Companies Blazing a Paper Trail to Comply With New SEC Rules

Thanks to America’s newfound fondness for corporate integrity, top executives at Intel Corp. have two new commitments on their calendars.

Every three months, they must attend a pair of meetings, each lasting as long as a day, to pore over crucial details about the quarterly financial data they report to the Securities and Exchange Commission.

For the Santa Clara, Calif.-based chip giant’s chief executive and chief financial officer, the new mandate to collect, disclose and certify the information is no minor matter. Signing their names to phony numbers could bring criminal penalties of as much as 20 years in jail and $5 million in fines each.

The new rules are part of the barrage of requirements for public companies approved by federal regulators in the aftermath of financial scandals at Enron Corp. and other companies. The resulting plethora of fine print is shaking up long-held business practices, adding tension to critical relationships such as that between executives and auditors and keeping lawyers very busy.

The executive-certification requirements are “without a doubt, the No. 1 topic that has created lots and lots of work,” said Cary Klafter, Intel vice president and corporate secretary. “In our case, it involves people on a worldwide basis.”

Prodded by Congress, the SEC over the last six months has enacted reforms that affect financial reporting standards, codes of ethics for senior executives, financial expertise on audit committees, stock trading during pension fund blackout periods, retention of audit records, the independence of auditors, conflicts of interest among stock analysts and more.

“We’re really talking about something that’s revolutionary,” Robert M. Mattson Jr., an attorney with Morrison & Foerster in Irvine, said of the reforms mandated by last year’s landmark Sarbanes-Oxley legislation.

Senior executives are extremely concerned about complying with the new rules -- and the personal liability they would face for violating them, Mattson noted. “I had one general counsel tell me that since the passage of Sarbanes-Oxley, he’s been doing 90% Sarbanes-Oxley and 10% everything else,” he said.

Still pending at the SEC are rules that would require firms to have a majority of outside directors on their boards, and mandate that outside directors control audit committees. The power shift is supposed to make it harder for management to play games with the books because the financial data would be scrutinized by outsiders less beholden to the CEO.

Indeed, the SEC’s burst of rulemaking may open up an organizational culture that until now has concentrated power in a tiny executive cadre.

“People are scratching their heads in the boardroom,” said Neil W. Rust, an attorney with White & Case in Los Angeles who advises clients on corporate issues. “We’ve seen management looking across the table at the board of directors, and the board of directors looking across the table at management -- and neither is really sure how their relationship has changed.”

To comply with the standards on certification and disclosure, CEOs and CFOs must pledge that they have personally reviewed the financial information in their quarterly and annual reports, and that the numbers have been presented honestly and fairly.

Corporations also must set up and maintain controls over the collection and handling of such information, in effect guaranteeing that the data have been gathered through trustworthy methods and that all relevant information has been discovered and properly disclosed.

At Intel, this has meant new meetings and paper trails flowing up the chain of command, culminating with the two quarterly sessions that are attended by CEO Craig Barrett and CFO Andy Bryant in the fifth-floor conference room at the company’s headquarters.

Intel officials are not yet able to put a price tag on their compliance chores but say they are costing the company a lot more than projected by the SEC, which estimated it might take an extra five hours of company time each quarter.

“We think they’re wrong by 100 times and maybe an even larger order of magnitude,” Klafter said. “It’s hard to figure how they came up with that number.”

Intel also is grappling with a new regulation that requires corporations to speed up disclosures of transactions in company stock by firms’ senior executive officers.

Under the old rules, if an officer exercised stock options once a week for four weeks in a month, those sales could be reported to the SEC on one form, known as Form 4. It was due 10 days after the month in which the sales occurred.

In the post-Enron world, Form 4 is due 48 hours after each stock sale. For firms on the West Coast, the two-day deadline is even tighter because the SEC considers the deadline to be 5:30 p.m. Eastern time.

“Now you have four forms when you used to have one,” said Chuck Mulloy, Intel spokesman. “Let’s say you have two officers doing the same thing. Now you have eight forms instead of one.”

Other new rules are affecting not paperwork, but personnel.

The standard on auditor independence, for instance, dictates that the lead partner and “concurring partner” on an audit must move off the job after five years and refrain from auditing that company for another five years. Currently, the lead auditing partner is allowed to audit the firm for seven years before rotating off the job.

The audit partner “that serves us has had basically two years cut off his rotation, so they’ll have to assign another partner to us,” said Scott Keys, CFO at IndyMac Bancorp Inc., a Pasadena-based mortgage bank. Asked his view of that change, Keys responded carefully: “I do think that having some continuity in the auditing process has its benefits.”

Despite the waves of change, some critics say the new rules are less revolutionary than advertised. They contend that the federal government could have imposed more stringent demands to protect shareholders from a recurrence of the misdeeds that shook public faith in corporate honesty and sparked sweeping stock sell-offs.

The SEC did step back from some of its initial proposals. For example, it has delayed action on a rule that would have required lawyers to become whistle-blowers by informing the SEC of ongoing misconduct within corporations they represent.

Instead, regulators last month agreed only that lawyers must register such complaints with the company, which then would have to report such a complaint to the government.

Moreover, despite protests over the cozy relationship between Enron and its auditor, Arthur Andersen, the SEC also softened its proposal on auditor independence. It decided to allow accountants to audit tax strategies they designed and to permit corporations to be relatively imprecise about how much they’ve paid their accountants for other services, such as auditing and consulting.

As some see it, almost all good-behavior rules manufactured in Washington will pale in comparison to the influence of the marketplace on corporate behavior.

“The increased sensitivity of investors and directors is going to have a more lasting and profound effect than any rules that could ever be adopted,” said Nell Minow, editor of the Corporate Library, an investor-rights organization.

For example, the SEC in January decreed that companies would have to adhere more closely to standard accounting techniques. If companies want to report pro forma financial results, which typically exclude a raft of costs, they now also must give investors more complete information about the pro forma data. But many say that pro forma reporting was on the wane even before the SEC action.

That’s because the practice, which was popular among flash-in-the-pan companies during the dot-com heyday, is viewed negatively in today’s more skeptical marketplace.

“In the last couple of years, most companies have pretty much gotten the message that you can’t put something out as net income if it isn’t net income,” said IndyMac’s Keys, who called the market “one of the best regulators in the world.”

Some experts on corporate governance maintain that, whatever the expense, the array of new rules ultimately will pay off -- particularly on the margins where a wavering executive might have been tempted to cheat in the past but now may consider such a gambit too risky.

“We’re never going to overcome outright dishonesty,” said David S. Ruder, a professor at Northwestern University School of Law and a former SEC chairman. But “we can hope that marginally dishonest activity disappears.”

Others, pointing to the storm of regulations, say the real work lies ahead, as the SEC gradually figures out what its new rules mean in the world of business, a world that may not always reflect the theories of regulators in far-off Washington.

“Implementation and enforcement of the regulations is just beginning,” Minow said. “There’s a lot more to go.”