If You’re Counting On Congress, Well…

The news programs are full of stories today on the opening of the 111th Congress of the United States. 

I watched Hardball with Chris Matthews on MSNBC and saw two wonderful stories. One interview was with new Democratic Senator Mark Begich, who beat incumbent Ted Stevens who was recently convicted of corruption. Begich is a former Mayor, like Sarah Palin, and came off very well, impressing Matthews with his political savvy and smooth delivery. 
The second interview was with the youngest member of the House, freshman Republican Representative from Peoria Illinois, 27-year old Aaron Schock. Representative Schock was also sharp and demonstrated confidence and knowledge beyond his years. Matthews invited him to come back anytime. 

Unfortunately the rest of the day’s news portrayed  a major Capitol cluster schmuck, with numerous awkward moments, standoffs, and strained ceremonies. And yesterday I watched Congressional hearings on the Madoff “Ponzi scheme” scandal that were, although perversely fascinating, also very frustrating and not at all comforting to me as an investor, a taxpayer, and a citizen.

Dateline January 5, 2009

Washington DC

“Congressman Paul E. Kanjorski (D-PA), the Chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, today announced that the House Financial Services Committee will meet on Monday, January 5, 2009, to assess the alleged $50 billion investment fraud engineered by Mr. Bernard L. Madoff that is now the subject of multiple investigations. The hearing will help to guide the work of the Financial Services Committee in the 111th Congress in undertaking the most substantial rewrite of the laws governing the U.S. financial markets since the Great Depression.

And who do you think they got to testify at this hearing?

SEC Chairman Christopher CoxNot

Director of Enforcement Linda ThomsenNot

Director of Corporation Finance John WhiteNot.  He’s already gone back to a law firm. 

Director of Division of Trading and Markets Eric Sirri – Not

The roster of witnesses included H. David Kotz, the Inspector General of the SEC and Stephen Harbeck, Present of the Securities Investor Protection Corporation.

H. David Kotz has served as the Inspector General for the U.S. Securities and Exchange Commission since December 2007. Prior to joining the SEC, Kotz served as the Inspector General for the Peace Corps for nearly two years. In that capacity, he was responsible for overseeing the internal operations of Peace Corps programs in Washington, D.C., at 11 regional offices, and in nearly 70 countries around the world. Prior to being named Inspector General for the Peace Corps, Mr. Kotz served for over three years as Associate General Counsel for Litigation for the Peace Corps. Kotz is a graduate of the University of Maryland, with a Bachelor’s of Arts degree in political science with the honors of cum laude and Phi Beta Kappa. He graduated from the Cornell Law School.

Kotz did his damnedest to answer the Congressmen’s questions but there was a real obstacle to the process:

They hadn’t read his written testimony.

Some of the Representatives did not understand the role of the Inspector General’s Office and the organizational structure of the SEC. They mixed up the fine distinctions between the SEC as an Agency and the Inspector General as an independent watchdog office of the SEC but not an inherent part of that Agency itself. 

In fact, Kotz, in the first paragraph of his written testimony, states: 

“I am representing the Office of Inspector General, and the views that I express are those of my Office, and do not necessarily reflect the views of the Commission or any Commissioners.

He also explains that the mission of the Office, ” …is best achieved by having a vigorous and independent Office of Inspector General to investigate and audit Commission activities and to keep the Commission and Congress informed of significant issues and findings…”  

This is the same H. David Kotz that was ignored on the David Aguirre issue and the same H. David Kotz that may have been ignored when other audit reports were issued and investigations completed regarding issues that are relevant to the Madoff scandal. 

His written testimony continues:


“…We also have a vibrant and vigorous investigative unit that is conducting or has completed over 50 comprehensive investigations of allegations of violations of statutes, rules and regulations, and other misconduct by Commission staff members and contractors. Several of these investigations involved senior-level Commission employees and represent matters of great concern to the Commission, Congressional officials and the general public. 

Where appropriate, we have reported evidence of improper conduct and made recommendations for disciplinary actions, including terminations. Specifically, over the past year, we have issued investigative reports regarding claims of improper preferential treatment given to prominent persons, retaliatory termination, the failure by the Division of Enforcement to vigorously pursue an Enforcement investigation, conflicts of interest involving an Enforcement investigation and concerning the solicitation of services by an outside contractor, perjury by supervisory Commission attorneys, misrepresentation of professional credentials, falsification of personnel forms and the misuse of official positions and government resources. 

