- The Washington Times - Wednesday, July 10, 2002

Amid a frenzy of politicized outrage over the current corporate and accounting scandals, President Bush re-entered the fray yesterday with a speech delivered in New York that addressed corporate responsibility. Mr. Bush offered several sensible proposals, including increased funding for the Justice Department and the Securities and Exchange Commission (SEC) to battle corporate fraud. He also called on the nation's stock markets to require a majority of members of a company's board of directors to be truly independent. However, it has become increasingly apparent that the recent WorldCom-Arthur Andersen $4 billion accounting debacle pushed Congress beyond the tipping point. The president's speech is in danger of being overwhelmed by a tsunami of bipartisan congressional indignation.

Advancing the legislative process, Mr. Bush called on the Senate to act quickly and responsibly in passing its version of reform legislation. While the Senate will undoubtedly act quickly, whether its ultimate bill will be responsible is another matter. WorldCom precipitated a stampede for overbearing legislation, and the Senate appears ready to respond. What was expected to be a close vote over the bill crafted by Senate Banking Committee Chairman Paul Sarbanes before WorldCom went over the cliff now appears to have evolved into a rout, commanding as many as 80 votes. And stiffer congressionally imposed regulation is in the Senate amendment pipeline.

Meanwhile, in the post-WorldCom environment, sentiment in the House, which passed a less onerous version of regulatory reform in April by a 334-90 margin, is moving much closer to the Senate's tougher bill. The requisite conference committee following quick passage of the Senate bill could produce final legislation before the August congressional break.

The heavy-handed Senate version may prove to be counterproductive. After all, during the height of scandal, the pressure to act is always stronger. That produces overreaction; and there are incentives for politicians to act against their better judgment. The performance of some representatives during this week's House hearing about WorldCom, for example, showed just how hot-headed some members can be at the moment a scandal peaks. Without the benefit of cool-headed review that occurs when members are afforded time to reflect, government's response to scandal can be overreaching. Clearly, excessive regulatory responses can produce large, unintended, negative consequences upon one of the world's least regulated free-enterprise systems that has indisputably generated extraordinary levels of wealth over the past 20 years.

Much of the legislation may be unnecessary. Already, America's free-market system has begun to respond substantively and energetically to the corporate excesses. Reacting to the disinformational nature of the recent proliferation of "pro forma" earnings reports, which essentially allowed firms to define their profits any way they chose, Standard & Poor's Corp. recently took it upon itself to calculate and report consistently derived, comparable operating profits of the nation's largest 500 corporations that comprise its market index. The New York Stock Exchange (NYSE) has petitioned the SEC to require corporations to emphasize profits calculated using generally accepted accounting principles in all financial reports and news releases, rather than the "pro forma" results that a growing number of companies had been showcasing.

On the accounting front, both the NYSE and Nasdaq have offered regulations that would require a corporate board's audit committee to select the external auditor and to approve all non-auditing "consulting-services" contracts. Several major corporations have already adopted rules prohibiting such contracts; and a recent McKinsey & Co. survey revealed that seven of 10 corporate directors oppose those consulting contracts today. Meanwhile, another NYSE reform, which the president echoed support for yesterday, would require a majority of directors to be otherwise fully independent of the corporation.

No fair-minded person disputes the fact that the overwhelming majority of corporations operate aboveboard. These firms understand that demonstrating transparency is in their interest; and they know that they, too, are victims when a relatively small group of rogue corporations impinges upon the corporate integrity of the many. So, there should be little surprise that the free market has responded. And it may well be that some form of legislation is necessary. The worry is that Congress will overreach, and, if not kill, then at least wound the private goose that has laid all those golden eggs the past two decades.

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