More than two decades ago we blew the whistle at Enron and WorldCom, industry giants whose spectacular falls revealed two of the largest accounting fraud scandals in American history. We know the destruction that fraud causes. We lived through it. We witnessed how unchecked power, collusion at the highest levels and manipulated financial statements can bring down iconic companies, destabilize markets and vaporize billions of dollars and thousands of jobs overnight.
That’s why we are raising our voices now against a proposal by Republican lawmakers to eliminate the Public Company Accounting Oversight Board, a watchdog that Congress created in the wake of those scandals to protect against accounting fraud and audit failure. The rollback of this hard-won safeguard would unleash additional risk into this highly uncertain economic environment and make the next corporate disaster more likely.
The collapse of Enron and WorldCom exposed a broken system for verifying financial honesty. Before the P.C.A.O.B., accounting firms essentially policed themselves. That system failed in part because they often earned far more money selling advice to the same clients than they did from auditing. As a result, firms were sometimes incentivized to go easy on the auditing side — by reducing testing, lowering standards or putting more junior staff members on complex audits, for example — to secure their more lucrative consulting business. This conflict of interest, combined with auditing methods of the time that weren’t strong enough to uncover elaborate, high-level fraud schemes, created an environment that allowed enormous deceptions to go unnoticed.
At their peak, Enron and WorldCom employed more than 100,000 people combined and operated in over 40 countries. Enron pioneered the trading of energy derivatives, reinvented the natural gas industry and earned Fortune magazine’s title of America’s Most Innovative Company for six consecutive years. WorldCom was the dominant player in internet infrastructure and a telecom leader that reshaped the industry, once boasting the largest acquisition in corporate history and the fifth most widely held stock. Both had powerful chief executives and celebrated chief financial officers who were beloved by Wall Street.
The cost of their deceit was staggering. More than 50,000 employees lost their jobs and the companies entered bankruptcy, leaving investors and creditors with catastrophic losses. At the time, these were the largest bankruptcies and civil settlements in corporate history.
In response to these and other failures, Congress came together in 2002 to pass the Sarbanes-Oxley Act, which created a strong framework to deter and detect fraud. The P.C.A.O.B. was a cornerstone of that reform: an independent, nonprofit, nongovernmental regulator charged with overseeing public company audits and restoring trust in financial reporting. The bill enjoyed overwhelming bipartisan support and passed almost unanimously in the House (423-3) and in the Senate (99-0).
The accounting oversight board ushered in rigorous inspections, enhanced enforcement and an improvement in audit quality that the profession badly needed. Successive Securities and Exchange Commission chairs from both parties have affirmed the board’s value as a vital post-crisis innovation: Thanks to its work, audits today are more consistent, more credible and more accountable, helping to uncover deficiencies that might otherwise fester. The board’s continued vigilance is crucial, as many of the systemic risks that necessitated its creation — such as the inherently conflicted relationship between auditors and their clients and the temptation of fraud — still endure. Every organization has room to improve, but any needed changes can be addressed within the current framework.
Instead, as part of its broader federal budget reconciliation bill, the House has advanced a measure to eliminate the board and shift its responsibilities to the S.E.C. That might sound like a bureaucratic tweak. It isn’t.
Independence from the S.E.C. is one of the board’s greatest strengths. The S.E.C. does oversee it, approving its budget and appointing members, but the two work separately and in complementary ways to protect investors. While the S.E.C. has a sprawling agenda — regulating public companies that sell investments such as stocks or bonds — the board has one mission: ensuring high-quality audits. That laser focus is critical, and it’s only possible because of the board’s operational independence.
One of the most concerning risks is losing audit oversight for overseas companies listed on U.S. exchanges. Under formal cooperative agreements with many foreign regulators, the P.C.A.O.B. has conducted inspections in over 50 international jurisdictions — including China, where in 2022 it secured unprecedented access. That may not survive a transfer to the S.E.C., a government agency, because Chinese regulators have historically rejected direct involvement from other governments. Without a nongovernmental alternative like the P.C.A.O.B., oversight would likely have to be renegotiated from scratch and might be lost entirely. The upshot would be a higher risk of frauds like that of Luckin Coffee, a Chinese company that fabricated approximately $310 million in sales and cost investors billions after listing on a U.S. exchange in 2019.
Systemic risks metastasize in regulatory gaps. The United States learned this after the free-market fever of the late 1990s and early 2000s, when Congress deregulated the telecom, energy and financial sectors, including by repealing the Glass-Steagall Act and exempting derivatives from oversight. The rollback of these essential guardrails contributed to the downfall of WorldCom and Enron, as well as the 2008 financial crisis.
Since then, technological risks and the complexity of financial markets and reporting have only grown. Yet Congress is now considering barring states from regulating artificial intelligence for 10 years despite knowing very little about how A.I. tools might be used. It is highly likely that A.I. will dominate audit procedures and public company financial statement preparation in the near future. Accounting oversight has never been more needed.
The proposed bureaucratic consolidation purports to save taxpayer dollars. That is merely wishful thinking or creative accounting. The P.C.A.O.B. is funded by fees from public companies and registered brokers and dealers, not taxes; transferring its duties to the S.E.C. would only shift its costs to the public.
And taking on yet another job couldn’t come at a worse time for the S.E.C., which reportedly has lost 16 percent of its staff in the past year, mostly because of Department of Government Efficiency-related buyouts. To continue the board’s work, the S.E.C. would effectively need to rebuild it, but it does not have the resources to do so.
Representative Michael Oxley once said, “We often think of money as the currency of a free market system, but in truth the system rises and falls on the confidence of its investors.” Trust is hard won and easily lost. The P.C.A.O.B. was built to protect it. But if it’s allowed to erode, we will all pay the price from market volatility, higher borrowing costs and potentially taxpayer-funded cleanup efforts. The silent, immeasurable value of well-designed safeguards lies in the scandals they prevent from happening.
Sherron Watkins and Cynthia Cooper are former vice presidents of Enron and WorldCom. They exposed accounting fraud at those companies, for which they were named Time magazine’s Persons of the Year in 2002. Ms Cooper previously served on the P.C.A.O.B.’s Standing Advisory Group.
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