President George Bush on July 9 set forth his response to recent corporate scandals that have called into question the validity of balance sheets, the adequacy of financial reporting laws and the integrity of corporate governance. But his main proposals address only a portion of the problems that have dragged down the likes of Enron and WorldCom, according to CCH INCORPORATED (CCH), a leading provider of securities and business law information, software and services. A comprehensive approach also will require action by the Securities and Exchange Commission (SEC) and both houses of Congress.
Speaking on Wall Street, the President offered a multi-faceted approach intended to “end the days of cooking the books, shading the truth and breaking our laws.” Bush placed special emphasis on solutions that highlighted his role as the nation’s chief law-enforcer.
“The President proposed tougher penalties for existing crimes, announced he was creating a Corporate Fraud Task Force in the Justice Department and called for more enforcement personnel at the SEC,” noted James Hamilton, JD, senior securities law analyst for CCH.
“He also emphasized the ‘bully pulpit’ function of the presidency by calling on others – Congress, the exchanges, the SEC and especially corporate leaders – to do their part to restore confidence in the nation's financial markets,” Hamilton noted.
While he touched on a variety of topics, from insider trading to protection for participants in 401(k) plans, Bush had little to say about the accounting profession, which has been in the spotlight since the disclosures that lead to Enron’s downfall.
“Just how accountancy will be regulated is a major point of contention between rival financial services reform bills in the House and Senate,” Hamilton observed, “and the spotlight now shifts to how differing positions in those bills will be reconciled.”
Things Are About to Heat Up on the Hill
The House of Representatives passed a bill creating an accounting oversight board with the authority to certify accountants auditing corporate financial statements and to punish accountants who violate securities laws, standards of ethics, competency or independence.
In the Senate, Paul Sarbanes (D-MD) has introduced a bill that would also create a new oversight board for the accounting industry, but one seen as having more independence from the accounting establishment and greater enforcement powers. Sarbanes’ bill also requires reporting on loans made by a company to its executives – a subject that the President touched on in New York.
“Various amendments will be offered on the Senate floor that would take the Sarbanes bill even further,” Hamilton noted. “Some senators, for example, want to require companies to count stock options as current expenses. This would make the use of options for executive compensation less attractive, and in theory make it less likely that top executives will manipulate earnings results in order to cash in on options.”
Senate action on the Sarbanes bill is expected shortly, and then the center of attention will be a House-Senate conference committee.
“That’s where the decisive action will come,” said Hamilton. “Not only will the conferees be ironing out the differences between the two bills, but they undoubtedly will get input from the administration on just what the President will support. There are sure to be some sharp differences of opinion, but also a lot of pressure to come up with a set of measures that can be passed in both houses and signed into law.”
About CCH INCORPORATED
CCH INCORPORATED, founded in 1913, has served four generations of business professionals and their clients. The company produces approximately 700 print and electronic products for securities, tax, legal, banking, securities, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at cch.com.