Seven months after Enron Corp. went broke, a new regime of governance and oversight is settling in that could help the nation begin to surmount a rare period of economic malaise.
Thursday's congressional passage of the biggest tightening of corporate regulation since the 1930s is expected to help restore at least a modicum of shaken trust in the quality of corporate bookkeeping.
At the same time, the sight of executives from Adelphia Communications being hauled off in handcuffs this week sends a signal that new levels of accountability are, in fact, more than just rhetoric.
Some are even wondering if the nation has begun to turn the corner on a period of economic insecurity and stock-market despair.
Many of the economic fundamentals certainly remain strong. Corporate profits, which drive much of the movement on Wall Street, are doing better than are often portrayed in the headlines. Productivity, a key to economic growth and rising incomes, has held strong. Overall economic growth, while slowing, is believed to still be around 3 percent.
But weaknesses and worries persist. The all-important housing market, for instance whose rise has acted as a counterweight to the stock-market decline is showing signs of leveling off.
More corporate scandals will undoubtedly surface as well, which could continue to unnerve Americans. Late Wednesday, media giant AOL Time Warner Inc. said the Securities and Exchange Commission has opened an inquiry into accounting practices in its online division.
The tough tone in Washington is expected to alleviate at least some public anxiety about the state of corporate integrity. The bill that President Bush will sign as early as today establishes an independent oversight board, requires corporate officers to vouch for the fairness and accuracy of financial statements, and imposes strong criminal penalties for those who commit fraud.
"[It's] the right bill at the right time," says John Dillon, chairman of The Business Roundtable, an association of chief executive officers. "The agreement will help to restore investor trust and put the financial markets on the road to recovery."
But the measure could also create new uncertainty. Some in the business community don't know how seriously the reforms will be enforced or how far Washington may be moving back into corporate life after decades of deregulation.
"It's new fraud statutes that no one understands, new statutes of limitations no one understands, new corporate law and accounting law," says Bruce Josten, executive vice president of the US Chamber of Commerce. "Business people like to know what the rules of the road are."
CENTRAL to how effective the law will be is the vigor with which federal regulators will monitor corporate books and behavior. "The key is whether the Justice Department decides to enforce it vigorously," says Stanley Collender, a financial analyst at Fleishman-Hilliard, Inc.
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.