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Warning that future Enron-like debacles are inevitable without reform, a coalition of more than 250 pension funds urged regulators and Congress to radically revamp the auditing profession, financial reporting and the role of outside directors. “Real reforms — not superficial ones — must occur,” said George Philip, executive committee chairman of the Council of Institutional Investors and executive director of the New York State Teachers’ Retirement System. The group’s members, which control $2 trillion in pension assets, unveiled their demands Monday at a Capitol Hill press conference. They also sent letters demanding reform to Securities and Exchange Commission Chairman Harvey Pitt, Senate Banking Committee Chairman Paul Sarbanes, Senate Commerce Committee Chairman Ernest F. Hollings, House Energy Committee Chairman Billy Tauzin and 18 other lawmakers. The council made 12 recommendations to improve auditor independence, including a ban on consulting work for a client it also is auditing, creation of a new public entity to regulate auditors, criminal prosecutions of firms that audited companies guilty of accounting fraud and requirements for companies to disclose in proxy materials any nonaudit relationships with outside auditors. To improve oversight by outside directors, the council wants companies to disclose all financial links with directors, to create a rule requiring that outside directors constitute the majority of all boards and audit committees and to refine the definition of outside directors. “The first line of defense for preventing future Enrons are not the auditors,” said Keith Johnson, chief legal counsel to the State of Wisconsin Investment Board. “It is the board of directors.” Other recommendations include requiring all candidates for SEC commissioner to disclose their clients prior to a confirmation hearing, mandate that two of the five SEC commissioners have experience representing investors, create a toll-free number for employees to report accounting fraud by their bosses and subject audit firms to civil Racketeer Influenced and Corrupt Organizations Act suits. The group also said companies must improve the quality of their financial statements, though it did not issue specific recommendations. Laurie Hacking, executive director of the Public Employees Retirement System of Ohio, said it is impossible for investors to police companies if they cannot comprehend their financial statements. The council said past reform efforts failed because accounting firms and corporations were able to leverage their campaign contributions to generate congressional opposition. But the public outcry over Enron opens a narrow window for change, it said. “The unprecedented magnitude of this debacle demonstrates the necessity for regulators and legislators to take a close, hard look at the supposed safeguards that failed and to make the necessary changes so that similar cases cannot happen in the future,” the council said in the letter sent to lawmakers. Several members of the council called for even more extreme reforms. The AFL-CIO sent a letter Monday to Pitt asking that the SEC immediately bar Enron directors, except two members added in October, from serving on the boards of other companies. Eleven Enron directors serve on boards of 21 companies, including Comdisco Inc., Owens Corning Corp., Motorola Inc. and Lockheed Martin Corp. “The fundamental failure of the Enron directors to exercise their legal mandate to protect the interests of Enron shareholders demonstrates the Enron directors’ substantial unfitness to serve as an officer or director,” AFL-CIO Secretary-Treasurer Richard L. Trumka wrote. “At Enron, the board facilitated disloyal acts leading the failure of the company at staggering costs to Enron investors and the public.” Others called for the federal government to take over the job of auditing public companies. Ron Richardson, executive vice president of the Hotel Employees and Restaurant Employees International Union, said auditors will never be truly independent because they receive multimillion-dollar fees from management. The only solution is for the government to take over audits of companies, as it does with unions, he said. Government-conducted audits would be in line with the original intent of Congress when it drafted the securities laws in the 1930s, said Alan Cleveland, legal counsel to the New Hampshire Retirement System. Legislators only dropped their demand for government audits after accountants swore they would operate independently from management, he said. Richardson said the council will decide at a March board meeting whether to add the call for government audits to its formal list of demands. A spokesman for the American Institute of Certified Public Accountants did not return a call for comment. William Boarman, chairman of the CWA-ITU Negotiated Pension Plan, said lawmakers must realize that Enron’s mismanagement is not an isolated incident. Other companies with accounting irregularities in recent years include Lucent Technologies Inc., MicroStrategy Inc., Safety-Kleen Corp., Rite Aid Corp. and McKesson HBOC Inc. “This problem is widespread through accounting firms,” Boarman said. Copyright (c)2002 TDD, LLC. All rights reserved.

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