The Blame Game Part V: Transparency

“Stimulus funds need to be infused into the economy as quickly and efficiently as possible in order to stimulate growth,” said David Williams, leader of Deloitte’s Financial Advisory Services practice. “However, the legislative process as well as the public’s desire for transparency surrounding how stimulus funds are allocated do not bode well for getting stimulus funds into the economy quickly.”

That isn’t happening, according to the Wall Street Journal. In fact, the Wall Street Journal reports the largest banks receiving Troubled Asset Relief Program, or TARP, funds actually offered less credit to business and consumer borrowers during February.

The culprit may be the public thirst for transparency.

“The government is trying to walk a tightrope here, to the extent that they publicly disclose how banks are doing in the bailout they further under mine the public’s confidence in the banking industry,” said Victor Lund, senior analyst at WAVGroup.

Results from a survey conducted on a recent Deloitte webcast titled “Oversight of the Fiscal Stimulus Bill: Transparency in a New Age”, reveals that 79.8 percent of the more than 1,540 business professionals from the financial services; consumer & industrial products; technology; media & telecom; banking & securities and energy & resources industries participating in the webcast and survey believe the emphasis on transparency and accountability in government spending will translate into increased regulations for businesses. More than half (58.2 percent)  also said the level of transparency the Obama administration promised to attach to bailout spending is not possible to obtain. Nearly half (40.5 percent) of those responding indicate that the government’s emphasis on transparency and ethics will lead to a re-evaluation of their organization’s anti-fraud programs and controls.

“As you are no doubt aware, in times of fluctuating markets and uncertain economic trends, transparency and financial reporting quality take on even greater importance,” the Securities and Exchange Commission’s (SEC) then  Chief Accountant Lynn Turner told the Interagency Accounting Conference back in 2001. “As we all know too well from the past,, including our experiences here in the U.S., in the Asian market, and with the Long-Term Capital Management Crisis, it is important for financial institutions of all types, including banks, securities firms, insurance companies, and finance companies, to provide complete, clear transparent information to investors, depositors and regulators on a global basis. We believe it is important that the financial reporting and disclosures reflect, on a timely basis, the underlying economics of the transactions in which these institutions are engaged.”

Previous crises have resulted in the enacting of the Sarbanes-Oxley Act (SOX) in 2002, the Gramm-Leach-Blilley Act (GLB) in 1999, and even, during the Depression of the 1930’s, Glass-Steagall Act of 1933 and the creation of the SEC and the Federal Deposit Insurance Corporation (FDIC). The current situation differs somewhat from previous downturns the extent to which the government has at least initially bailed out many troubled banks, financial institutions, insurance companies and auto manufacturers rather than allowing them to fail as a totally free market economy would and the extent to which the public is aware of these bailouts.

Current legislative efforts appear to be focused on amending and expanding the False Claims Act (31 U.S.C. § 3729–3733). The False Claims Act (FCA), also referred to as the Lincoln Law, is one of the primary tools used by the federal government in pursuing fraud cases and protecting whistle-blowers who expose government waste. In 2008, the Federal Times reports that the U.S. Department of Justice collected more than $1.3 billion bring the total amount collected from fraud cases since 1986, to more than $21 billion. The 2008 amount is slightly lower than the $2 billion collected in 2007 and less than half of the $3.1 billion collected during fiscal year 2006. Yet, 79.8 percent of those participating in the Deloitte survey admitted they were unfamiliar with the False Claims Act.

“Beyond conducting fraud risk assessments to figure out if existing controls adequately cover risks unique to their organizations, executives and boards will need to gain better understanding of the False Claims Act,” Williams said. “While familiarity with this term is almost nonexistent today, the False Claims Act is likely to achieve increased visibility as bailout money is further injected into the economy.”

Several bills, S. 440 and S. 458 in the U.S. Senate and H.R. 1788 in the House, that would expand the False Claims Act are being debated. Congressman Howard Berman (D – CA), sponsor of H.R. 1788, has long been a proponent of expanding the False Claims Act. In fact, Rep. Berman and Sen. Charles Grassley (R- IA), sponsored amendments to the FCA as far back as 1986. Sen. Grassley is the sponsor of S. 458, which is currently being considered by the Senate Committee on the Judiciary. Both H.R 1788 and S. 458 seek to amend the FCA. S. 440, in contrast, seeks to amend the Internal Revenue Code of 1986 to allow an above the line deduction for attorney fees and costs in connection with civil claim awards. Sponsored by Sen. Arlen Specter (R – PA) and co-sponsored by Sen. Patrick Leahy (D – VT), S. 440 has been referred to the Committee on Finance.

“Currently, the government’s primary civil fraud enforcement mechanism, the False Claims Act, empowers individuals to ‘blow the whistle’ on companies that defraud the government and receive a ‘finders fee’ if the government collects fines or retribution,” Williams continued. “In addition if two bills pending a vote in the Senate expand the reach of the False Claims Act, enforcement efforts by the FBI and DOJ will accelerate. Furthermore, we would expect that the amount of money the government recovers will increase substantially in the coming years, well beyond the average of $1 billion recovered annually during the past two decades.”

It should be noted that during periods of prosperity and economic growth, many, if not all of the laws enacted to provide transparency come under considerable fire for placing an unreasonable burden on businesses. Transparency today, however, also applies to government. The people want to know how and why their tax dollars are being used to bailout some firms but not others as well as how the distribution of bailout funds are going to the everyday life of the average American.

“We absolutely do need a better regulatory infrastructure though, to monitor and provide better early-warning signals, and to provide procedural mechanisms for responding to emergencies,” said Cheryl Block, leading federal budget expert and professor of law at Washington University in St. Louis, MO, who has previously expressed concern about enacting major legislation during times of financial crises. “My view is that at least some procedures and rules should be in place to make sure that bailout costs do not get hidden off the budget. In addition, accounting standards and methodologies used to estimate costs should be clearly identified in advance.”

Donald Kettl, the incoming dean of the University of Maryland School of Public Policy and author of The Next Government of the United States agrees.

“We’re finding out all too clearly that there are no governance structures in place to handle problems on the scale of the banking crisis,” explained Kettl, whose new book details the need for all levels of government to change the way they do business.

“The most enduring legacy of the Obama administration might well be redefining the future of market capitalism,” Kettl adds. “The bailout of the banking system and of the broader economy, and the new regulatory system put into place to prevent the crisis from recurring is likely to reshape the behavior of private markets for a very long time.”

Previous installments of The Blame Game series includes:
The Blame Game Part IV: Mating Men
The Blame Game Part III: Control Confusion
The Blame Game Continued: Is CRA at Fault?

The series began in November 2008 with The Blame Game.