156 ShowMetheMoney
tion. He also instructe dthe SEC staff to focus on materiality not
solely in quantitative terms but also in qualitative terms, reject the
notion that materiality can excuse minor errors, an dpromulgate new
standards on revenue recognition.
Levitt also called on private standard-setting organizations to join
the cause, particularly asking the Financial Accounting Standards
Board (FASB) to reconsider the definition of liabilities under gen-
erally accepte daccounting principles. He encourage dthe Public
Oversight Boar dto review an dintensify its focus on the au dit
committees of boards and recruit more members with financial back-
grounds (as opposed to legal, marketing and public service back-
grounds). He envisioned audit committees meeting more often and
asking tougher questions—what he calle da “private sector re-
sponse.” He impanele da blue ribbon commission to report on ways
to enhance the audit committee’s role and ultimately called upon
management itself an dWall Street to revitalize integrity in financial
reporting by cooperating an dsupporting these initiatives.
This program emboldened the SEC to prosecute scores of en-
forcement actions against companies engage din earnings manage-
ment of the sort Levitt highlighted. The SEC adopted tougher rules
governing audits, including a requirement that quarterly financial
statements be reviewe dby au ditors, an dmateriality rules that ex-
pressly deal with qualitative and quantitative dimensions.^2
Audit committees must now review and vouch for the accuracy
of financial statements, provide a report in proxy statements con-
cerning whether they signe doff on the financial statements, state
whether a written charter spells out the committee’s duties, and sub-
mit any such charter to the SEC every three years. The stock ex-
changes adopted rules requiring listed companies to disclose
whether members of the audit committee are independent of man-
agement an drequiring au dit committee members to have a financial
background.^3
Levitt’s ambitious crusade is ongoing, and investors should sup-
port those who carry it out. No amount of effort, however, can elim-
inate the inevitable flexibility that generally accepte daccounting
principles provide or the temptations or capitulations to which they
lead. It remains for the intelligent investor to monitor financial re-
porting with measure dskepticism an dstay alert to the possibility of
distortion. While the past is no guarantee of the future, it certainly
is prologue, an das early as 1936 Ben Graham lampoone dcorporate