- The Washington Times - Wednesday, July 17, 2002

The Senate-passed bill to crack down on corporate auditing abuses has been condemned by a bipartisan group of economists, who say it will result in regulatory overkill that will enrich trial lawyers and heap huge costs on U.S. firms "with little likely benefit."

The bill, which passed the Senate on Monday 97-0, "goes far beyond what is necessary" to prevent corporate fraud, the economists said in a lengthy study of its impact that was conducted for the U.S. Chamber of Commerce.

A copy of the study, which has not been made public, was obtained yesterday by The Washington Times as the House reversed itself and passed criminal penalties for corporate fraud in the aftermath of the Senate's action.

The House bill, overwhelmingly approved 391-28, calls for criminal penalties and jail sentences for executives of publicly traded companies who deceive investors. The criminal-penalties provisions were not in the original bill the House passed in April. Yesterday's action was seen as a move by House Republicans to strengthen their hand when differences between the two bills must be ironed out in conference, which could happen by the end of the week.

However, the U.S. Chamber of Commerce's study questioned the effectiveness of recent legislation, saying that many of the provisions in the Senate bill authored by Sen. Paul S. Sarbanes, Maryland Democrat, "go well beyond what is truly required to stem accounting and auditing abuses."

While some aspects of the regulations "are advisable on economic grounds," many of the reforms "will likely impose significant new costs on American firms with little likely benefit. In addition, the new rules may significantly increase the exposure of firms and, particularly their managers, to litigation," the report said.

In a separate broadside against the Senate bill, Paul Beckner, president of Citizens for a Sound Economy, said the Sarbanes bill was "a giveaway to a major financial backer of the Democrat Party the trial lawyers."

"All the Sarbanes legislation does is make it easier for class-action lawsuits to be filed against corporations," Mr. Beckner said.

As for improving the ability of the government to uncover further corporate fraud, the chamber study said that "there is a strong possibility that the new rules will provide little help in sorting out the bad apples, in which case these extra costs would have little benefit."

The Senate bill passed Monday would ban personal loans from companies to their top officials and directors, and would require company insiders to notify the Securities and Exchange Commission (SEC) more promptly when they buy or sell stock.

The measure creates a new private-sector oversight board for the accounting industry with disciplinary powers, to replace the system in which the industry polices itself.

The chamber study was written by economists Kevin A. Hassett and Peter Wallison of the American Enterprise Institute, and Robert J. Shapiro, a former Democratic Leadership Council economist.

Among their chief conclusions:

•"The bill imposes potentially large costs on U.S. firms, costs that Congress has to date made no attempt to quantify."

•"The bill could introduce new inefficiencies into the normal operations of businesses and potentially new distortions into the reporting of their financial condition."

•"The bill would create a largely unprecedented and unconstrained bureaucracy, with unlimited taxing power and authority when what is required is to allow the SEC to pursue the authority it already has."

•The bill "would enhance the power of Congress to influence the establishment of accounting principles a route that will lead to far greater lack of investor confidence in the securities markets than we have seen thus far."

The study concluded that "the Sarbanes bill in the tangible and intangible costs it will impose on the economy goes far beyond what is necessary to address the significant questions about the quality of accounting and auditing raised by the collapse of Enron and other companies."

The White House opposes the Sarbanes bill in its present form, charging that the new auditing oversight board it would create will overlap with the regulatory jurisdiction of the SEC.

"What you would end up with is turf wars, finger pointing and things falling through the cracks," said White House economic adviser Lawrence Lindsey.

Under the Sarbanes bill "the board would have much broader jurisdiction that would include getting involved in securities fraud, and we think the SEC should be the one that handles that. The Sarbanes bill muddies the waters," he said.

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