- The Washington Times - Monday, July 29, 2002

Optimism for a stock market rebound this fall has risen due to a notice issued by the Securities and Exchange Commission requiring the chief executives of the 947 largest U.S. corporations to submit certified, accurate financial statements by Aug. 14.
SEC officials say the order, issued last month, is designed to remedy worries about unending corporate scandals by flushing out any remaining financial misstatements from major corporations that have erred in the past.
"We're providing the basis for a clean start," Treasury Secretary Paul O'Neill, a former chief executive of Alcoa Corp. who originated the certification idea, said last week. "I am confident that no CEO will take the risk of certifying falsely."
Worries about massive earnings restatements, such as Enron's, WorldCom's and Xerox's, have cast a cloud over the market this year and were a major factor in driving down stock indexes to 1997 and 1998 levels early last week.
Despite offering hope for relief this fall, the looming deadline appeared to contribute to the market's troubles last week as it gave institutional investors another reason to sit on the sidelines and avoid buying shares of corporations that could be embroiled in scandal within the month.
Edward Yardeni, chief investment strategist with Prudential Securities, has been advising his clients to avoid major stock buys until the deadline passes, but he expects the market to improve markedly after that.
"The bad news could be that some corporate CEOs may have to disclose that their earnings reports were misleading and must be revised downward," he said, dubbing the SEC order a "CEO amnesty program."
"The good news is that the quality of earnings is now likely to improve dramatically. If this scenario is correct, then most of the remaining bad news related to the corporate accounting and governance scandal should be behind us by September," Mr. Yardeni said.
The SEC clearly had this "purging" effect in mind when it issued the order June 28, though it perhaps underestimated its short-term effect on the market.
Linda Thomsen, the SEC's deputy director of enforcement, told the American Bar Association that the agency hopes to "find the bottom" of the accounting scandals by forcing CEOs to come forward with any undisclosed accounting problems or face strict enforcement.
Companies with clean books will be able to regain investors' confidence, she said, while corporations with hidden accounting problems will be able to close those books.
"I don't think this is meant to cause corporate America to go into a huge spasm," she said, but added that "it obviously is."
SEC Chairman Harvey Pitt said last week that the order already has produced an unexpected benefit reflecting the eagerness of corporations to alleviate investors' concerns about bad bookkeeping.
Some small firms not targeted by the order, which affects businesses with $1.2 billion or more in revenue, have asked the SEC whether they can certify as well, he said. A few other companies have filed their certifications early to reap the rewards that investors now provide to companies with clean books.
Some pundits have speculated that the order was conceived to help the White House and the markets overcome the current malaise. But the idea goes back to Mr. Bush's program in March for cracking down on CEOs after the Enron scandal.
Mr. O'Neill, who as Alcoa's CEO was known for his tight-laced and disciplined management style, insisted that CEOs should not be able to "pass the buck" to subordinates but rather should take ultimate responsibility for financial statements.
Former Enron CEOs Kenneth L. Lay and Jeffrey Skilling testified in January that they had no knowledge of their company's gross financial abuses.
Mr. O'Neill persuaded Mr. Bush that CEOs should not be able to evade responsibility like that again. Mr. Bush later asked the SEC to issue the certification order, said Federal Reserve Chairman Alan Greenspan.
"The SEC clearly was influenced by the president's position," Mr. Greenspan testified. "I felt it cut right to the core" of the problem at Enron and other corporations.
"I believe there will be significant restatements and most won't be restated up," Mr. Greenspan said. "But I'm not worried about the impact. If we get a lot of restatements, I'm not sure that's all bad," because it will improve the information available to investors, he said.
Still, David Strauss, portfolio manager with Johnston Lemon Asset Management Inc., said officials shouldn't underestimate the damage to the market in the short term. "It really hurts the markets. No one wants to do anything until after the 14th," he said.
Mr. Strauss predicts that the market will be driven lower as restatements are issued, but it is likely to hit bottom in two to four weeks with the passing of the SEC's Aug. 14 deadline.


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