Year of reform puts corporations on notice

The worst of the corporate-fraud crisis has probably passed - an outcome shaped by more stringent oversight on many levels of those who manage America's large corporations.

Government prosecutors have become busier and more numerous. Corporations and their auditors are working harder to keep their books accurately. The securities industry is cleaning up its act. Company boards are exercising more independence from management. The courts are tougher on miscreants.

It's now been a year since the Sarbanes-Oxley Corporate Reform Act was passed - a law described by President Bush "as the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt."

The law itself has come in for criticism as heavy-handed and hastily crafted. Yet it represents a core response to abuses that tarnished some of America's largest corporations, and rippled outward during an economic slump.

The crisis began with the failure of Enron in late 2001. After a series of disclosures of shady accounting and business practices at WorldCom, Tyco, and other firms, an alarmed Congress passed the measure in part to restore investor confidence in the soundness of corporate books.

"In some ways, investors are in better shape," says Joel Seligman, dean of Washington University's School of Law in St. Louis.

In a degree, rising stock prices over the last few months may reflect various reforms that have already taken place. And important changes are still to come.

The Securities and Exchange Commission, the nation's top securities and corporate regulator, has been reinvigorated.

During much of the stock market boom, from 1995 to 1998, the SEC was so short-funded it did not add one position, despite an explosion in public stock offerings on Wall Street. "The commission was just overwhelmed" as a result, says Mr. Seligman.

But Congress did boost the agency budget to a record $716 million this fiscal year, up 63 percent from 2002. Because of the difficulty of hiring qualified accountants and inspectors, the SEC has a surplus $103 million it can't spend so quickly.

William Donaldson, who replaced Harvey Pitt as SEC chairman some six months ago, is widely credited with lifting the morale at the agency and winding down various political storms.

The Bush administration, noting the one-year anniversary of the president's Corporate Fraud Task Force, boasts that federal prosecutors have obtained more than 250 corporate-fraud convictions or guilty pleas, including those of 25 former chief executives. It has charged 354 defendants with some type of corporate fraud in connection with 169 cases. That's up hugely.

But some major figures involved in scandals, such as Kenneth Lay, former CEO of Enron, have not yet been indicted on criminal charges.

Corporate books probably are in better shape today than a year ago. Under Sarbanes-Oxley, chief executive officers and chief financial officers must certify quarterly that their company financial statements comply with "generally accepted accounting practices" and present a "fair picture" of their firms' position.

"It has probably had some impact," says John Coffee, a finance professor at Columbia University, New York. If the books aren't accurate, the executives "are putting their own necks in the noose."

William Freund, an economist at Pace University in New York, sees as a result "a good deal of restoration of investor confidence."

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