CORPORATE CRIME REPORTER

Lynn Turner Says Unless Big Four Change, Bring on SEC as Public Auditor
21 Corporate Crime Reporter 8, February 14, 2007

First Bevis Longstreth.

Now Lynn Turner.

Maybe not a movement.

Call it a drumbeat.

Earlier this week, Bevis Longstreth – a former SEC commissioner under President Reagan – said that the Securities and Exchange Commission (SEC) should be in charge of auditing America’s public companies.

Now, the former chief accountant at the SEC, Lynn Turner, says that “unless the large accounting firms change their attitudes and culture from a ‘me’ culture to one recognizing they serve as a public franchise,” then the government should assume the responsibility of auditing public companies.

Turner is currently managing director for research at Glass Lewis in Denver.

In an interview with Corporate Crime Reporter, Turner said that when the legislation creating the SEC was first drafted in the early 1930s, it included a provision making the SEC the auditor for public companies.

Then, at the last minute, the legislation was changed.

“Toward the tail end of the Congressional hearings on the Senate side, the head of the New York State Society of Certified Public Accountants – who was also the head of Haskin and Sells – now Deloitte Touche – went down to Washington and testified and convinced the guys to let the CPA firms to do the auditing. The legislation was revised and hence the external auditing function that we have today.”

Turner also agreed with Columbia Law School Professor John Coffee’s proposal that Congress overturn the Supreme Court’s 1994 decision in Central Bank of Denver – a decision which effectively eliminated aiding and abetting liability.

“But the practicality of it is that it’s just not going to happen,” Turner said. “You are not going to get the votes to get it passed and signed by the President. It would be not just the auditing community that would oppose it. It would the business community, the Chamber of Commerce, the Wall Street investment banks. That type of legislation would impact all of those groups. And given that you have a 51-49 balance in the Senate, you could never get enough votes to overturn a veto. It would be a cold day in hell before this administration would ever sign such legislation. So, while I couldn’t agree more with Jack Coffee that it would be good to see that Central Bank of Denver decision overturned, it just isn’t going to happen. It’s pie in the sky.”

Turner criticized the Public Company Accounting Oversight Board (PCAOB) for “placing enforcement on the back seat.”

“The thing that concerns a lot of people to date is we are out now early in 2007 – over four years after the PCAOB was created,” Turner said. “There have been a number of post Sarbanes-Oxley scandals on the financial side – including HealthSouth, AIG, Fannie Mae and now Dell. And yet, the PCAOB has yet to bring a single case against any of the top six accounting firms.”

And Turner criticized SEC chairman Christopher Cox for not accepting more money from the Congress for the SEC’s budget when it was offered last year.

“Both Chairman Cox and I testified before the Senate Banking Committee,” Turner said. “And the Committee chair,

Senator Richard Shelby from Alabama, pleaded with Cox to take more money so that he could do a more thorough investigation of options backdating. And Cox sat there and told him he didn’t want more money. The only reason I could come up with for that was he didn’t want to go and investigate them all. Anytime you have that powerful a Senator sitting there – pleading with you to take money – it is yours for the taking. And he turned it down.”

Turner said the he supports a limit on auditor liability, but only if the big four change their ways – agree to transparency of their financials,  a heightened standard on auditing for fraud, and mandatory rotation of auditors every ten years.

"The reality is that there have to be certain changes in the system in order for us to get them to do the type of quality audit that we need out of them," Turner said. "And they aren’t going to make those changes on their own. They just flat out aren’t going to make those changes on their own."

Turner said that reports issued by auditors 100 years ago provided greater information content than those currently presented to investors.

“If you went back and looked at the audit report that Pricewaterhouse gave 100 years ago on U.S. Steel, it was a report that went into much greater detail as to exactly what they did when they were doing their auditing,” Turner said. “If you went back and read it, you would find that it says things like – here’s what we did with the cash accounts, here’s what we did with inventory. In some instances, it would say – we went out and we counted the inventory, made sure it was there and it was on the books at the right value, and we didn’t find any discrepancies. It went in and provided much more information to investors as to exactly what the auditors had done, and what they found.”

(For a complete transcript of the “Interview with Lynn Turner,” see 21 Corporate Crime Reporter 8(11), February 19, 2007, print edition only.)

 


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