud cases fell 75 percent.

Statistics from the Transactional Records Access Clearinghouse, a research group at Syracuse University, show a drop of nearly 50 percent white-collar crime prosecutions in the same period, addressing only F.B.I. activity.

At the present time, the F.B.I. is investigating Fannie Mae, Freddie Mac, American International Group (AIG), and Lehman Brothers. It has also opened more than 1,500 other mortgage-related investigations. Some F.B.I. officials wonder whether the trillion-dollar federal bailout of the financial industry may become a source of new frauds.

Some in Congress are advocating a stronger F.B.I. action. Representative Mark Kirk, an Illinois Republican, and Chris Carney, a Pennsylvania Democrat, have urged Congress to triple the F.B.I.’s financing to investigate financial crimes.

Internal records show the F.B.I. officials realized beginning in 2003 and 2004 the growing danger from financial fraud in the housing market, but the Department of Justice and Office of Management and Budget rejected FBI requests to increase the number of their criminal agents. From 2001 to 2007, the F.B.I. requested an increase of 1,100 agents for criminal investigations, that is, apart from the counter-terrorism mission. Yet instead the F.B.I. lost 132 agents, while it received an increase of $50 million instead of the $800 million it asked for. The F.B.I. received enough money in the 2007 budget for only one new agent in criminal investigations.

The F.B.I. has 177 agents devoted to mortgage fraud, and they have opened 1,522 cases. This is in contrast with the hundreds of agents in the 1980s for the savings and loan crisis. Of course, the Bureau claims they have given up only low-level cases and have focused on public corruption and other complex cases. Some cases are now privately investigated and brought to the F.B.I. for prosecution. Such a case, done well, requires no F.B.I. resources and makes prosecution more likely. One of these was the extortion of the Kroll firm, which led to arrests in Germany after private investigators set up an undercover sting operation.

It is the complexity of the white-collar cases as well as diminished resources that have had their effect. In dozens of cases in the last four years, the Justice Department has agreed to deferred prosecution that allowed companies to pay fines to avoid criminal prosecution. This is in contrast to the first Bush Administration first term that witnessed several big-name prosecutions, such as Enron and WorldCom.

What’s more, you can also be sure that if the small business person found themselves accused of some type of crime, such as fraud, there would be immediate and thorough investigation and prosecution. No wonder our citizens are disgusted with the current situation. It seems that If you’re big enough, you get millions of dollars as parting compensation instead of penalties and jail. Meanwhile, those average “Joes” falsely accused of criminal actions must hire dedicated and experienced lawyers to make sure their rights are protected.