- The Washington Times - Wednesday, July 10, 2002

President Bush put more teeth in his plan to take a bite out of accounting fraud yesterday, but while many applauded the renewed emphasis on ethics, the initiative failed to restore Wall Street's confidence.

The Dow Jones Industrial Average fell 179 points as investors braced for the possibility of more revelations from corporate executives now pressured to report any irregularities in their financial statements or face jail. The market's slump sent major indexes back toward their lowest levels in five years.

"Hopes that the accounting scandal will not get much worse and will begin to fade from the public eye later this year are ill-founded," said David A. Levy of the Jerome Levy Economic Institute, which estimates that "pervasive and systemic" accounting legerdemain enabled corporations to inflate their earnings by at least 20 percent on average in recent years.

"The storm of recognition blowing across the country and around the world is still in its early stages," he said.

Mr. Levy said that beyond the cases of overt fraud like Enron and WorldCom, "the majority of publicly traded corporations may have stayed within the law or at least within the gray areas on the margin but nevertheless produced accounting statements that overstated their earnings and misled investors."

Those executives face possible severe punishment at the hands of the Securities and Exchange Commission and Mr. Bush's new corporate-fraud task force, including jail terms of up to 10 years.

Already, the largest 947 corporations are being required by the SEC to submit accurate, revised financial statements by Aug. 14 prompting some on Wall Street to predict more major accounting bombshells will explode in the next month.

"We think the odds favor that at least one out of 947 companies that we never suspected had a problem, indeed has a problem," said Edward Yardeni, chief investment strategist with Prudential Securities. "Regulators are working overtime. This will continue to hang over the market."

Some on Wall Street were skeptical that the government will succeed in putting many executives in jail, given their often complex and subtle accounting crimes. They note that none of Enron's executives, who created byzantine off-book partnerships to disguise losses, have been prosecuted yet despite more than six months of investigation.

Other analysts are concerned that the regulatory push announced by Mr. Bush, under pressure to respond to political challengers, could result in overkill and prevent a rebound in the market as well as the broader economy.

"The fear is we go too far and get a witch hunt," said Richard Cripps, chief market strategist at Legg Mason Wood Walker in Baltimore, contending that stocks will be unable to rally as long as corporate misdeeds stay in the headlines.

Some said that over the long run, at least, the president's prescription for errant executives is just the medicine needed to clean up corporate balance sheets and restore the investor faith.

"The prospect of jail time and the utter destruction of one's professional reputation likely will be a very powerful disincentive for those who are tempted to monkey with the books," said Charles Elson, director of the Corporate Governance Center at the University of Delaware. "Civil penalties clearly haven't been enough."

No one questioned that Mr. Bush had to come out with strong remedies to address this year's string of corporate scandals, not only to fend off political attacks but to prevent any public backlash, which could spell even more drastic measures for corporate America.

"He's got to take the lead in restoring confidence," said Gary Sawka of EPlanning Securities LLP. "You have to be right in front of the markets and say, 'I'll fix the problem.'"

An important part of Mr. Bush's plan is to beef up the SEC's budget with an additional $100 million in funding, enabling it to hire an army of new investigators to target corporate fraud.

Analysts said Mr. Bush is merely accepting the reality in Congress, where the Republican-led House already has passed an SEC funding bill that exceeds his request by nearly $300 million. A bill pending in the Senate would do the same.

The General Accounting Office in March concluded that the SEC did not have enough funding and staff to address the record number of enforcement actions it has undertaken this year, prompting widespread criticism of Mr. Bush's earlier low funding levels for the agency.

Few in Congress disagreed with the stiff new penalties for corporate criminals proposed by Mr. Bush, including enabling the SEC to nullify any bonuses they earn as a result of falsified financial statements.

A consensus seems to be forming around the need for such severe penalties, which have garnered the support of major business groups like the Chamber of Commerce and Business Roundtable.


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