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Bush Signs Strict Business Reform Law

July 31, 2002|RICHARD SIMON and LISA GIRION | TIMES STAFF WRITERS

WASHINGTON — President Bush signed far-reaching accounting reform legislation into law Tuesday as corporate executives, auditors, lawyers and Wall Street analysts braced for a significant change in the way they do business.

At the White House's carefully orchestrated signing ceremony, Bush stressed the punitive aspects of the most far-reaching business reforms since the Depression--measures that appeared all but dead just a few months ago.

"No more easy money for corporate criminals, just hard time," Bush said.

But while the prospect of tough prison sentences for white-collar criminals has captured the spotlight, experts say the law's most sweeping changes concern corporate governance.

Lawyers, for instance, now will have increased responsibility to inform corporate boards of directors of misdeeds. And the boards' audit committees must operate independently of management.

Like much of the law, the audit committee requirements will be spelled out in detail by the Securities and Exchange Commission in regulations that could take three to six months to complete. But the requirements are so substantial that some companies already are scouting for qualified audit committee members.

"Given the things that have to be done, people need to start immediately to comply," said John Harkins, a partner in the Philadelphia law firm of Harkins Cunningham who specializes in corporate litigation and governance. "Companies can't wait until the last minute."

Finding qualified financial experts, such as public accountants, auditors or controllers, will be hard enough. But finding people willing to devote the time necessary to meet the new duties could also be a challenge, he said.

"Audit committee members are going to have to work a lot harder. There are a lot of obligations, and to spend the amount of time that needs to be spent to do what has to be done means you are going to have to look long and hard on whether you want to be on that committee," Harkins said.

In recent weeks, as the reform bill worked its way through Congress, Bush and lawmakers rallied behind it as a way to restore investor confidence that had been badly shaken by a spate of business scandals. But the financial markets sent a mixed signal Tuesday as the measure became law.

The Dow Jones industrial average lost about 32 points, while the Nasdaq and Standard & Poor's indexes registered slight gains. Analysts welcomed the results as a sign that the market may be stabilizing.

Whether the new law fulfills its promise of restoring integrity to financial markets will depend heavily on the SEC, which has been strongly criticized by some for not moving aggressively enough to root out corporate misdeeds.

The bill's congressional sponsors promised to keep an eye on the agency. "We'll be watching very closely," Sen. Paul S. Sarbanes (D-Md.), the bill's chief architect, said after attending the signing ceremony.

Investor groups said they also will be monitoring the bill's implementation.

"This new law has the potential to dramatically improve the quality and independence of the audits of public companies and, in so doing, to increase the reliability of corporate disclosures," said Barbara Roper, director of investor protection for the Consumer Federation of America. "But it will only live up to that potential if everyone does their part, starting with [SEC Chairman] Harvey Pitt and the SEC."

The law gives the SEC 90 days to appoint the five members of a new, independent board that will oversee the accounting industry. Reform advocates have touted this board as essential to more effectively policing the accounting industry and preventing the type of accounting abuses that have surfaced in recent months.

Pitt said Tuesday that the SEC will "do our utmost to meet all timetables."

The bill establishes tougher criminal penalties for white-collar crimes, including quadrupling, to 20 years, the maximum prison sentence for mail and wire fraud. It also establishes a new crime of securities fraud, punishable by up to 25 years in jail.

However, experts predicted that the law's longer sentences for corporate crimes would have little, if any, effect on the behavior of officers, directors and consultants who are inclined to cross the line. Also, it is unclear how many more cases federal investigators and prosecutors will be able to take to trial, even with added resources.

"Another $100 million is like throwing nickels at the system," said Henry Pontell, a criminology professor at UC Irvine. "The real question is does the system have the capacity to push cases to that final stage? That's always been the Achilles' heel of the criminal justice system when it comes to processing white-collar crime cases.

"When you look at the SEC budget compared to what they spend on drugs, it's a small fraction, and the amount of work that's required to do these kinds of cases is preposterous."

The law is expected to hit small firms harder than big ones.

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