Business Scandals Force GOP to Consider Broader Reforms

Mounting public concern about the new wave of business scandals is forcing President Bush and congressional Republicans to consider a more intrusive government role in monitoring the private sector than they have been willing to accept.

For months, Bush and fellow Republicans have held the line at relatively limited federal action in response to accounting abuses and controversial financial practices, blaming problems on a few corporate bad apples and contending the business world was already stepping forward to clean up the mess.

Now, their restrained approach has begun to give way as the scandals have spread to some of the nation’s largest corporations, including telecom giant WorldCom, and as Democrats have mobilized behind tougher government action.

On Tuesday, Bush will move to seize a prominent place in the reform campaign by going to Wall Street to deliver a stern lecture on ethics to business leaders. He is widely expected to propose new or tougher criminal penalties, such as mandatory jail time, for executives guilty of misleading or defrauding stockholders.

The address should represent a notable turn for an oilman-turned-politician who boasted of being shaped by the culture of business rather than government and who has often inveighed against government meddling.

On Sunday, White House Press Secretary Ari Fleischer said Bush “will focus on strict enforcement and tough punishment,” pressing for adherence to existing laws and punishing corporate wrongdoers. Fleischer spoke in Kennebunkport, Maine, where Bush was spending the holiday weekend.

Also this week, the Democratic-controlled Senate will debate a tough corporate reform measure that has been strengthened by the recent revelations of an almost $4-billion accounting fraud by WorldCom. It is expected to pass, with a significant number of Republicans supporting it.

In the House, Republicans are planning to take the lead in grilling current and former WorldCom officials at a hearing today on the company’s accounting misstatement.

Unclear is exactly how far beyond tough words Bush and GOP lawmakers are willing to go in supporting increased federal oversight of business.

White House officials vow that the administration will follow through with an aggressive stance toward corporate wrongdoing. “We think this administration will show through action, not rhetoric, that it means business,” White House communication director Dan Bartlett said.

At the very least, the recent corporate miscues have put the president and other regulatory-wary Republicans in the center of debate on a subject they would have preferred to avoid.

Some political analysts expect Bush in his Tuesday speech to sound like a modern-day Theodore Roosevelt, the most notable GOP president to go toe to toe with big business.

“President Bush’s challenge is to get in touch with his inner Teddy Roosevelt and demonstrate that he can be a regulator with results,” said Marshall Wittmann, a political scholar with the conservative Hudson Institute.

Some also see Bush inching closer to accepting much of the reform bill drafted by Senate Democrats.

“There’s a perception that the GOP are in bed with industries that need tougher regulation,” said Greg Valliere, chief strategist for Schwab Washington Research Group, which provides investment-oriented political analysis. “The Republicans need some political cover.”

The bill, written by Senate Banking Committee Chairman Paul S. Sarbanes (D-Md.), is stricter than an industry-backed measure passed by the GOP-controlled House this year. It would establish a new board to oversee and discipline accountants. The House bill also would create such a panel but is less specific about its powers.

The Senate bill also would go further in limiting the amount of consulting that accounting firms could provide to companies they audit, a response to suggestions that Arthur Andersen’s consulting and auditing work for Enron Corp. led to a conflict of interest that may have delayed the disclosure of the energy giant’s financial weaknesses late last year.

The House and Senate bills include a number of common features, improving prospects that the chambers can reconcile their differences and send Bush a bill he can sign.

Both bills would impose new financial disclosure requirements on public companies and prohibit senior executives from selling company stock during periods when lower-ranking employees cannot.

Democrats plan to try to make the Senate measure even more stringent, adding new criminal penalties for securities fraud and document shredding, new protections for corporate whistle-blowers and extending to five years from three years the time frame for investors to file securities fraud lawsuits.

Democrats also are expected to make a new push to pass pension reform legislation that was proposed at the height of the focus on Enron’s financial collapse. That measure, which has been stalled in Congress for months, would give employees new rights to sell company stock and diversify investments in their 401(k) retirement accounts.

