Washington moves to clean up Big Business
SEC and Senate take steps to reform accounting practices. But will they be enough to calm investors?
NEW YORK AND WASHINGTON — For months, Lynn Yturri has read the stories of corporate accounting errors, executive greed, and conflicts of interest. He's watched as the stock market has fallen, partly because investors are shellshocked by the unpleasant surprises.
"It's just disgusting," says Mr. Yturri, a professional money manager for the One Group of mutual funds in Columbus, Ohio. "What we need is a cleaner and better-functioning system."
It is a message that is finally resonating in Washington. On Monday, the Securities and Exchange Commission (SEC) proposed reforms ranging from a requirement that CEOs personally vouch for the veracity of their companies' financial statements, to a new independent regulatory board for accountants. Then in a surprise vote Tuesday, the Senate Banking Committee passed its version of a strong accounting-industry oversight board, as well as rules on the separation of consulting and auditing services.
The activity in Washington illustrates how policymakers think it's crucial to buttress the markets, already one of the most heavily regulated industries in America. Since the collapse of Enron last year, congressional hearing rooms have reverberated with tales of investors losing life savings because of executive misdeeds. Even some Wall Street CEOs have warned of serious problems.
"One of the strengths of our economy has been the integrity of the American capital markets, and they're all at issue if you can't even rely on the figures that are being handed to you in these corporate financial statements," says Sen. Paul Sarbanes (D) of Maryland, chairman of the Senate Banking Committee.
Economists also worry that if Congress does not act soon, the crisis may start to have a broader impact on the economy. Some consumer-confidence surveys are starting to show a decline, which coincides with a month-long slide in the stock market. "Many of these business-ethics issues may start to influence consumer behavior, especially since so much of confidence is related to what's happening to consumers' investment portfolios," says Roger Blackwell, a professor at the Fisher College of Business at Ohio State University in Columbus.
But the bill to reform the audit industry faces an uphill battle. A strong fight is expected on the floor of the Senate, where industry representatives are regrouping support on both sides of the aisle. There could be an even stronger fight with the House, which passed its own version of the bill in April.
Republicans say the legislation is too proscriptive, and actually weakens the hand of the SEC, whose staff will spend much time responding to requests for waivers from small companies.
"Part of our problem in this highly charged environment we're in is that there's a great temptation to do something just to feel good about it," says Sen. Phil Gramm (R) of Texas, ranking Republican on the Senate Banking committee, who opposed the bill.
Consumer groups, however, argue that investors no longer trust the industry and the SEC to fix the problems themselves. "An oversight board mandated by Congress is necessary," says David Butler of Consumers Union, publisher of Consumer Reports. "This is critical to investors. The credibility of the capitalistic system is at stake here."
Mr. Butler adds that he's worried Congress will run out of time to legislate reforms. "Congress has to make sure this bill does not get lost in the mix," he says.
Butler and others note the damage that's already been done to the markets. In the first quarter, some of the broad stock indexes dropped as much as 30 percent. This is particularly true in sectors and companies that are under investigation, such as the utility companies. It's even worse for some individual stocks. Tyco International, which is suddenly discovering all kinds of executive abuses and self-dealing, is down almost 75 percent this year.
The crisis in confidence in the markets started two years ago, however, when the dotcom stocks imploded and individuals started to question why their brokers had put them into the stocks in the first place. As the whole high-tech sector dropped, securities analysts lost credibility. Then, the Enron affair called into question management and its overseers the accountants Arthur Andersen.
"People are saying, 'I can't believe the broker, the analyst, managers and overseers, and maybe the SEC and NASDAQ were asleep at the wheel. Then what confidence can I have in the spoken word, the written word, and the stated numbers?' " says Sam Stovall, a strategist at Standard & Poor's in New York.
But some think Congress can save the day. "The Senate bill is going to wrap everyone together, including the brokerage houses and industry analysts, to make sure everyone is providing accurate information to the marketplace," says Kevin Pianko, an audit partner at Eisner LLP, a New York-based firm. "The industry will be able to say, 'We had a blip in the road, and now we're fixing it.' "