According to its web site,
"The 'No more Enron' Coalition is a rapidly growing alliance of
Americans committed to fighting and promoting the interests of working
families." A report published by this group estimates the costs
of the corporate scandals since the collapse of Enron at more than $175
billion (or $175,000 million) in lost 401(k) investments, plus another
$25 billion in lost jobs and tax revenue. To prevent Enron-like fraud,
mismanagement, and bankruptcies from occurring again, Congress this
summer passed the Sarbanes-Oxley Act (named after their sponsors, Sen.
Sarbanes, a Maryland Democrat, and Rep. Oxley, an Ohio Republican).
It requires public companies to make immediate disclosures of any material
changes in their financial condition or operations. In the past, for
example, a company could quietly pursue merger negotiations without
fear that their termination would harm its business. No more! From now
on, the law demands that public corporations operate in the public eye
at all times.
The Act creates an independent accounting board to oversee corporate
accounting and auditing. Chief executive and chief financial officers
(CEOs and CFOs) must certify the financial statements they issue. No
longer will officers and directors be allowed to receive loans from
their own corporation. In line with the Act, the Department of Labor
issued new rules requiring corporations to give employees thirty days
notice before a 401(k) blackout period would prevent them from accessing
their retirement accounts. Executives, moreover, are not allowed to
access pension funds during blackouts. The demand, however, that employees
may sell their company stock after a three-year holding period remains
unmet. Neither are employers required to ensure employee pension plans
against catastrophic losses.
To cope with the vastly increased oversight requirements, the Sarbanes-Oxley
Act called for some 300 more inspectors in the Securities and Exchange
Commission (SEC) and an annual budget of $776 million. President Bush
promised to support the Act "to the fullest" when he signed
it, but in the budget for 2003 he provided only $447 million for the
SEC. The House has not even introduced a bill for next year's SEC funding.
The Sarbanes-Oxley Act forces CEOs who benefit from fraudulent earnings
to pay back all compensation received twelve months prior to restatements.
All other management officers may apparently keep their ill-gotten gains.
Although the excessive executive pay in many American corporations is
widely criticized, nothing has been done to deal with the problem. In
1982, CEOs made 42 times what the average workers made. Presently CEOs
on the average get 411 times that much. Congress could certainly require
shareholder approval of all executive compensation plans, particularly
stock options. The huge retirement packages, known as "golden parachutes,"
given to retiring executives would be subject to a new excise tax if
Congress enacts the proposed Emergency Worker and Investor Protection
Act (H.R. 3622). The Sarbanes-Oxley Act has toughened the punishment
for corporate crime, but the law still does not provide for the withholding
of government contracts from corporations convicted of commit criminal
offenses.
It takes more than a corrupt CEO to commit corporate fraud. Often accountants,
auditors, and attorneys have extensive conflicts of interest and thus
become accomplices to criminal wrongdoing. The Private Securities Litigation
Reform Act of 1995 and the Securities Litigation Uniform Standards Act
of 1998, however, protect support personnel by severely limiting their
liability in corporate fraud cases. Both laws need to be revised to
make all participants in violations responsible for their conduct.
It remains unclear whether the Sarbanes-Oxley Act will have any effect
on the epidemic of conflicts of interests among investment analysts.
The investigations of recent corporate frauds showed that analysts brazenly
recommended stocks in companies that they internally labeled as "crap."
because the investment banks for which they worked conducted millions
of dollars worth of business with the same "crap" companies.
If America's millions of shareholders don't want to be routinely hoodwinked
by crooks in corporate suites and on Wall Street, they will have to
take a much more active interest in the businesses to whom they entrust
their money.