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| 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:
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.
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