Schumer and Bloomberg: cultural warriors

"[T]he culture war against regulation" I discussed yesterday has found new adherents – NY Mayor Bloomberg and, of all people, Chuck Schumer. Writing in today's WSJ, they don't like the fact that "more money will be raised through IPOs in Hong Kong than in either London or New York." They discuss NY's moves, which I've previously noted, to study how to correct this problem.

Among the problems Schumer & Bloomberg see:

While our regulatory bodies are often competing to be the toughest cop on the street, the British regulatory body seems to be more collaborative and solutions-oriented.

I wonder if these New Yorkers have any particular "toughest cop" in mind?

The pair moan that

Since [SOX] passage, auditing expenses for companies doing business in the U.S. have grown far beyond anything Congress had anticipated. * * * [T]here appears to be a worrisome trend of corporate leaders focusing inordinate time on compliance minutiae rather than innovative strategies for growth, for fear of facing personal financial penalties from overzealous regulators. * * *

The excrutiating irony there is that Schumer was one of the key proponents of a strict version of SOX.

Schumer & Bloomberg add

It may be time to revisit the best way to reduce frivolous lawsuits without eliminating meritorious ones* * * We learned that too much regulation stifles entrepreneurship, competition and innovation; while too little regulation creates excessive risk to industry, investors and the overall system. New York cannot afford to lose its place as the global leader in financial services. We have to carefully redefine this balance of innovation and regulation. That is what we seek to do over the next several months.

Other than the ironies just noted, there are several interesting aspects to this. First, it's a striking example of how jurisdictional competition, in this case at the global level, can chasten even the most pro-regulatory forces.

Second, when compared to the NYT stories I discussed yesterday it shows how out of step New York's home town newspaper is even with local needs acknowledged by local politicians.

Third, while the Times portrayed deregulatory efforts "as part of a plan to cater to the most well-heeled constituents of the administration," Schumer & Bloomberg's op-ed is another indication that the best hope for a political (as opposed to a regulatory) solution may be from Democrat politicians.

Comments

[NickBranch]

Interesting little tid-bit.

The most controversial bit of SOX is the requirement that public companies have an independent audit of controls. This process is complex and expensive. The argument is that such an audit will "eliminate future Enrons".

Unfortunately for this logic, Enron (virtually alone) had already submitted to this review, and had an opinion on controls starting in 1998.

[M.D. Fatwa]

Wasn't most of the SEC's enforcement activites post Enron a result of Eliot Spitzer? Is Schumer suggesting that the Democrats now favor limiting the ability of states attorneys general to go after securities law violations?

Yeah, I didn't think so...

[Sam E. Antar]

My Response to Senator Schumer and Mayor Bloomberg Commentary on Sarbanes-Oxley “Reform” in an Open Letter:

Dear Senator Charles E. Schumer and Mayor Michael R. Bloomberg:

I read with great interest you commentary entitled “To Save New York, Learn from London” published in the Wall Street Journal on November 1, 2006.

While your commentary raises many valid issues, there are some issues I respectfully ask you to consider before you decide on any “reform” of the Sarbanes-Oxley Act.

In your commentary you wrote:

“Since its passage, auditing expenses for companies doing business in the U.S. have grown far beyond anything Congress had anticipated.”

Prior to Sarbanes Oxley accounting firms used to offer consulting services to the client’s they audited. I ask you to consider that prior to Sarbanes Oxley accounting firms would keep audit fees artificially low (as a loss leader) so they could attract higher margin consulting business from their current and future clients.

In addition I would caution against “turning back the clock” and having the inherent “conflict of interest” of having such accounting firms offer consulting services to the client’s they audit.

I agree with your commentary that:

“…we must not in any way diminish our ability to detect corporate fraud and protect investors.”

However, any “reform” of Sarbanes Oxley must include higher educational standards for the accounting profession.

Today a significant majority of accounting students prior to obtaining their CPA license never take a single specific college level course in white collar crime, fraud, securities law, internal controls, criminology and other crucial subject areas they require to be effective auditors. Even as licensed certified public accountants they are only recommended (and not even required) by the American Institute of Certified Public Accountants (AICPA) to take 10% of their continuing education requirement courses in fraud (at most 4 hours a year). We must require as a minimum more a more educated, trained, skilled, and experienced accounting profession as part of any “reforms.”

Legislation like Sarbanes-Oxley can only be as good as the profession who is called on to police it – our accounting profession.

Senator Schumer, you may seek the advice of your brother Robert B. Schumer now a partner at Paul, Weiss, Rifkind, Wharton, and Garrison. Before, becoming a partner he handled Crazy Eddie’s securities issues on behalf of his law firm.

Robert Schumer and the other attorneys at Paul, Weiss, Rifkind and Garrison asked many important questions to Crazy Eddie management and its auditors. Such questions made my co-conspirators and I fear the consequences of their determined efforts to obtain the truthful answers.

However, at almost every turn we found our auditors unwittingly aiding us because the corrosive affects their lack of independence (from consulting work which impeded their objectivity and professional skepticism) and their lack of enough education, skills, training, and knowledge which caused them to give inaccurate answers to the attorney’s very good questions.

While the law firm of Paul, Weiss, Rifkind, Wharton, and Garrison was rightfully never held in any way responsible or negligent regarding the Crazy Eddie fraud, as innocent victims of our lies, they paid a heavy price in legal fees defending their competence.

Senator Schumer and Mayor Bloomberg, I am quite sure you agree that the main pillar of great free market capitalist economic system is the integrity and reliability of financial information.

As an ex-felon I caution you to be very careful that any steps taken to “reform” Sarbanes Oxley do not have the unintended result of later causing our financial markets to lose faith in the reliability and effectiveness of external audits performed by competent independent external auditors.

Any loss in the faith of our financial markets in the integrity of financial information will cost much more than the compliance costs of Sarbanes-Oxley that certain people are trying to reduce.

Respectfully,

Sam E. Antar (former Crazy Eddie CFO and ex-felon)