Just four months ago, bipartisan outrage over Enron's shady dealmaking and Arthur Andersen's lax auditing practices raised hopes that Washington was on the verge of a sweeping overhaul of Corporate America's financial practices. Subpoenas flew, and for a time, CEOs, corporate lawyers, accountants, and Wall Street financiers lined up to testify on Capitol Hill. But now the drive for post-Enron legislative reforms is stalled, victim of Presidential indifference, Republican hostility, fierce business lobbying, and disorganization among reform-minded Democrats.
The paralysis comes despite a steady stream of unsettling news from boardrooms that is sapping investor confidence. Almost daily, investors have been stunned by abrupt CEO departures, earnings restatements, and Securities & Exchange Commission investigations of corporate highfliers. Revelations that Wall Street analysts and traders have put their own interests above those of their clients have made things even worse. With the corporate crime wave showing no signs of abating and Washington gridlocked, investors who normally would be plunging back into the stock market by now are sitting it out.
Clearly, Washington has dropped the ball. Early on, lawmakers offered up more than 50 ways to prevent another Enron, such as banning accounting firms from performing consulting services for audit clients, requiring companies to deduct the cost of stock options from earnings, and capping the amount of company stock in employee 401(k) plans. But no bills have made it past both houses of Congress, and the outlook for legislation reaching the President is grim. "If there is no real progress on serious reform," says Felix G. Rohatyn, former managing director of Lazard LLC, "it will just perpetuate this cloud that is hanging over the securities markets."
There has been scant leadership from a White House preoccupied by the war on terrorism and by global hotspots. President Bush has said little publicly since a White House task force in March produced a 10-point plan that called for more timely disclosure of financial information, more accountability to shareholders, and stronger board oversight of auditors. And Bush's conservative economic advisers remain convinced that many reforms would do more harm than good. "We [need] better transparency, better accountability, and improved governance," says chief White House economist R. Glenn Hubbard. "Beyond that, there's not really a role for government."
That view is widely shared by Hill Republicans. But to avoid Democratic charges of complacency, the House GOP has pushed through bills that adopt the rhetoric of reform but mandate few meaningful changes. And while many Senate Democrats favor stronger steps, they lack the votes to propel them to passage. "It is becoming increasingly clear that we may not get real reform," frets Senator Jon S. Corzine (D-N.J.).
Yet there's more to Congress's weakening resolve than gridlock. Corporate and accounting industry reps, for instance, have mounted a sophisticated lobbying blitz to bottle up Democratic measures that would force a separation of auditing and consulting and establish an accounting oversight board with teeth. At the grassroots level, thousands of CPAs, organized by the American Institute of Certified Public Accountants, have flooded lawmakers with faxes, e-mails, personal visits--and money. The profession has given $4 million in campaign contributions so far in the 2002 election cycle. Top recipients include members of the Senate Banking and House Financial Services panels, which have jurisdiction over accounting. All told, 75% of lawmakers got money from the green-eyeshade brigade.
The CPAs have succeeded in watering down reform in the House and are now homing in on the Senate. Banking Committee Chairman Paul Sarbanes (D-Md.) has had trouble getting his Senate panel to approve a tough bill that would give a new oversight board the right to set audit standards and discipline errant accountants. It would also ban auditors from most consulting services and require firms to rotate the lead partner on an audit every five years. But prospects are dim.
Orchestrating the counter-reformation is Texas GOP Senator Phil Gramm, whose wife, Wendy, sits on Enron Corp.'s board. On May 16, Gramm met with 30 corporate and accounting lobbyists to plot strategy and get their members to contact lawmakers. Later that day, Sarbanes began receiving faxes from Maryland-based CPAs. Clifton Gunderson LLP, a Timonium (Md.) CPA firm, fired off a fax saying: "Congress should consider proposals that will promote economic recovery, not enact legislation that inhibits it." That language comes directly from the AICPA call to action.
So far, the business lobby has overpowered pro-investor voices. Consumer groups, the AARP, and Common Cause support reforms. But they either lack muscle or are unwilling to devote resources to fight business. The vacuum has prompted Vanguard Group founder John C. Bogle to start the Federation of Long-Term Investors, a shareholder-rights group including Warren E. Buffett and other prominent investors. A strong accounting oversight board is a top priority. "Our capitalistic system is in peril," says Bogle.
While the reform drive in Washington has largely stalled, the private sector is mustering a response to the market's demand for a cleanup. Dozens of corporations have fired consultants affiliated with their audit firm, and at least 18 companies have adopted shareholder proposals to make the split permanent. Boards, meanwhile, are strengthening their audit and compensation committees with directors who have no ties to management, acting in advance of proposed new stock exchange rules. "We are seeing the beginning of a cultural shift in corporate governance," says William B. Patterson, director of the AFL-CIO's Office of Investment.
That shift is getting a push from the SEC. Chairman Harvey L. Pitt leaned on the markets to shape up governance rules. He's calling for shareholder approval of all stock option plans. And if Congress doesn't establish an accounting oversight board, he'll propose his own version--although it won't be able to subpoena records. But Pitt's main achievement has been a crackdown on accounting abuses. In the first quarter of 2002, the SEC opened 64 financial-reporting cases, more than twice the number in the 2001 quarter.
Still, Pitt has made many missteps, undercutting investor confidence. While the SEC pressed for new rules to address stock analyst conflicts, the agency played catchup with New York Attorney General Eliot Spitzer's probe of Merrill Lynch & Co. And other states are capitalizing on Washington's inaction. Pitt, a Washington lawyer who represented the Big Five firms, has also been criticized for meeting with former clients and other companies under SEC scrutiny.
The lack of strong, visible lead- ership on accounting and market reforms in Washington has left investors wondering what sort of shield they'll have against the next wave of corporate abuses. The drumbeat of SEC investigations only serves to scare investors away from the market. And as long as Washington dithers, investors don't have any reassurance that the corporate numbers game will end soon. "We need a restoration of trust from every entity," including government, says Byron R. Wien, senior investment strategist at Morgan Stanley. But as George W. Bush once observed, trust is not a commodity in great supply in Washington these days.
By Amy Borrus, Mike McNamee and Paula Dwyer, in Washington, and with Marcia Vickers and David Henry in New York