- The Washington Times - Wednesday, July 24, 2002

In an amendment co-sponsored by Democratic Sen. Joe Biden Jr. and Republican Sen. Orrin Hatch, the Senate is piggy-backing on a recent Securities and Exchange Commission (SEC) directive. Beginning Aug. 14, the SEC will require the chief executive officer and chief financial officer of any company with at least $1.2 billion in annual revenue to personally attest to, and assume personal liability for, the accuracy of the financial statements their company submit to the SEC. The Biden-Hatch amendment will make this bad idea worse by requiring a company's chairman of the board to also certify the statements.
There are short-term and long-term problems with this approach. In the short run, it is difficult to imagine a greater incentive for corporations to intentionally lowball their earnings. To be on the "safe side," that would include legitimate earnings. The result, of course, will be increases in corporate price-earnings ratios, a development that could easily encourage a further downward-spiraling in stock prices.
In the long run, given that the False Statement Act already requires such submissions to be truthful, the seeming redundancy of both the SEC and the Senate versions appears tailor-made to appeal to one of the Democratic Party's most politically generous groups, the tort bar. The required signed statement, which, interestingly enough, the SEC had to correct shortly after the agency designed it, contains several weasel phrases "to the best of my knowledge" and "a material fact" that tort lawyers will exploit with the fervor they have displayed while chasing ambulances. Indeed, is there any doubt that tort lawyers will seek to do to America's capitalistic system the greatest creator of wealth in history what they have done to OB/GYN doctors and patients?
Now, unless a CEO or chairman is thoroughly steeped in the arcane minutiae of corporate accounting a category that would exclude Bill Gates, Andy Grove and other corporate titans who have generated incalculable wealth exploiting their entrepreneurial-engineering instincts and backgrounds the CEO and chairman will surely be hostage to their accounting staffs. How much entrepreneurial energy will be sacrificed as a CEO or chairman immerses himself in accounting complexities?
Moreover, consider the bipartisan analysis of Kevin Hassett and Peter Wallison of the American Enterprise Institute and Robert Shapiro, formerly of the Democratic Leadership Council, who warned recently that "significantly increas[ing] the exposure of firms and particularly their managers to litigation" will "likely impose significant new costs on American firms with little likely benefit." They argue that requiring CEOs, CFOs and chairmen to certify that the financial statements "fairly present, in all material respects, the operations and financial condition of the public company" would "expose firms subject to changing market conditions to new liability exposure. When an unforeseen material event occurs," they note, "the plaintiffs lawyers with the benefit of hindsight will be able to argue that the previous certification was false in its claim." Who doubts that this is precisely what will happen? And, as this process surely evolves, how many highly qualified people will be discouraged from accepting senior executive positions? And what price will that exact on the economy?
Finally, it is bemusing at the least that Congress, which refuses to honestly address, or even acknowledge, the trillions of dollars of unfunded liabilities in the so-called trust funds for Social Security and Medicare, assumes it is capable of devising complex, efficient solutions enabling corporations to honestly address business problems about which so many in Congress know so little.


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