October 7, 2003

The Honorable William H. Donaldson
Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

The Honorable William J. McDonough
Chairman
Public Company Accounting Oversight Board
1666 K Street, N.W.
Washington, D.C. 20006

Dear Chairmen Donaldson and McDonough:

I am writing with respect to the September 3, 2003, report, Securities Exchange Act: Review of Reporting Under Section 10A, GAO-03-982R, which was prepared by the U.S. General Accounting Office (GAO) at my request (see, letters to the Honorable David M. Walker, dated June 7, 2001 and February 14, 2002). The report provides updated information on (1) the number of Section 10A fraud-report submissions through May 15, 2003, and the status of Securities and Exchange Commission (SEC) actions on those reports, and (2) the current initiatives being taken by the accounting profession and regulators related to the detection of fraudulent financial reporting. The numbers are abysmal.

The Private Securities Litigation Reform Act of 1995 (Public Law 104-67) made it more difficult for defrauded investors to hold issuers and their accountants responsible for their illegal acts, but the Act included an amendment sponsored by Senator Ron Wyden, then a Member of this committee, and Representative Ed Markey to enhance the detection and remediation of and enforcement against financial fraud. Section 10A of the Securities Exchange Act of 1934 requires reporting to the SEC when, during the course of a financial audit, an auditor detects likely illegal acts that have a material impact on the financial statements and appropriate remedial action is not taken by management or the board of directors. This requirement became effective for fiscal years beginning on or after January 1, 1996. GAO's specific findings in the report that I am releasing today and my comments are as follows:

1.    In a February 2000 report, GAO found that only six 10A reports had been filed with the SEC through December 14, 1999. In the September 2003 report, GAO states that the SEC received an additional 23 10A reports through May 15, 2003, for a total of 29 10A reports in 7 ½ years. GAO's October 2002 report, Financial Statement Restatements: Trends, Market Impacts, Regulatory Responses, and Remaining Challenges, GAO-03-138, noted at page 6: "With the increase in the number of restatements due to accounting irregularities, almost 20 percent of SEC's enforcement cases since the late 1990s were for violations resulting from financial reporting and accounting practices. . . . 150 accounting-related cases [were] brought from January 1, 2001, to February 28, 2002." The Division of Enforcement advised GAO that it processed approximately 600 enforcement cases during its last fiscal year, of which approximately 23 percent involved accounting and/or auditing issues (2003 GAO report, p. 4). This begs the question: where are all the missing 10A reports? What are you doing to better ensure that they do? What actions are you taking against those who failed to report?

2.    GAO reports at page 5 that, of the 29 registrants named in the 10A reports that were filed, 10 are currently subjects of active SEC enforcement investigations, 8 have had actions brought against them by the SEC, and 11 were closed without formal action. If public and to the extent appropriate, please advise me in each case of the registrants, auditors, and alleged violations.

3.    GAO describes at pages 6 and 7 the new fraud-detection auditing standard adopted by the American Institute of Certified Public Accountants (AICPA) in October 2002. While I commend the AICPA for this action, I am appalled that the key requirements set forth on page 7 were not already being carried out. This may help to explain, in part, why the early warning system has failed the investing public. I would encourage the Public Company Accounting Oversight Board (PCAOB), which has the AICPA standard under review, to be rigorous if we are to be successful in restoring confidence in the integrity of the accounting profession and companies' financial reports. A sea change is required in attitude and performance. I stand ready to assist you in that regard in every appropriate way.

Thank you for your cooperation and attention to this matter. I am sharing this information with Chairman Oxley and Ranking Member Frank of the Committee on Financial Services, which now has jurisdiction over securities and exchanges, for any action they deem appropriate. The Committee on Energy and Commerce retains jurisdiction over the setting of accounting standards by the Financial Accounting Standards Board. And those standards are only as good as they are implemented and enforced by companies, accountants, and their regulators.

The collapse of Enron and the stunning demise of its auditor, Arthur Andersen, was supposed to have ushered in a new era of accountability for accountants. But, as pointed out in a recent Fortune article, "The Fires That Won't Go Out," October 13, 2003, at 139, it is still business as usual and the main culprit continues to be "the omnipresent potential for conflicts of interest among auditors." More needs to be done, and I look forward to working with you on this important investor protection issue.

Sincerely,

JOHN D. DINGELL
RANKING MEMBER

Enclosures

cc: The Honorable W.J. "Billy" Tauzin, Chairman
Committee on Energy and Commerce

The Honorable Michael G. Oxley, Chairman
Committee on Financial Services

The Honorable Barney Frank, Ranking Member
Committee on Financial Services

The Honorable David M. Walker, Comptroller General
U.S. General Accounting Office