The independent report by former US Attorney General Nicholas Katzenbach concluded that TIAA-CREF appropriately responded to the conflict of interest issue raised regarding CREF trustee Stephen Ross and TIAA trustee William Waltrip and their ownership interest in Compensation Valuation Inc (CVI) (See TIAA-CREF Officials Step Down Under SEC Pressure ). Formed in August 2003, CVI offered stock-option valuation services.
The issue was that auditor Ernst & Young, who served as TIAA-CREF’s auditor, began a business relationship with CVI even though Ross owned a controlling interest and Waltrip had a smaller share – a situation which critics claimed compromised the auditor’s required independence from TIAA-CREF as an audit client. “This relationship constituted a violation of the applicable auditor independence rules” the report noted. “E&Y did not identify or disclose the relationship to TIAA-CREF, and neither Ross nor Waltrip reported their involvement in CVI or CVI’s relationship with E&Y on their TIAA-CREF director questionnaires.”
The Katzenbach report was commissioned by the TIAA Board of Overseers.
Waltrip and Ross were forced to resign last year and PricewaterhouseCoopers replaced Ernst & Young as TIAA-CREF’s auditor at the beginning of 2005. Katzenbach said Ernst & Young was primarily responsible for assuring its own independence from its clients.
The report also noted that there was a controversy over notification of some overseers including former Securities and Exchange Commission chairman Arthur Levitt who did not learn for months that there were questions about conflict of interest.
The report also noted that CREF chairman Martin Gruber stepped down after disclosing that he agreed in 1999 to participate in an academic advisory program sponsored by the non-audit arm of Ernst & Young.
According to the Katzenbach study, there were underlying problems with TIAA-CREF’s organizational structure. For instance, the report said that the TIAA wing of the organization has both a Board of Trustees and a Board of Overseers. “The obvious solution to potential conflict would be elimination of the board of overseers, perhaps through merger with the TIAA board,” the report said. “There is no compelling reason for it to exist as a distinct entity.”
TIAA-CREF chairman and chief executive Herb Allison said in a statement released with the report that that the pension fund has already dealt with some of the problems arising during the controversy and would consider Katzenbach’s recommendations on its corporate structure.
In a separate statement , Stanley Ikenberry, president of the TIAA board of overseers, noted that the SEC signed off on the fund’s 2003 and 2004 financial statements.