Sarbanes said he has seen a change in attitude by members of both parties in recent months.

“You’ve had these egregious practices,” he said. “You’ve had enough of them that people are reaching the conclusion that it’s not just bad apples who need to be punished, that you also need to make changes in the system.”

Sarbanes said big losses for investors, declining confidence in financial markets and worries about the effect of the scandals on the economy have helped generate bipartisan support for his legislation. “I think there is a growing appreciation that this is a serious situation, and we really need to come to grips with it.”

Indeed, Sen. Rick Santorum of Pennsylvania, a key Republican on financial issues, said he now favors creation of a board to oversee accountants. “I didn’t always feel that way,” he said.

But Santorum said he thinks Sarbanes’ bill would go too far, contending that it amounts to Congress legislating accounting standards. “What we’re doing here is new. We have to be very careful that we don’t overdose on the medicine.”

There remains a wide gulf between House Republican and Senate Democratic lawmakers over how far Congress should go in responding to the wave of scandals.

Senate Majority Leader Tom Daschle (D-S.D.) on Sunday assailed Securities and Exchange Commission Chairman Harvey L. Pitt as a “huge disappointment” and blasted the administration for its “permissive” attitude toward business. “That’s the kind of thing that got us into the trouble in the first place--winking at regulation,” Daschle told CBS’ “Face the Nation.”

“We’ve got to have tougher enforcement of the regulations that exist,” Daschle added, “but we need a new framework, a better system of regulation than we have today.”

But Rep. Michael G. Oxley (R-Ohio), chairman of the House Financial Services Committee, said on “Fox News Sunday” that the reform bill he wrote “gives the SEC added authority to do what they do best and regulate that area. But I don’t think that we want to interfere with the capital markets, and I fear there may be some overreaction.”

Defending Pitt, Fleischer on Sunday said that “the SEC has taken more enforcement action against major” corporate wrongdoing “this year than in the previous eight years, and the year isn’t over yet.”

Those who have followed the business reform legislation say they think House Republicans will gravitate toward the Senate bill.

“Since [President] Reagan, anti-regulation has been Republican dogma,” said Larry Sabato, director of the University of Virginia Center for Politics.

“But electoral necessity is the mother of political flip-flopping.”

But Valliere contended that more is at work in the evolving GOP attitudes than political considerations. Most Republicans, especially Bush, are really steamed at business, he said.

“They feel betrayed by people they thought they could trust. This anger seems to be genuine, and I think Bush will sound pretty tough” in his speech, Valliere said.

When Bush travels to Wall Street, he will be walking a political tightrope, experts said.

In order to “satisfy swing and independent voters, he has to sound suitably horrified about what has been going on in parts of corporate America,” said Patrick Basham, senior fellow at the libertarian Cato Institute. “But, at the same time, he can’t recommend too draconian a solution for risk of offending his conservative political and fund-raising base or making it unnecessarily costly for businesses to keep their accounts straight.”

Fred Smith, president of the Competitive Enterprise Institute, a pro-market Washington policy group, said he hopes Bush will use his bully pulpit to “calm the populist anti-business rhetoric now sweeping the country.”

“Bush should note that he will pursue fraud aggressively.... No one is entitled to lie to their investors,” he said. But, Smith added, Bush also should discuss “the creative chaos of the economic frontier, the fact that entrepreneurs are basically making it up as they go along. That this trial-and-error process is the only way to invent the future, and to realize the wealth that America must have to enjoy that future.”

Some analysts expect Bush’s speech to mark a significant departure for him and his party.

“The president’s speech will likely signal the end of the past 20 years of Republican deregulatory zealotry,” Wittmann said.

Others are more cautious in assessing its long-term effect.

“What the Republicans really have to hope for is that this spate of corporate scandals runs its course by summer’s end, with the stock market picking up and the press’ attention turning elsewhere,” Sabato said.