| Transparency
and Accountability (For Some?)
AUGUST
2006 - Just when the investing public thought it was safe
to go back into the stock market, the regulatory waters have
gotten murkier. In
2002, the Sarbanes-Oxley Act (SOX) sought to restore public
confidence in the market by instituting additional requirements
for the auditors, CEOs, and CFOs of publicly traded companies.
On May 5, 2006, without any fanfare or publicity, President
George W. Bush signed a memo delegating presidential authority
under section 13(b)(3)(A) of the Securities Exchange Act
of 1934, as amended, to the Director of National Intelligence,
John Negroponte. This section of the Act reads, in part,
as follows:
With
respect to matters concerning the national security of
the United States, no duty or liability under paragraph
(2) of this subsection shall be imposed upon any person
acting in cooperation with the head of any Federal department
or agency responsible for such matters if such act in
cooperation with such head of a department or agency was
done upon the specific, written directive of the head
of such department or agency pursuant to Presidential
authority to issue such directives.
The
paragraph (2) referred to above states, in relevant part,
that every issuer of publicly traded securities shall “make
and keep books, records, and accounts” and “devise
and maintain a system of internal accounting controls sufficient
to provide reasonable assurances” of the reliability
of the financial transactions and the preparation of the
financial statements in conformity with generally accepted
accounting principles.
A translation
of the legalese in section 13(b)(3)(A) of the Act presents
an unsettling prospect of adverse implications for the investing
public. This memo effectively gives the Director of National
Intelligence the ability to exempt companies from meeting
their legal obligations as they pertain to keeping accurate
books, records, and accounts and maintaining a system of
internal accounting controls.
While
it’s unclear whether Bush, or any other President
since Jimmy Carter (the first to possess this authority
under an amendment to the Act), has ever permitted a company
to evade standard securities disclosure and accounting requirements
in the name of “national security,” just think
of the possibilities this new wrinkle presents. Imagine
an Enron-like scandal in which a corporate executive who
has close personal ties with high-level government officials
uses that influence to involve the government in a cover-up
of the company’s misdeeds under the guise of “national
security.” To further muddy the waters, the President
now has the luxury of deniability; after all, someone else
is “pulling the trigger.”
Transparency
and Apple Pie
The
concept of financial transparency has become as patriotic
as apple pie since the corporate scandals of Enron, WorldCom,
et al. Turning on the proverbial light that transparency
provides increases the perception of detection and reduces
the likelihood of fraud or other illegal acts. Many regulators
and elected officials have recognized this simple fact and
supported regulations aimed at increasing transparency.
SEC
Chairman Christopher Cox has made it clear that he opposes
government interference in business when it comes to setting
executive compensation. However, Cox has proposed a requirement
that companies disclose the pay of all highly compensated
employees, including nonexecutives. “I have a feeling
that when people are forced to undress in public, they’ll
pay more attention to their figures,” Cox said while
addressing a meeting of institutional investors earlier
this year. Ironically, stock option practices at some public
companies recently came under fire for “spring-loading,”
which entails setting the grant date and exercise price
of an option shortly before the company expects to announce
positive corporate news, or “backdating” executive
stock options after the price has risen.
IRS
Commissioner Mark Everson has encouraged legislators to
make corporate tax returns public information, which would
allow shareholders to identify differences between companies’
financial statements and the corresponding tax returns,
and would also make corporate practices more transparent.
In
the not-for-profit arena, the U.S. Government Accountability
Office (GAO) has also recently completed major revisions
to the Yellow Book for the purpose of improving government
operations and accountability. Additionally, New York State
Attorney General Eliot Spitzer has spearheaded efforts to
implement SOX-like requirements for publicly funded entities.
Furthermore, government agencies in New York are also subject
to the Freedom of Information Law (Public Officers Law,
Article 6), which ensures the public’s right to access
and review government records.
These
hard-won gains have helped to restore public confidence
in our economic and governmental infrastructure. Let’s
hope President Bush’s recent action doesn’t
cause a detour in our quest for greater transparency and
accountability. We need to keep our eye on the ball. The
public’s trust is at stake.
As
always, I welcome your comments on these and other issues.
Mary-Jo
Kranacher, MBA, CPA, CFE
Editor-in-Chief
mkranacher@nysscpa.org
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