With Democrats like Representative Carolyn Maloney of New York, who needs the Republicans? When special interests pursue self-interested legislation – or seek to block legislation that affects their interests – Maloney waves the jobs and economic growth flag for campaign contributors rather than defending investors.
Maloney voted for the JOBS Act in spite of the fact the bill destroys investor protections hard-won after the Enron fraud in the Sarbanes-Oxley Act. Maloney also recently spoke up on behalf of the audit industry instead of investors during a hearing held by the House Subcommittee on Capital Markets and Government Sponsored Enterprises. PCAOB Chairman Jim Doty testified about several agency initiatives to increase auditor independence, transparency, and accountability for auditors behaving badly. Maloney joined Republican Congressmen who pushed back hard on Doty and the PCAOB, the audit industry regulator, accusing the regulator of “mission creep” and “overreach”.
Maloney represents Manhattan’s East Side and Queen’s West Side, the home of the financial services industry including the US headquarters of all of the Big Four accounting firms. Maloney serves on three key subcommittees of the House Committee on Financial Services because she, “believe[s] one of my chief tasks is to maintain the preeminence of New York City as the world’s financial center.” Maloney is “committed to defending the health of our financial institutions so that they can lead our economic recovery.”
But, in my opinion, she’s no expert on financial services or accounting policy.
Maloney’s real interests show up at the most inopportune moments. Back in 2000, before the Enron scandal, Richard Baker, a Louisiana Republican, ran the House Subcommittee on Capital Markets. He was very worried at the time about Fannie Mae and Freddie Mac. Baker saw the writing on the wall with the mortgage giants, behemoth Government Sponsored Enterprises (GSEs) that were eventually nationalized under a conservatorship in September of 2008 because of the significant losses they racked up from subprime mortgage securitization. Taxpayers are still paying the bill for the inattention by so many for so long to the accounting manipulation, fraud, and excessive risk taking at the GSEs that put both public companies into receivership.
Baker convened hearings and the undersecretary for domestic finance at Treasury at that time, Gary Gensler, offered his views during one of them on the Housing Finance Regulatory Improvement Act. Baker’s bill proposed removing the $2.5 billion line of credit available to Fannie and Freddie from Treasury. Gensler came out in favor of cutting off Fannie and Freddie. According to Gretchen Morgenson and Josh Rosner in their recent book, Reckless Endangerment, the Subcommittee on Capital Markets at that time was dominated by two factions.
“First were the “housers”—true believers in government subsidies for housing and supporters of Fannie and Freddie as the best vehicles to provide them. Equally zealous, though, were the members who received campaign contributions funded by the companies as well as the ribbon-cutting ceremonies for projects in their districts.”
As one of the most contentious hearings ended, Representative Carolyn Maloney piped up with a closing question for Franklin Raines, Fannie Mae’s chief executive, that seemed to ignore the point of the hearings – Fannie and Freddie were already overextended.
“I think it would be appropriate to bring the GSE structure to childcare, an area that has been failed by the private markets. I would like to know, would Fannie and Freddie be opposed to having the authority to buy childcare facility mortgages?”
Maloney’s quest to use the GSEs to fund childcare facility mortgages went nowhere in 2000. She sponsored variations of the bill repeatedly in the following years. In 2006 it was called H.R. 5207, the Children’s Development Commission Act (Kiddie Mac). Maloney ignored what everyone else who was close to the financial services industry saw at that time: The mortgage industry was headed for a crash, led by subprime. By 2006, some of the big mortgage originators who fed Fannie Mae and Freddie Mac like New Century and Countrywide had started to falter.
These days Carolyn Maloney is pushing jobs and growth, growth and jobs, and protecting the interests of the venture capitalists, bankers, and “job creators” who would love to repeal the Sarbanes-Oxley Act. Maloney recently supported the Jumpstart Our Business Start Ups Act (JOBS Act) which goes a long way towards erasing the gains investors made in Sarbanes-Oxley.
Some Democrats who voted for the JOBS Act as a jobs bill, including Maloney, are now backpedaling. “I don’t see it as a great jobs bill,” Rep. Carolyn Maloney (D-N.Y.) told MSNBC’s Chris Hayes. “I don’t see it creating a lot of jobs.”
When Chris Hayes confronted Maloney with SEC Chairman Mary Schapiro’s objections to the removal of significant investor protections in the JOBS ACT, Maloney said Schapiro could write a letter to all Senators and Congressmen explaining her objections and they would consider a bill to address them.
