At the same time, the head of the Securities and Exchange Commission is urging Congress not to bar big accounting firms from providing consulting and other services to companies whose books they audit.
``Stripping down accounting firms so that they only produce audits will result in worse audits,'' SEC Chairman Harvey Pitt testified Wednesday to the House Financial Services Committee, which is considering legislation.
His predecessor, Arthur Levitt, and critics of the accounting industry have insisted that allowing accounting firms to do both auditing and consulting for the same clients creates potential conflicts of interest.
The industry has come under intense scrutiny following Enron's bankruptcy, the largest corporate failure in U.S. history. Enron's former auditor, Arthur Andersen LLP, pleaded innocent Wednesday in Houston to a federal charge of obstructing justice in shredding documents and deleting computer files related to Enron.
Other financial players have come under Congress' microscope in recent weeks.
Members of the Senate Governmental Affairs Committee asked officials of the three big credit-rating agencies Wednesday why they maintained high ratings for Enron even as its stock plummeted last year, up until four days before its bankruptcy filing Dec. 2.
Many Wall Street financial analysts recommended that investors buy Enron stock almost until it went under - an issue previously examined by the committee.
Officials of credit-rating agencies testified at Wednesday's hearing that Enron executives misled them about partnerships used to conceal massive debt. Senators criticized them for not questioning the finances of the energy-trading company more closely.
The complex web of partnerships, improperly buttressed by Enron stock, ultimately brought down the Houston-based company.
John Diaz, a managing director of Moody's, testified that Enron executives lied to his agency about the partnerships in the fall of 1999 as Enron was pushing for an upgrade of the rating of its long-term debt. ``We now know that material information was missing'' and that Enron failed to disclose the existence of three of the partnerships, Diaz said.
Furthermore, based on what has become known recently about Enron, he said, ``Much of the information that was provided was inaccurate.''
Sen. Joseph Lieberman, D-Conn., the committee's chairman, told the witnesses they weren't as ``aggressive'' in looking at Enron's finances as they should have been. ``Why didn't you press harder for more information?'' he asked.
Ronald Barone, a managing director of Standard & Poor's, said: ``This was not a ratings problem. It was a fraud problem. ... We're not forensic accountants.''
Separately, committee leaders agreed to issue a new set of subpoenas to Enron, Enron directors and Andersen, seeking documents related to their contacts with the White House, the Energy and Commerce departments and other federal agencies.
Lawmakers and regulators are examining the role played by Moody's Investors Service, Standard & Poor's and Fitch Ratings. Their grading of companies' creditworthiness is closely watched by the markets and can determine whether banks and other financial institutions invest in a company.
``You can put people out of business,'' Lieberman reminded representatives from the agencies.
The SEC, which is pursuing a civil investigation of Enron and Andersen, also is examining the role of the credit-rating agencies.
SEC Commissioner Isaac Hunt told the Senate panel that the market watchdog agency will examine thoroughly the role of the credit raters and consider whether they should be more tightly regulated. Despite their power, the SEC allows them to police themselves.
One of the questions that has arisen: whether the agencies' delay in lowering Enron's rating was due to pressure from investment banks that were trying to put together a merger with rival energy company Dynegy to rescue Enron last fall.
The agency officials said the investment-grade rating that was retained for Enron was based on the assumption the merger would go through and would bring a cash infusion to Enron.
http://accesswdun.com/article/2002/3/197095