Big changes in corporate accounting sail through Congress, but will they work?
Friday, July 26th 2002, 12:00 am
By: News On 6
WASHINGTON (AP) _ Spurred by a meltdown in the stock market, Congress has passed with remarkable speed the biggest changes in corporate accounting practices in six decades. But now comes the big test: Will the legislation work?
Many market analysts believe the answer is yes and no.
The measure, they say, is tough enough to force companies to stop lying to investors about their true financial situations. But in the short term, these experts also say, the crackdown on fraudulent bookkeeping could drive Wall Street even further into the doldrums as the tougher rules and expanded budget given to the Securities and Exchange Commission flush out more companies with questionable numbers.
``It's going to take awhile for the market to rebound,'' said Robert Litan, director of economic studies at the Brookings Institution. ``Investors have lost confidence in the whole system of reporting and that is not something that can be fixed just with legislation.''
President Bush and members of Congress are hoping that a positive response from Wall Street will occur much more quickly, given that the November elections are fast approaching.
Investor anger at having lost trillions of dollars in stock market wealth was a chief reason propelling the legislation through Congress.
Bush has promised to quickly sign the bill, which was approved by the lopsided margins of 423-3 in the House and 99-0 in the Senate on Thursday.
And to hasten the process of restoring confidence, the administration is urging corporations to quickly file certifications that their books are up to snuff, before the Aug. 14 deadline set by the SEC.
Treasury Secretary Paul O'Neill said an ``avalanche'' of these filings in the days ahead would go a long way to prove that the great majority of American companies have not been hiding problems from shareholders.
Bush, who was criticized for being slow to grasp the enormity of the problem when it first erupted with the collapse of the big Houston-based energy trader, Enron Corp., last December, is pledging a get-tough approach, saying his administration ``will haul in and prosecute any CEO who breaks the law.''
The arrests on Wednesday of several executives of bankrupt Adelphia Communications contributed to a huge 489-point stock market rally that day and analysts said such high-profile arrests will help convince investors that the government is serious about rooting out corporate corruption.
``Seeing CEOs carted away in police cars does wonders for confidence,'' said Mark Zandi, chief economist at Economy.com.
Analysts generally praised the provisions of the new law, which will impose the biggest changes on the accounting profession since the Great Depression.
The measure creates stiff penalties for corporate fraud and document shredding; imposes restrictions on accounting firms doing consulting for corporations whose books they audit; and establishes an independent board, with subpoena power, to oversee the accounting industry.
Analysts applauded these changes but said the bill did have one glaring omission _ it fails to require that corporations count as a business expense lucrative stock options they shower on top executives.
However, those pushing for this change vowed to keep up the pressure for action in Congress.
Both Democrats and Republicans said they still plan to pass additional legislation to improve protections on employee pensions, a problem exposed when Enron's collapse wiped out the retirement savings of thousands of employees.
And some Republicans said they also were considering making a push for a variety of tax breaks to help individual investors who have gotten burned by the market's plunge, possibly by increasing the amount of capital losses taxpayers can deduct.
Congress was also expected to continue with the corporate reform movement when they return from their August recess by considering legislation to crack down on abusive corporate tax shelters.
No one was willing to forecast an exact date when all the legislative activity would help halt what has become the steepest and longest slide in stock prices since the bear market of 1974-75.
Diane Swonk, chief economist at Bank One in Chicago, said while the tougher legislation will help, it will be up to corporations themselves to demonstrate a new fidelity to honest books.
``Corporate America got us into this mess and they have to get us out in terms of shoring up confidence,'' she said.
Donald Straszheim, president of a Santa Monica, Calif. consulting firm and former chief economist at Merrill Lynch, said the accounting scandals were just one of a number of factors weighing down the stock market.
``Investors are worried not just about corporate governance but also about how strong the economic recovery will be and whether or not there will be more terrorist attacks,'' he said. ``I think we are well into the bottoming out process, but we are not there yet.''