Bush to Call for Investor Safeguards
Reacting to the Enron Corp. collapse, President Bush will call today for measures to protect shareholders by requiring corporate officers to personally vouch for the accuracy of financial reports and to establish an independent regulatory board to uphold accounting standards.
The proposals represent the first specific steps being taken by the president to boost confidence among investors and toughen protections against corporate shenanigans.
As such, the proposed safeguards play like a veritable highlight reel of alleged misdeeds surrounding the disintegration of Enron, which late last year quickly went from being the world’s largest energy trader to the nation’s largest bankruptcy case.
Seeking to demonstrate a sensitivity to concerns about potential threats that the Enron case has demonstrated--particularly to retirement holdings--Bush had been promising such measures since he delivered his State of the Union address Jan. 29.
Most of the recommendations can be implemented by the Securities and Exchange Commission under its existing authority, according to the White House, although several measures would require legislative action.
Under the White House plan, investors “should have quarterly access to the information needed to judge a firm’s financial performance, condition and risks,” as well as prompt access to “critical information.” The information should be provided “in plain English.”
Though Enron reported its earnings every quarter and many of the off-the-books partnerships that contributed to its bankruptcy were disclosed to investors, the Houston company was known for the murky nature of its financial reports, and many financial analysts have admitted that they really didn’t understand how the company made its money.
In fact, an internal Enron investigation determined that $1 billion, or more than 70%, of recent profit was illusory, created by inappropriate accounting for partnership transactions.
The Bush proposals, disclosed by a White House official, include a provision that chief executives should “personally vouch” for the accuracy and timeliness of corporate information, including financial statements. CEOs should be barred from profiting from erroneous financial statements and should lose the right to serve in corporate leadership jobs if they abuse their power.
Both of Enron’s recent chief executives, Kenneth L. Lay and Jeffrey K. Skilling, have said they were unaware of any wrongdoing at their company.
Also under the Bush plan, corporate officers would be required to disclose significant purchases or sales of company stock within two business days.
Corporate executives now can wait as long as 40 days before publicly reporting open-market transactions and as long as a year before reporting sales to their own employer.
That appears to be a direct reaction to disclosures that Lay was selling stock back to Enron as late as October--after he had been warned about accounting improprieties at the company and while he was still urging employees to buy Enron stock.
As part of its 10-point plan, the White House will declare that “investors should have complete confidence in the independence and integrity of companies’ auditors,” who should be held to “the highest ethical standards” by an independent regulatory board under SEC supervision.
Auditors should not perform other services for a client if the service “compromises the independence of the audit,” the Bush plan states. Companies should be forced to provide more detail about the fees paid to auditing firms, according to the plan.
After Enron’s meltdown, questions arose about the role of its auditor, Andersen, which also served as a consultant for the firm in setting up many of its controversial off-balance-sheet partnerships.
Accounting firms often earn more from consulting for a company than they do for auditing books, which raises concerns about conflicts of interest. Some of the nation’s largest accounting firms have said they are willing to give up some lucrative consulting work to restore confidence in the industry.
To help investors better assess changing corporate conditions, Bush also calls on the SEC to expand the list of significant events that a company must immediately report to its shareholders.
Bush plans to announce the plan at a presentation of the Malcolm Baldrige National Quality Award, which honors performance excellence by American corporations and was named for the late Commerce Department secretary.
The president has been under political pressure to act as new details of the Enron case came to light. Bush has long-standing political connections with Lay, who has contributed more financial support to Bush’s political career than anyone else.
In another development Wednesday, Enron asked a federal bankruptcy judge for an eight-month extension of a deadline for filing a reorganization plan, saying it needed more time to try to salvage its business, pay creditors and come out of Chapter 11.
Companies trying to restructure their debts under that chapter of the bankruptcy law have the sole right to advance a recovery plan in the first 120 days after filing. Though courts often extend this exclusive period in large and complex cases, creditors can fight the request and seek to advance competing reorganization plans. An extension would mean Enron’s creditors may have to wait longer to be paid the roughly $49 billion they’re owed.
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Gerstenzang reported from Washington, Rivera Brooks from Los Angeles. Bloomberg News was used compiling this report.