Maloney also told the panelists that day, “I think it’s very difficult to take on the financial interests.”
I guess it wasn’t enough for SEC Commissioner Schapiro to send a letter with her concerns to the Senate Banking Committee before they took up the bill that the House passed with bipartisan support. That bipartisan support included votes from current House Committee on Financial Services ranking member Rep. Barney Frank, Rep. Maloney, and Rep. Maxine Waters. Rep. Capuano was the only Democrat voting no on this bill in committee.
In her letter to Senators Johnson and Shelby, SEC Commissioner Schapiro said the Jumpstart Our Business Startups (JOBS) Act, HR 3606, passed by the House would weaken investor protections by, for example, exempting emerging growth companies from the internal control audit opinion provisions of Section 404(b) of Sarbanes-Oxley. Schapiro believes the Section 404(b) internal controls requirement “has significantly improved the quality and reliability of financial reporting and improved investor protections and, therefore, believe this change is unwarranted.”
Instead of carefully considering growing public objections to the bill, the Senators expedited its passage instead. There was no bill mark-up session and no further hearings. SEC Chair Mary Schapiro did not testify and neither did any of the SEC Commissioners.
I attended the bill markup session for H.R. 3606, “Reopening American Capital Markets to Emerging Growth Companies Act of 2011” by the House Committee on Financial Services on February 16th. Republican Congressman Garrett, the Committee Chairman, led a quick discussion of proposed amendments to the bill. Carolyn Maloney had none. In fact, Maloney was absent for much of the discussion because this was the same day as a Senate hearing on birth control. Maloney’s protests about, “Where were the women?” at that hearing dominated the evening news and play repeatedly as a video on her website. Instead of looking out for the investor, Maloney was focused on a soundbite and a photo op.
Maloney’s focus on women’s issues is the excuse given by many for giving her a pass on otherwise generally corporatist positions on everything else. As a woman and a progressive Democrat, I take Democratic legislators’ support for women’s health, anti-domestic violence, and pay equality issues for granted. I give Maloney no extra credit points for strongly supporting these initiatives. Maloney is a drive-by Democrat who does the warm and fuzzy blanket stuff and supports financial services and business legislation based on who has buttered her bread.
Maloney sought to repeal the protections of Sarbanes-Oxley early on. According to reports in the Huffington Post on October 28th, 2009, Rep. Carolyn Maloney sponsored the original bill to repeal SOx 404 internal control audit requirements for companies with market capitalization less than $75 million. This loophole applied to about 55% of publicly traded firms. Maloney’s amendment, co-sponsored with Rep. Scott Garrett, a New Jersey Republican, was to be attached to a bill pending in the House Financial Services Committee, the Investor Protection Act of 2009,.
The permanent exemption for companies under $75 million in market capitalization was passed under Dodd-Frank in July of 2010. The audit industry otherwise escaped any mention or sanction in Dodd-Frank, in spite of their failure to warn investors of problems at the bank who failed, were bailed out or acquired by healthier banks. In particular, legislation to repeal the exemption from aiding and abetting liability in securities litigation for third-parties like auditors never made it into Dodd-Frank.
Employees of KPMG, PwC, and Deloitte were among House Committee on Financial Services ranking member Barney Frank’s top 25 contributors leading up to the passage of Dodd-Frank, 2009-2010. During the 2008 election year, all of the Big 4 contributed to Frank’s reelection campaign.
The JOBS Act exempts “emerging growth companies” – that’s companies with up to $1 billion in revenue – from SOX 404(b) internal controls audits for five years or until they exceed the revenue threshold. That’s bad for the business of the accounting/audit industry. The additional provision that reduces required audits at the time of IPO filing for “emerging growth companies” from three years to two also takes food off auditors’ tables. The audit industry said nothing during the debate about the impact those provisions would have on investors. They would have appeared greedy. The auditors learned the hard way after the Sarbanes-Oxley Act was passed not to oppose public company executives who push for less regulation and less cost just because reducing investor protections may harm the true client – investors. After all, it’s company executives and Audit Committees who hire auditors and their consulting and tax professionals and pay their bills, not shareholders.
