Capitol Beat: Mortagage Mess Blame Game

‘Hearings’ Focus on Mortgage Meltdown

By Bruce C. Allen and Jeannie Tindel
Assembly Banking and Finance Committee Chair Pedro Nava (D-Santa Barbara) recently held two hearings in Sacramento on the accounting profession and its role in the subprime mortgage meltdown. The first featured class-action attorneys, one of whom has filed a billion-dollar lawsuit against a Big Four accounting firm.
Hearing highlights included an indictment of the entire profession by a Teamsters Union official, who represents the Center for Public Interest Law and a collection of individuals who make their livings suing CPAs.

The “evidence” of wrongdoing consisted of selective news accounts, editorial commentary, the filing of some lawsuits that have yet to be litigated and the bankruptcy of a large California mortgage company. The rationale seemed to be that because CPAs play a role in the financial community, they must have caused the collapse.

At the follow-up hearing, which was purported to allow the accounting profession to respond, Andrew Atkeson, director of the Business Economics Program at UCLA, described the causal forces that led to both the run-up in the housing market and its quick decline. He indicated that the meltdown was a worldwide phenomenon fueled by easy credit. Atkeson also identified all of the information that was available to investors who bought securitized loan packages sold by the mortgage companies.

CalCPA member Dana Basney, a shareholder of Mayer Hoffman McCann PC and a director of CBIZ Accounting, Tax and Advisory Services in San Diego, testified that “market forces were the primary cause of the decline in these companies, which were ultimately dependent on a real estate market that collapsed after it was pushed to unsustainable levels.” He added, “The profession certainly did not set government policy that promoted subprime lending, it had no role in the repackaging and resale of mortgage instruments, and it does not set underwriting policies either at the governmental or the company level.”

Bob Petersen, president of the California Board of Accountancy, then testified that the CBA needs additional resources to hire CPA investigators.

Preston DuFauchard, commissioner of the Department of Corporations, testified that, when his agency became aware of the impending crisis, he focused on increased scrutiny of the situation and the market to ensure consumers, who had agreed to mortgages with the affected lenders, were able to complete their transactions through the collaborative efforts of lenders willing to take the loans.

Lisa Troe, a CPA with a consulting company in Los Angeles, who spent eight years with the SEC providing enforcement expertise in cases involving CPAs, lent her familiarity with the oversight process to the proceedings. She provided valuable insight into the regulatory structure that exists to govern the conduct of CPAs involved in mortgage company audits, and pointed out misstatements from earlier testimony and corrected the record.

Last to testify was Ed Howard, an attorney and lobbyist, who represents the Center for Public Interest Law. He raised concerns regarding the amount of revenue that large firms receive, and the difficulty that the under-funded CBA has in providing enforcement oversight over multi-national firms.

Howard noted that the CBA, unlike the state contractors’ license board and the medical board, had too few investigators for the size of the licensed population in California, and that there was no standardized model for discipline or consumer disclosure.

He also said that, unlike the contractors’ board, there was no requirement that the unlicensed board members represent specific interest groups, like consumer advocates or investors.

Historically, CBA representation has been balanced, consisting of consumer advocates, bankers and other sophisticated users of financial statements. It’s important to retain informed, interested, intelligent and objective individuals on the board.

At the hearing’s conclusion, Nava announced that he planned to hold at least one more hearing to delve into the mortgage meltdown in further detail. CalCPA will continue to monitor these hearings and participate as appropriate to ensure the profession is fairly and accurately represented, and does not become the scapegoat for a global financial crisis.

Other News: Legislative Update
SB 691 (Yee, Niello, Ma) has cleared the Senate and faces its next challenge in the Assembly Business and Professions Committee. The bill will establish the 150-hour requirement as the only pathway to licensure in the state as of 2014.

Once passed, California will become a substantially equivalent state, thereby allowing California CPAs to serve clients needs outside California.

• AB 117 (Niello), CalCPAs licensing status disclosure bill, has passed the Assembly and is now in the Senate.
• AB 129 (Ma), a bill to re-enact the taxpayer privilege to conform with the federal taxpayer bill of rights, has passed the Assembly and will be heard next by the Senate Judiciary Committee.
• Finally, CBA-sponsored, CalCPA-supported legislation to require mandatory peer reviews for all CPA firms performing audits, reviews and compilations has passed Assembly and will be heard in the Senate. 

Bruce C. Allen is CalCPA’s director of government relations. Jeannie Tindel is CalCPA’s director of legislation.