Hostile terrain ("Enron" Rubin/"Global Crossing" McAuliffe watch

Hostile terrain
Monday August 12, 3:50 pm Eastern Time
FT.com
By Andrew Hill and Adrian Michaels in New York

The view from the corner office has changed. As US chief executives look out today at corporate America, they contemplate a new regulatory and legislative landscape.

The Securities and Exchange Commission's requirement that some 700 chief executives should swear to the accuracy of their accounts by tomorrow's close of business has concentrated minds in the executive suite. Accounting practices, corporate governance, relations with Wall Street, executive compensation, a host of business methods that would have been condoned or even encouraged a year ago - all are now up for review.

"The changes in the law, and the regulations that are yet to be written are really going to create a shift in the tectonic plates [for corporations]: it's that significant," says Warren Dennis, litigation partner in Washington with Proskauer Rose.

New regulation consists of twin pillars: the Sarbanes-Oxley Act, with its heavy criminal penalties for corporate fraudsters, strict accounting supervision and sweeping requirements for top executives to certify their accounts; and the New York Stock Exchange principles on corporate governance, which, along with parallel proposals from other stock markets, still have to be approved by the SEC.

Both are more far-reaching than the business lobby would have predicted six months ago. But, in public, there is no carping from executives. Typical of the mood is Jeffrey Immelt, chief executive of General Electric, the US conglomerate, who last month said reform was "simply the right thing to do - and I believe both sets of reforms will help restore investor confidence".

Privately, however, executives are wrestling with new constraints - not just those imposed by Congress, the SEC and prosecutors, but also the heightened sensitivity of investors to any perception of misbehaviour.

Accounting techniques are being examined for any suggestion of lack of transparency. As Leon Panetta, the former White House chief of staff, who sits on the NYSE board alongside business leaders, says: "Chief executives are looking at the August 14 deadline: if there's any question out there, if there's any possibility that the company's [accounts] don't reflect what they've said about the state of the corporation, they're nervous."

Tomorrow's deadline is only the first in a number of SEC initiatives. The Commission is also cutting the amount of time companies can take to file quarterly and annual reports and speeding up the reporting of share deals by company insiders, a measure now included in the Sarbanes- Oxley Act.

The regulator is getting tougher on ordinary financial disclosure too. Financial statements will have to contain a clearer explanation of critical accounting assumptions. Aon, the insurance broker, said last week the SEC had told it not to mention earnings before interest, tax, depreciation and amortisation (ebitda) - once one of Wall Street analysts' favourite performance measures - in its financial highlights.

The rush of US companies now treating stock options as expenses is one symptom of a voluntary embrace of greater accounting clarity - although the debate about whether the move is necessary has split corporate America.

A less obvious consequence may be a reduction in financial engineering. Enron's use of special purpose entities has given such techniques a bad name. "People will think twice before setting up SPEs to keep things off the balance sheet," says Robert Willens, accounting specialist at Lehman Brothers.

Citigroup indicated last week that it was even willing to scale back its structured finance business - turning down deals that would hide debts from investors - as part of its attempt to ease investors' anxiety.

Imaginative mark-to-market accounting of forward energy contracts, which helped Enron and other energy traders produce impressive results, is also becoming taboo.

Companies will have to rein in aggressive assumptions about the returns on their pension plans, which have benefited earnings in the past. Mr Willens believes that in the wake of the bear market, an assumed return of more than 10 per cent will be frowned on.

Reinforcing this new caution is the change in relations between companies and their accountants. The profession has been stripped of the old system of self-regulation and the ability to offer wide-ranging non-audit services to audit clients.

The SEC has asked for nominations for the new five-person Public Company Accounting Oversight Board, only two of which can come from the profession. It will have beefed-up powers of investigation over auditors, and be able to levy harsher punishments than its predecessor, the Public Oversight Board.

As a result of Andersen's disintegration, 2,500 US public companies now have new firms poring over the books, determined not to be caught out. At these companies and the rest, audit committees are likely to grill auditors more closely.

How long this new atmosphere of caution lasts will depend on two factors: the recovery of the economy, and the persistence of prosecutors, legislators and investors. "For a period of time there will be inevitably a heightened level of sensitivity in the boardroom, and executives will ask tougher questions," says Toby Myerson, a partner with Paul Weiss Rifkind Wharton & Garrison in New York. "In the longer run, the question is how important an impact the new legislation will have. Bad actors will always find a way to invent schemes to defraud. Certainly this [legislation] isn't going to eliminate criminal behaviour."

The most aggressive politicians believe more law-making may be necessary. That prospect worries business, which is already concerned about possible unintended consequences of the current wave of regulation. The Business Roundtable, the lobby group of chief executives, says it is now up to business to rise to the challenge of restoring confidence.

The potential for litigation - which most lawyers and executives believe is heightened by the broad wording of the Sarbanes-Oxley Act - could prove an equally telling influence on the future corporate landscape. "Investors are depressed, very depressed. They don't want to buy and sell, they just want to sue," says Delos Smith, senior business analyst at the Conference Board, the New York business research organisation.

That threat could have a chilling effect on a whole range of business activities, from the recruitment of directors to executives' willingness to take legitimate business risks. As Richard Berner, the Morgan Stanley economist, wrote last month, making executives liable for the accuracy of their financial reports "could spawn more rigid bureaucratic management structures aimed at limiting lawsuits rather than meeting customers' needs".

After the excesses of the 1990s, however, it seems more discipline is what most outsiders now want from companies. Peter Clapman, senior vice-president at TIAA-Cref, the big institutional shareholder, says: "Too much damage has been done to the system, and there have been too many past felons for reform not to happen."

Corporations that once shaped the landscape themselves are finding they have to accommodate other people's views. As Harvey Pitt, SEC chairman, put it in a speech yesterday: "Professionals and businesses alike must keep their eyes firmly on their public responsibilities. They must first make certain those responsibilities are in fact satisfied. Then, they need to be sure the public knows they've satisfied their obligations."

Here is a few more talking points on the Social Security issue, Pass them along

Q. Which party took Social Security from an independent fund and put it in the general fund so that Congress could spend it?
A. It was Lyndon Johnson and the Democratic-controlled House and Senate.

Q. Which party put a tax on Social Security?
A. The Democratic party.

Q. Which party increased the tax on Social Security?
A. The Democratic Party with Al Gore throwing the deciding vote.

Q. Which party decided to give money to immigrants?
A. The Democratic Party. An immigrant can move into this country at 65 and get SSI Social Security. The Democratic Party gave that to them although they never paid any money into it.

And the Kicker is ...
After doing all this, they promulgate the lie that Republicans want to take your Social Security. The worst part is that it is believed, perhaps not by you, but the uninformed. When a lie is told often enough it is believed.

The Democrats are desperate to find an issue. Please pass this on.

"Rubin should be fitted for an orange jumpsuit..."

It's inevitable, IMHO, if the Right had the cajones to make Rubin an issue!! Limbaugh spent most of his second hour explaining how Rubin cooked the books in 1999 and 2000, mis-stating the performance of the US Economy by almost 40% in the last Quarter reported before the November 2000 elections!! How is that different from what Enron and Global Crossing did?! How is that not a criminal offense?!

Rubin's TOAST...as is DNC Chairman Terry McAuliffe!! Writin's on the wall...MUD

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