Fight brews over accountants’ role in market meltdown

One of Sacramento’s most lucrative lobbying contracts – it was nearly $1 million annually during 2007-08 — is up for grabs, as the major accounting firms’ prepare for a political and regulatory battle. The dispute between accountants and attorneys is reverberating in the Capitol and lobbying community, and looms as a potential issue in the 2010 race for state attorney general.
At issue is whether the accounting profession played a role in the meltdown of California’s subprime mortgage market. Assemblyman Pedro Nava, D-Santa Barbara, the chair of the Assembly’s banking committee, already has held two public hearings on the role of accountants. More hearings are scheduled, and he has been urged to use subpoenas and depositions – an unusual step in the Legislature.

“When an accountant attests to the accuracy of a financial document with an unqualified opinion, the public should be able to rely on the accuracy of that document,” Nava said. “What responsibility, if any, does the accounting profession have?  This is very complex. We will no doubt need additional hearings to explore this.”

There also is no doubt that California has been especially hard hit by the turmoil in the mortgage markets: More than half of $1.38 trillion in subprime mortgages between 2005 and 2007 originated from 15 lenders in California, according to a May study by the Center for Public Integrity. Subprime lenders created mortgages that gave people with low credit ratings cheap initial payments that grew more expensive over time. Some subprime lenders allowed people to state their income without documenting it.

The question of whether accountants had a role in that meltdown is less certain.

Critics of the accounting industry’s regulatory landscape, led by consumer attorneys, believe that accounting mishaps played pivotal economic roles twice in 10 years  — in the electricity market meltdown of 2001 as well as the collapse of the subprime mortgage market.

The accountants, rejecting that contention, say they don’t set company policy, and don’t make underwriting or strategic financial decisions. Others agree. “I have to say from my examination, I haven’t seen anyone pointing to the accounting industry as having a substantive role in this crisis. In terms of having a material impact on the outcome, I haven’t seen anybody say the accounting industry played a big role, Andrew Atkeson, a UCLA economics professor, testified before the Assembly.

But behind the issue is a tangle of politics, within the Democrat-controlled Legislature itself and statewide.

Accountants, deeply suspicious, believe they are being singled out by Nava and the attorneys for political reasons, and that hearings are a forum contrived to generate information that can be used against them.

Dana Basney, a certified public accountant and forensics auditor, as well as an economics professor at the University of San Diego, was more blunt. The allegations against the accounting profession, he said, are raised by “regulators who were looking for scapegoats for their own lack of oversight, and by plaintiff’s lawyers looking to further their own economic interest.”

Nava is a candidate for attorney general in a crowded Democratic field that includes two Assembly colleagues, Ted Lieu of Torrance and Alberto Torrico of Newark; former Assemblymember Joe Canciamilla; San Francisco District Attorney Kamala Harris; L.A. City Attorney Rocky Delgadillo; and Chris Kelly, the chief security for the Facebook web site.

The Democratic rivals are looking for issues that will distinguish them from the pack and are elbowing each other for primacy. “Democrats for attorney general align themselves with consumers, Republicans align themselves with law enforcement,” was the way one veteran Capitol observer put it.

Historically, accountants and attorneys have been at loggerheads in the Capitol. Earlier legislation by Assemblymembers Fiona Ma, D-San Francisco, and Roger Niello, R-Sacramento, intended to make it easier for California-licensed accountants to accommodate out-of-state clients, was blocked after critics said it would weaken accounting regulations and was discriminatory. Ma and Niello both are accountants.   

Similar legislation, SB 691 authored by Sen. Leland Yee, D-San Francisco, has passed the Senate and is awaiting a hearing in the Assembly’s Business and Profession’s Committee, chaired by Assemblywoman Mary Hayashi, D-Alameda. Yee’s bill requires 150 units of accounting study, rather than the current 120.

Earlier, attempts to boost the study requirements was criticized as discrimination against the poor and people of color because adding 30 additional credits would cost more.

“What ultimately swung me over was the fact that more than two thirds of the states already have adopted the 150 hours. When you have a situation whereby California accountants could end up being unable to practice outside the state of California, that gives you some pause,” Yee said. The NAACP, he noted, dropped its opposition to the bill.

Nava, meanwhile, is in the midst of putting together his own bill on the accounting profession.

While the Capitol fight continues, the big accounting firms are looking for a new champion in the lobbying world.

The major accounting firms – known as the Big Four – have been represented for years by lobbyist Richard Robinson, an accountant and former Assemblyman from Orange County, who built a reputation for being effective and aggressive, in both the Legislature and in the ranks of lobbyists. But he is retiring, and the accounting firms are looking for new representation. On a temporary basis, they reportedly are being handled by Nielsen, Merksamer, Parrinello, Mueller and Nayor, a political law firm.

For several weeks, word that the big accounting firms – Deloitte, KPMG, PricewaterhouseCoopers and Ernst & Young – have been looking for a lobbyist has been going through the lobbying corps. The companies’ business is among the most lucrative in the Capitol.

According to disclosure reports filed with the Secretary of State, the four firms paid some $1.95 million to Robinson’s firm, Richard Robinson and Associates, from January 2007 through December 2008. The firms lobbied the governor’s office, regulatory authorities and on behalf or against a number of bills.

Joe Dunn, a litigator and former state senator who led an investigation into market manipulation during California’s electricity crisis, urged Nava and his committee to pull no punches. He said the committee should use its subpoena power to force accounting industry representatives to turn over documents and testify before the Legislature.

“These are tools that you may not be aware are available to you,” said Dunn, now the president of the California Medical Association. “The court upheld our use of these tools. We issued subpoenas for documents. We ended up having produced millions of documents in response to those subpoenas. We actually did issue deposition subpoenas. It was the first time this Legislature had ever taken depositions…you do have the power to do that.”

Ed Howard of the University of San Diego’s Center for Public Interest Law, which has long scrutinized the accounting industry, said the state needs a “good solid fact-based analysis of the role of the accounting profession in the financial meltdown.”

But Ma — and others believe — the attorneys' are motivated by something other than the search fo truth.

"I am highly insulted over these attacks on the accounting profession by the CPIL,"  said M
a, who supports Yee's bill.  "They have attacked other professions as well, as they go after deep pockets. We have to get special educational training to be licensed, we take ethics training. People depend on us for financial statements, for tax returns, even to be registered on any of the stock exchanges. We take this very , very seriously."

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