Representative Carolyn Maloneycontinues to be a member of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises. The latest incarnation, under the leadership of Rep. Garrett, recently held a hearing to discuss pending proposals and current challenges facing the auditing and accounting industries. (I guess the firms fal under this subcomittee because the audit firms are government sponsored enterprises by way of their exclusive franchise for providing stock exchange mandated and SEC mandated audits of public companies and because there’s a a stated “too few to fail” policy?)
Jim Doty, Chairman of the PCAOB, Jim Kroeker of the SEC, and Leslie Seidman of FASB answered questions from Committee members. Among the issues discussed was HR 3503, co-sponsored by Reps. Lynn Westmoreland (R-GA) and Barney Frank (D-MA) which would amend the Sarbanes-Oxley Act of 2002 to make Public Company Accounting Oversight Board disciplinary proceedings open to the public and a bill sponsored by Rep. Michael Fitzpatrick (R-PA) that would prohibit the PCAOB from mandating firm rotation. The bill, sponsored by Rep. Michael Fitzpatrick (R., Pa.), hasn’t yet been introduced.
The Wall Street Journal’s Michael Rapoport tells us:
According to data from the Center for Responsive Politics, which tracks campaign finance, Rep. Fitzpatrick has gotten major contributions from PricewaterhouseCoopers and Deloitte during the 2012 election cycle. PwC is his 10th-biggest contributor throughout his career in Congress, and the accounting industry has given him a total of $108,779 over his entire career.
Rep. Scott Garrett (R., N.J.), who is chairman the capital-markets subcommittee, has also benefited from the industry’s contributions. KPMG is his fourth-largest contributor throughout his career, and PwC is his 12th-largest. The accounting industry has given him $152,904 over his career.
Rep. Maloney is skeptical about the PCAOB’s request to make disciplinary proceedings against audit firms and auditors public. The Sarbanes-Oxley law bars the PCAOB from making such proceedings public unless both parties consent. That’s inconsistent with how the SEC handles similar sanctions against audit firms and auditors for violating securities laws. The PCAOB has said this allows audit firms to drag out legal proceedings for years while keeping audit committees and investors in the dark about auditor negligence and bad behavior.
“I understand the concern … but I also want to hear whether there is any concern that by making these proceedings public, we are unnecessarily harming the reputation of a firm before any official action is taken. Personally, I don’t think we should do so unless there is an official action taken.”
Maloney isn’t crazy about mandatory auditor rotation, either.
“Aren’t there other ways to boost auditor independence without putting in an arbitrary requirement that may disrupt the relationship between the firms and companies they audit? It may affect the cost and quality of the audits, too.”
Those talking points could have come directly from the audit firms. In fact, they probably did.
“Mandatory firm rotation will not improve audit quality and its cost cannot be justified. “
PwC’s Bob Moritz in testimony to the PCAOB on March 21, 2012
“Ernst & Young…does not support mandatory firm rotation. In our view, it is not a necessary or constructive means to promote auditor skepticism, and we are aware of no evidence that it will improve audit quality…A mandatory audit firm rotation model would not only give rise substantial costs and disruptions, but would also impair audit quality and undermine sound corporate governance – all to the ultimate disadvantage of investors. We believe the mandatory re-tendering approach suffers from the same or even greater flaws.”
Steven Howe, Ernst & Young in testimony to the PCAOB on March 21, 2012
“Given the significant costs and disruption, the lack of evidence linking engagement tenure to audit quality, and, most importantly, the risk that mandatory rotation is actually a detriment to audit quality, we oppose mandatory firm rotation.
PCAOB enforcement proceedings currently are confidential under Sarbanes- Oxley, because Congress understood that auditors belong to a profession in which a good reputation is essential and publication of unproven charges may end an individual auditor’s career or audit firm’s existence.”
Barry Melancon, President of the AICPA, the audit industry trade organization, in testimony before the House Subcommittee on Capital Markets and Government Sponsored Enterprises, March 28, 2012
Maloney is at the top of the list of Democrats receiving campaign contributions from the auditors, second only to Brad Sherman of California, a CPA and Big Four alumni. Sherman has pocketed $49,500 from the industry already in 2012. Maloney, who counts the Big Four US headquarters amongst her district’s constituents, has accepted $28,500 in 2012. The accounting industry has given her $176,000 over her twenty-year career according to OpenSecrets.org, more than either Republicans Garrett or Fitzpatrick.
Looks to me like it’s the audit firm money, not Carolyn Maloney, doing the talking.