The battle to rein in corporate fraud by toughening accounting standards moved to the House of Representatives during the week of July 15 after clearing the Senate by a vote of 97-0.
The Senate bill, named after its principle author, Paul Sarbanes (D-Md.), creates a new regulatory board with investigative and enforcement powers to oversee the accounting industry, limits the amount of consulting work auditors can perform and also provides for jail sentences for corporate executives who falsify financial reports.
Scott Klinger, a financial analyst at United For a Fair Economy, called the Sarbanes Bill a “step in the right direction” but criticized it for its failure to deal with stock options given to corporate executives as part of their compensation package that also includes salary and bonuses.
“Any effective reform would deal with the composition of corporate boards of directors which, as events have shown, are too often rubber stamps for management, especially when it comes to compensation,” Klinger, who once worked as a Wall Street analyst, told the World. He added that the Senate bill was weak in its failure to prohibit corporations from making sweetheart loans to company executives, as was done by WorldCom when it lent nearly a halfbillion dollars to then-CEO Bernie Ebbers.
Like others interviewed for this article, Dean Baker, assistant director of the Center for Economic and Policy Research, credited a shift in public attitudes with giving the Senate the courage to act. “A month ago they couldn’t get the Sarbanes Bill out of committee but now it passes unanimously. What a difference one more example of corporate corruption made,” he said, referring to the collapse of WorldCom. “WorldCom is different than Enron or some of the others in that it occupies a key position in the telecom infrastructure.”
Baker said the Sarbanes Bill “is better than nothing” but said it doesn’t “measure up” to what is needed. “Remember, we are not dealing with just a few bad apples, we’ve got a whole barrel of bad apples,” he said.
Baker said the legislation’s impact on the bottom line “is not clear. We can hope the oversight board will have some teeth and will be willing to use them but there is no guarantee. It all depends on who is appointed to the board and that depends on who makes the appointments.”
Baker called stock options the “heart of the problem,” adding that they should be counted as compensation – and therefore as an expense – and that executives should not be able to exercise them until after leaving the company.
Jeff Faux, president of the Economic Policy Institute, a labor-backed Washington think tank, agreed with others on the need to break up what he called the “cozy relationship” between auditors and the companies they work for. “We can do that in several ways,” he said. “We could establish a national clearinghouse of auditors who could be assigned to different companies in much the same way that arbitrators are selected to deal with labor -management disputes under the Railway Labor Relations Act. But in any case, auditors should be prohibited from working for the same company for years on end.”
Faux expressed concern for the need to protect the 401(k) pension plans of individual workers who, he said, own 65 percent of the money invested in these plans but have no voice in their management. “Despite all the talk about how much money – all too often in the form of company stock – companies put into these plans, the fact remains that nearly two-thirds of all the money invested in 401(k) plans came from workers’ paychecks. And they have nothing to say about how that money is managed.”
Faux said the solution to the problem lies in legislation that gives workers the right to elect members to some kind of an oversight board. “The present situation is a classic example of taxation without representation.”
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