Where appropriate, we have also referred our investigative findings to the Department of Justice for possible criminal prosecution. We are continuing to follow up with the Department and the Federal Bureau of Investigations on several ongoing criminal matters.”     

It took quite awhile for the Representatives to catch on that they had the wrong guy from the SEC at their hearing.   

Eventually they figured out that Mr. Kotz’s Office investigates after something bad happens and audits SEC processes, policies and procedures only at the behest and at the pleasure of the SEC commissioners.  In fact, in order to initiate the Madoff investigation, Mr. Kotz had to be invited, requested,  to investigate by Chairman Cox.

At this point, Kotz has wide authority to get to the bottom of Madoff.  He indicated that one major step already taken was the issuance of a document retention order for the entire SEC with regard to Madoff and related SEC activities.  Right now, that includes only official SEC email and documents but may soon also include personal correspondence and documents of both current and former staff.
But the realization that poor Mr. Kotz had been set up, sent to the woodshed by his SEC “colleagues” to bear the brunt of the anger, dismay, and frustration felt by not only the Congressional Committee members but also by one of the most poignant witnesses, Mr. Allan Goldstein, came late.  But not before many of the Committee Members repeated the same questions as prior members, asked fundamental organizational questions including the tedious “agency – office” interchange, and questioned the scope of the Sarbanes-Oxley Act.  
Yes, a Congressman questioned why the Sarbanes-Oxley Act did not require the inspection of audit firms that only audit private companies like private broker – dealer Bernard Madoff Investment Securities LLC.  

Now, if you’re reading this blog, you probably know that Sarbanes-Oxley is a law, passed by Congress, sponsored by Senator Paul Sarbanes and Representative Michael Oxley in response to the Enron failure.  There has been criticism ever since of the supposedly overreaching nature of the legislation and the cost of its implementation, delays in its applicability smaller public companies and foreign private issuers, and calls for its repeal altogether.  But it’s a law passed by Senators and Congressmen, not a rule or standard created by the SEC, the PCAOB, or FASB.  In fact, the PCAOB was created by the law, and although organizationally responsible to the SEC, operates independently, under its own budget, and with a unique mission.
So, the idea that a member of Congress should castigate SEC Inspector General Kotz about the limited range of the Sarbanes-Oxley law as it applies to small audit firms that only audit non-public companies makes me plotz.

Someone also asked a question that will warm the cockles of my friend Richard Murphy’s heart. Unfortunately the answer made my heart sink again: 


8 replies
  1. Independent Accountant
    Independent Accountant says:

    The PCAOB is a scam in my opinion. It just harasses small CPA firms. This morning, Satyam, a large Indian outsourcing firm admitted its financial statements were fraudulent. Who audits Satyam? PWC. Did you think it was Joe Schmoe CPA? What has the PCAOB accomplished? Nothing. I agree, Kotz was set up. Congress should have new hearings. This time specifying who will appear from the SEC and determine who sent Kotz. Congress should get real tough on this. How tough? Make a criminal referral to the US attorney for the District of Columbia under, I think, it’s 18 USC 1510, obstruction of a federal agency. What a joy, the thought of Chris Cox and Linda Thomsen sharing a cell, if that’s how it comes out. Congress should also follow up on this to make sure the DOJ doesn’t drop the ball.

  2. Anonymous
    Anonymous says:

    PWC gets one more to its star list – satyam computers one of india’s top software companies – how did they miss 1Bn $ of cash ?

  3. Anonymous
    Anonymous says:

    Congresswoman Roseanne Rosannndana “Oh…S.E.CEEE…I was angry with Kotz because I thought he was failing to crack down on S E X. Oh Never Mind…”

  4. Chicago Accountant
    Chicago Accountant says:

    Funny how Kotz was grilled and not other members of the SEC. One person commented on CFO.com that the problem with the SEC is that you have attorneys playing accountant and auditor. I tend to agree with that on some level. I think I have a similar problem with Congress.

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