Corporate America faces era of oversight

One provision that could act as an early warning system to prevent future scandals is a series of new protections for corporate whistleblowers. In addition, corporate lawyers will be required to report evidence of misconduct to top management and even to the oversight board.

"This is a landmark breakthrough in corporate accountability, and a legal revolution for corporate freedom of speech," says Tom Devine of the Government Accountability Project.

Some big-money managers welcome the new standards, which a few corporations have already adopted. "We are pretty enthusiastic about the bill's core provisions," says Kenneth Bertsch, director of corporate governance at TIAA-CREF, which manages $275 billion of educators' pension money. He approves of the independent board to regulate auditors, the restrictions on non-audit work by auditors, and the tougher penalties for executives who engage in fraud.

Soon after the Enron debacle, top accounting firms began their own reforms, including enforcing a separation between their auditing and consulting operations. The New York Stock Exchange and the National Association of Securities Dealers are strengthening their own corporate governance provisions, including new rules for board directors.

And in the last two weeks, some 18 companies have announced that they are going to start expensing stock options, a reform that did not make it into the final version of the bill.

The Financial Accounting Standards Board took up the issue of expensing options in the mid-1990s, but at that time members of Congress blocked the FASB from requiring expensing in the regular financial statement of corporations. (It is required as a footnote in a company's 10-K form, which gets less distribution to the public.) High-tech companies have lobbied Congress to defeat such proposals.

Industry groups hope that broad moves to reform corporate governance will boost consumer confidence in financial markets. "It is strong and thoughtful legislation that will help strengthen investor confidence in the reliability of investing as a prudent means to achieve long-term financial goals," says Matthew Fink, president of the Investment Company Institute, a national association of the investment industry.

Still, for all the changes, many in Washington, exhibiting a new get-tough mood in an election year, want to go further. Even some Republicans who initially opposed the bill just passed are calling for more legislation on accountability.

"Now, we can't lose sight of what this debate is all about, and that is the retirement security for working Americans," says House majority whip Tom DeLay (R) of Texas. "We have taken only the first step."

Other lawmakers are now openly skeptical of the once-powerful business lobby. "In the past, we'd give [accounting lobbyists] the benefit of the doubt," says Sen. Robert Matsui (D) of California. "But now they need to prove their case."

• Staff writer David R. Francis contributed to this report.

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