"This S-OX still got some holes in it"

By Lee Drutman and Charlie Cray

The mood at the Securities and Exchange Commission Wednesday was decidedly self-congratulatory. It was one year after the President had signed the Sarbanes-Oxley Act (S-OX), and lawmakers and regulators had gathered for a press conference in the SEC's basement. They were there to celebrate a year of progress in cleaning up the conditions that led to a tickertape of scandals that started with Enron and went on and on : Adelphia … Tyco … Global Crossing … Dynegy … Qwest … WorldCom … HealthSouth … Halliburton (that one went down the memory hole, didn't it?) … Freddie Mac…

But if anybody should have been celebrating, it was the corporate lobbyists who, despite a tsunami of corporate crime that looted trillions of dollars from millions of workers and small investors, have watered down the rules implementing the law, continued their legislative assault on investor rights, and prevented virtually any other significant reform from being given serious consideration. The real story is not how much has been done to fix the conditions that led to the scandals - it is how little has been done.

Instead of figuring out what's next, members of Congress, with tacit support from the SEC, are trying to tack a dangerous little provision onto an otherwise decent bill that would boost the SEC's powers to seize the ill-gotten gains from corporate criminals. That "poison pill" provision in HR 2179 ("The Securities Fraud Deterrence and Investor Restitution Act of 2003") says that state securities regulators have to bow to the SEC when dealing with securities violations in their states. If this had been law a year ago, New York Attorney General Eliot Spitzer's hands would have been tied and there would have been no big Wall Street enforcement action, anemic as it was. This obvious assault on investor rights is the clearest sign yet that the financial services industry and their allies in Congress are intent on rolling back the incipient investor protection movement that seems to be gaining momentum. Supporters of this provision postponed a House committee vote on the bill before August recess, but promised to reintroduce the legislation with some improvements in the fall.

The Securities and Exchange Commission is also letting reform efforts backslide in the implementation of Sarbanes-Oxley. In implementing conflict-of-interest rules for accountants, for example, the agency decided to let auditors still provide tax advice, including advice on tax shelters. One of the goals of Sarbanes-Oxley was to make sure such conflicts were eliminated, so that auditors wouldn't go soft on the books because they wanted to earn other lucrative non-audit business from the same clients. So much for that idea. And we still have a situation where the same firm advising a company on how to cheat the Treasury through complex tax shelters can still be responsible for certifying that a company's books are honest.

Then there was the issue of corporate lawyers, who, under the legislation, were supposed to act as whistleblowers when they observed blatant and unremedied fraud. When the SEC got around to implementing the rules for lawyers, it stopped at requiring them to report up-the-ladder within the company, rather than going the next step and reporting fraud to the SEC. Like so many well-intended provisions of law, this "noisy withdrawl" rule has so far been quietly snuffed out by corporate lawyers and lobbyists.

Then there is the Public Company Accounting Oversight Board, the supposed crown jewel of the Sarbanes-Oxley Act. So far, the group is best known for its ability to vote its members half-a-million-dollar a year salaries and for having an initial chairman who was on the audit committee of a company being sued for financial fraud.

So while lawmakers and regulators break out the cake and balloons on the first anniversary of the Sarbanes-0xley Act, Citizen Works says not so fast. We offer this list of ten reforms that we believe are essential to truly cracking down on widespread corporate crime:

1. Give the owners more control over the corporation. Many of the corporate scandals involved corporate governance failures. Corporations should open up proxy ballots to minority shareholders and should introduce cumulative voting so that shareholders can democratically nominate and elect the corporate board of directors. Shareholders should also vote on major corporate decisions, like executive pay and mergers and acquisitions of $1 billion or more.

2. Rein in excessive executive pay. Despite repeated scandals and outrages, CEO pay remains obscenely high and largely unlinked to performance. As a start, the SEC should require shareholders to approve annually all executive compensation plans.

3. Expense stock options. Keeping stock options off the balance sheet allows corporation to continue to inflate profits and mislead investors. In order to have honest accounting, options must be counted as expenses. Congress should drop any effort to delay FASB's effort to finish this inevitable reform.

4. Regulate derivatives trading. Unregulated derivatives trading has been a key factor in most major financial scandals of the past decade. They also figured prominently in the recent Freddie Mac fiasco. Rules for derivatives trading should be enacted regarding collateral-margin, reporting, and dealer licensing in order to maintain regulatory parity and ensure that markets are transparent and problems can be detected before they become a crisis.

5. Crack down on corporate tax havens. Every year, U.S. corporations cheat the Treasury Department out of billions of dollars through off-shore tax havens. Some companies have even moved their headquarters there while keeping their operations in the United States. The government needs to start going after these tax cheats.

6. Eliminate the gap between what companies tell the IRS and what they tell shareholders. Corporations report very different incomes to the IRS and to shareholders. In 1998, the gap was $159 billion, up from $92.5 billion two years earlier. From 1996 to 1999, Enron paid no federal income tax, reporting tax losses of three billion dollars while reporting to its shareholders rosy profits of over two billion dollars. Either corporations are cheating the government or lying to shareholders - and either way it needs to stop.

7. Establish an annual corporate crime report and database. It is hard to fix the problem of corporate crime without good, well-organized data. To remedy this, the Department of Justice should establish an online corporate crime database and the FBI should produce an annual corporate crime report as an analogue to its annual Crime in America report, which focuses principally on street crime.

8. Enact tough contractor responsibility standards. MCI/WorldCom enjoys approximately $1 billion a year in government contracts despite having paid $750 million to settle charges in the largest accounting fraud case in history. The federal government should not be rewarding corporate criminals with taxpayer money. Instead, it should enact high standards for contractors.

9. Restore protections for investors. The Private Securities Litigation Reform Act of 1995 created the conditions for the financial scandals by making it harder for defrauded investors to sue the aiders and abettors of corporate fraud - the bankers, lawyers, and accountants. Until this law is repealed, defrauded investors will have little success in seeking restitution through the courts.

10. Enforce the Foreign Corrupt Practices Act. Yesterday, the Senate Finance Committee released a report indicating that the SEC and the Department of Justice failed to act on an IRS referral of "serious allegations" regarding potential violations of the Foreign Corrupt Practices Act by Enron. The disturbing question is: how many of these cases are not being aggressively pursued. Other potential violators include Tyco, Xerox, Halliburton and Accenture.

Last Updated August 4, 2003