Corporate Fraud under Siege ; Senate Bill Goes Further Than Bush Proposals for Increased Accountability

Article excerpt

Washington is closing in on a sweeping reform of how corporate America is governed.

Scarcely 48 hours after President Bush lectured Wall Street on his get-tough plan, the Senate is poised to vote on its own version of reform - which on many points goes further than Mr. Bush's. Democrats have led the Senate drive, although support from Republicans has surged in the past few days.

The bill establishes an independent oversight board with powers to discipline and set standards for auditors. New rules cover everything from how often auditors must be rotated (every five years) to when documents can be shredded without risking jail time.

In a bid to curb conflicts of interest, the bill also restricts auditors from advising clients how to pay their taxes or design their financial-services system. Stock analysts could no longer publish research reports on customers that their firms also underwrite.

If the bill becomes law, corporate insiders lose some perks: No longer could top executives sell company stock during periods when employees cannot. Nor can they accept company loans without disclosing them. Those at the top also face more stringent regulations: Under the terms of this bill, CEOs and CFOs must personally certify that their company's financial reports are fair and accurate. If the accounts turn out not to be accurate - and the company also violates securities laws - they risk forfeit of profits and bonuses. If key amendments are added to this bill, they could also face a felony conviction and 10 years in prison.

In all, it's a much more intrusive solution to the problem of corporate governance than appeared likely even a few weeks ago. In fact, late last year, after the first disclosures of financial wrongdoing at Enron, it looked as if Congress would not get much beyond sensational hearings and finger-pointing.

Increasing pressure to act

But a recent surge of disclosures of wrongdoing at companies like WorldCom has dramatically increased the pressure on lawmakers to move quickly to restore confidence in troubled markets.

Within hours of the announcement that WorldCom hid $3.8 billion in expenses, Senate Democratic leaders moved a bill sponsored by Sen. Paul Sarbanes (D) of Maryland to the top of the Senate agenda, trumping 13 pending appropriations bills and a new law on prescription drugs.

Despite strong initial opposition to this bill from Sen. Phil Gramm of Texas, the ranking Republican on the Senate banking committee, many GOP senators are rallying to this bill, which passed the committee on a surprising 17-to-4 vote June 18. While some GOP amendments have been characterized by Democrats as "poison pills" designed to scuttle the bill, others aim to make it stronger.

For example, an amendment proposed by Sen. Richard Shelby (R) of Alabama would make it easier for investors to sue accountants, lawyers, or bankers who "aid or abet" in securities fraud.

With some two-thirds of the American public now invested in the stock market, the issue of corporate deception on financial statements has been too strong for partisans on either side of the aisle to ignore. "It is clear that there is a mind in the Congress, if not in the country ... that we need to do something, even if it is wrong," said Senator Gramm during this week's debate. …