Magazine article The CPA Journal

Transparency and Accountability (for Some?)

Magazine article The CPA Journal

Transparency and Accountability (for Some?)

Article excerpt

Just when the investing public thought it was safe to go back into the stock market, the regulatory waters have gotten murkier.

In 2002, the Sarbanes-Oxley Act (SOX) sought to restore public confidence in the market by instituting additional requirements for the auditors, CEOs, and CFOs of publicly traded companies. On May 5, 2006, without any fanfare or publicity, President George W. Bush signed a memo delegating presidential authority under section 13(b)(3)(A) of the Securities Exchange Act of 1934, as amended, to the Director of National Intelligence, John Negroponte. This section of the Act reads, in part, as follows:

With respect to matters concerning the national security of the United States, no duty or liability under paragraph (2) of this subsection shall be imposed upon any person acting in cooperation with the head of any Federal department or agency responsible for such matters if such act in cooperation with such head of a department or agency was done upon the specific, written directive of the head of such department or agency pursuant to Presidential authority to issue such directives.

The paragraph (2) referred to above states, in relevant part, that every issuer of publicly traded securities shall "make and keep books, records, and accounts" and "devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances" of the reliability of the financial transactions and the preparation of the financial statements in conformity with generally accepted accounting principles.

A translation of the legalese in section 13(b)(3)(A) of the Act presents an unsettling prospect of adverse implications for the investing public. This memo effectively gives the Director of National Intelligence the ability to exempt companies from meeting their legal obligations as they pertain to keeping accurate books, records, and accounts and maintaining a system of internal accounting controls.

While it's unclear whether Bush, or any other President since Jimmy Carter (the first to possess this authority under an amendment to the Act), has ever permitted a company to evade standard securities disclosure and accounting requirements in the name of "national security," just think of the possibilities this new wrinkle presents. Imagine an Enron-like scandal in which a corporate executive who has close personal ties with high-level government officials uses that influence to involve the government in a cover-up of the company's misdeeds under the guise of "national security." To further muddy the waters, the President now has the luxury of deniability; after all, someone else is "pulling the trigger. …

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