Wheels of justice
They grind slowly on, former SEC accountant says
By David Milstead, Rocky Mountain News
March 19, 2005
Lynn Turner, the former chief accountant at the Securities and Exchange Commission, has been a constant voice in the recent era of corporate reform. Currently the managing director of research for Glass Lewis, a San Francisco-based proxy advisory firm, Turner has spoken out in favor of quality financial reporting, stricter rules on executive conduct and the expensing of stock options.
In a week that saw the conviction of former WorldCom CEO Bernard Ebbers and civil charges against seven former Qwest executives, the Rocky Mountain News sat down with Turner to assess the new world of running a public company in America.
News: This week we saw the conviction of Bernie Ebbers, the first high-profile failure of the "I'm just the CEO, I didn't know the fraud was going on" defense. How do you think this changes things, both for executives accused of wrongdoing and for CEOs, going forward, who may consider it?
Turner: I think it shows when you have a blatant fraud, like there was at WorldCom, the jury is going to see the CEO as the guy in the corner office where the buck stops. In the new world, after Enron and WorldCom, I don't think the "I don't know anything" defense is going to be a winner.
News: There's another kind of defense, which is saying "the accountants gave us advice, the lawyers gave us advice, the board signed off on everything, and I may be the CEO, but everyone's involved in this." That seems to be what former Qwest CEO Joe Nacchio is saying. What about that? Can you claim that because you had a process, the outcome is not fraud?
Turner: What we're seeing at WorldCom and so far at Enron, it seems like jurors are able to understand the role everyone had in these disasters. As a result, the auditors are being held liable, the underwriters are being held liable, and the juries are also holding the executives accountable because they were the ones in charge of the control room. The argument the defense has tried to use of "it ain't me, it's the other guys" seems in many of these cases to be falling on deaf ears, as the public clearly considers these executives to have been the ones who clearly were supposed to have known what was going on. I don't think the public is willing to accept the notion these executives were receiving tens of millions in compensation for knowing nothing.
News: What is your reaction to the Qwest civil charges the SEC announced this week?
Turner: I think the complaints filed against the executives of Qwest are an extremely positive development. It shows that while the wheels of justice grind slowly, they nonetheless do grind. I think the complaints lay out a very good description of a massive $3 billion fraud that these seven executives are not going to be able to distance themselves from.
News: We're more than two years into Sarbanes-Oxley. Can you assess the law so far?
Turner: I do think it has been beneficial. First and foremost, we've seen the stock market rise about 3,000 points since the passage of Sarbanes-Oxley, and it has done so in part because the confidence of investors has come back to the capital markets. We've seen with the demise of Franklin Raines of Fannie Mae, Hank Greenberg of AIG and others that the day of the imperial CEO is coming to a close. Corporate boards are acting much more independent, are scrutinizing major transactions much closer and seem to be focusing a lot more on creating shareholder value. I think a big part of that is definitely related to (Sarbanes-Oxley). And clearly, the auditors are doing a much better job of digging into the numbers and ferreting out problems, giving investors earlier warnings.
The one part that has received the most criticism is section 404, which requires companies to have the controls audited that they were supposed to have in place beginning in 1977. What we have seen in the last year or so is that many of those companies did not have controls in place. We've also seen in recent months that hundreds of companies' executives had certified to their investors that their controls were fine, but, in fact, the auditors came in and said, "No, that's not true." While there's a tremendous cost to finding out the controls haven't been what they should have been, it should help prevent the type of global, pervasive fraud we saw in the dot-com bust, where investors in WorldCom, Qwest, Enron, Parmalat and many, many others lost literally hundreds of billions. That cost dwarfs by any measure the cost of implementing required controls under (Sarbanes-Oxley).
It's amazing to me that businesses always want to talk about the cost of getting controls in place that were supposed to have been in place over 25 years ago but never want to discuss the cost to investors in capital markets of the massive financial frauds that occurred.
News: Board compensation has gone up considerably in the last couple of years, which begs the question of what exactly it was board members were doing before.
Turner: There's no question that boards are much more engaged, asking many more questions than they did before. We've seen the number of not only board meetings, but meetings of committees of the board like the audit committee, grow. This morning I was reading the proxy report on a company that indicated that its audit committee, until this year, had never looked at or pre-cleared press releases but are now actively involved in doing that. So the boards are getting around to doing some of the things they should have been doing all along. In a way, you might say you get what you pay for, and the low directors' fees in the past were an indication you weren't getting a lot of directors' time.
News: I suspect one thing you've seen recently that has not been pleasing to you is the continuing push-back on the effort to expense stock options.
Turner: Every investor group I know of, from the Council of Institutional Investors, to the Consumer Federation of America, to the CFA Institute, have weighed in in strong support of expensing stock options. And literally hundreds of members of corporate America today are already expensing the value of these options. The fact that a few businesses with deep pockets can continue to go and influence Congress to push for ridiculous accounting is very troublesome. Perhaps as troublesome is there haven't been more members of the business community speaking out against those who are opposing transparency on this issue.
David Milstead is finance editor of the Rocky Mountain News. He can be reached at 303-892-2648 or at milstead@RockyMountainNews.com.