THE RISE AND FALL OF ENRON Former SEC Official Tells Senators Corporate Accounting Needs Review
Associated Press QUESTIONING THE BOOKS WASHINGTON -- Companies' balance sheets are bloated because of faulty accounting practices that include fake assets and must be changed to prevent future Enrons, a former Securities and Exchange Commission accountant testified Tuesday. Corporations are able to report as assets things that have no market value, such as goodwill, deferred income taxes and costs of raising debt capital, Walter Schuetze, SEC chief accountant from 1992 to 1995, told the Senate Banking Committee. The same practice goes for liabilities. "This is the kind of stuff that allows stock prices to soar when in fact the corporate balance sheet is bloated with hot air," Mr. Schuetze said. Following Enron's collapse, Congress is grappling with whether to change the private board system that has oversight for the accounting industry and sets the rules. Some members support keeping the system intact with minor changes and others want a major overhaul with help from the government. Schuetze urged Congress to step in and require the reporting of a company's true financial condition based on today's market value of all assets and liabilities, called "mark to market" accounting. For example, faulty accounting rules were partially responsible for the savings and loan crisis of the 1980s, he said. When short-term interest rates were raised dramatically, causing long-term rates to spike, the market value of previously acquired mortgage loans and government bonds held by savings and loan associations dropped significantly. But accounting rules allowed the mortgage loans and bonds to be reported at their historical cost. That made savings and loan associations appear solvent when they were not, he said. "The federal government paid for the losses that were hidden in the balance sheet under the historical cost label," Mr. Schuetze said. His far-reaching plan would dissolve the private-sector accounting oversight board, the Financial Accounting Standards Board, and would require Congress to set the basic accounting rules. "I am intrigued, but I am not yet convinced," said Sen. Zell Miller (D., Ga.). Other accountants testifying had problems with the idea. For one, "there are different notions of what assets and liabilities are," said Michael Sutton, an SEC chief accountant from 1995 to 1998. Some senators questioned whether Congress should get involved in establishing accounting rules for the industry. "I still support an independent body setting accounting standards," said Sen. Phil Gramm (R., Texas). "It scares me to death to think of government or politicians setting accounting standards." Separately, Congress also is examining whether the nation's pension laws should be changed. Sen. Chuck Grassley of Iowa, senior Republican on the Senate Finance Committee, said he will introduce legislation to tighten protections for participants. Enron "could happen to a lot of other companies if we don't do something about it," he said. Mr. Grassley's legislation includes several principles outlined by President Bush, such as allowing a participant to sell matching company stock after three years. Current law requires workers to be age 55 with 10 years of service to a company. His plan would require 30 days notice to temporarily suspend access to a 401(k) account, and ban company executives from selling stock during such a blackout period. Copyright � 2002 Associated Press Stephen F. Diamond School of Law Santa Clara University [EMAIL PROTECTED]
