The Homeland's economy: The Corporate Reform Weekly report

The Corporate Reform Weekly
Vol II, #10 March 17, 2003

In Short = NEWS

In Washington
Congress: GAO report describes Wall Street's role in Enron, urges more vigilance by banks

Public Company Accounting Oversight Board: PCAOB proposes a billing system

Securities and Exchange Commission: Journalists protest SEC proposal requiring analyst disclosure in print media

In the States
Texas: Package of legislation would create a Corporate Integrity Office

In Business
Accounting: FASB votes to overhaul options rules
Scandals: Securities fraud lawsuits were up 31% in 2002… Enron execs charged in $111 million broadband deal… GOP strategist Reed got $300,000 from Enron… KMPG pays $200 million to settle Rite Aid and Oxford Heath suits… ImClone's Waksal pays a fraction of what he made to settle insider trading charges

ACTION

Fighting Back: Ohio activists ask Ohio House members to stipulate that the 14th Amendment only apply to people… Citizens Prepare for 2nd annual Big Business Day

This Week's Action Item:
Tell FASB to require companies to expense stock options… Plug into Big Business Day

RECOMMENDED READING:
Final Accounting: Ambition, Greed and the Fall of Arthur Andersen

NEWS
In Washington
Congress

GAO report describes Wall Street's role in Enron, urges more vigilance by banks

A new General Accounting Office (GAO) report has documented the role of Wall Street banks in Enron's fraud and collapse. The report, prepared by the investigative arm of Congress, documents many so-called structured finance transactions, some of which have already been detailed in congressional hearings. These transactions generally involve complicated multi-million dollar deals that allowed Enron to book loans as profits and then hide the debt created by the loans. The banks that provided the loans profited handsomely from these deals.

The report, which was mandated by the Sarbanes-Oxley bill, urges banks to be more vigilant in their involvement with clients. But it also notes that shareholders may have a tough time bringing cases against big banks because some legal jurisdictions require firms to have had "actual knowledge" that their client was trying to deceive investors - a difficult legal standard to prove.

The banks mentioned include Citigroup, J.P. Morgan Chase, and Merrill Lynch. Merrill has already paid $80 million to settle charges with the SEC.

For more, visit http://www.gao.gov. The report # is GAO-03-511.

Public Company Accounting Oversight Board

PCAOB proposes a billing system

The Public Company Accounting Oversight Board has finally proposed its first rule - a fee plan for the public companies who will pay to support the PCAOB's existence.

The rule will require all companies with market capitalization of at least $25 million and all investment companies with net asset values greater than $250,000 to pay an annual fee. Bigger companies will pay more.

The PCAOB, now four months old, still has yet to rule on an actual accounting matter. Members have, however, voted to pay themselves $452,000 a year ($560,000 for the chairman).

The PCAOB is also still without a chairman. The Securities and Exchange Commission finished accepting nominations for the opening last week, but SEC Commissioner Cynthia Glassman estimated it would be at least four to six weeks before the SEC selects one of the 30 nominations and more than 450 applications.

To see the proposed rule, visit: http://www.pcaobus.org/pcaob1/rulelistings.asp

Securities and Exchange Commission

Journalists protest SEC proposal requiring analyst disclosure in print media

Several news organizations last week offered comments protesting a controversial SEC rule that would require print reporters who quote stock analysts to disclose the analyst's potential conflicts of interests in the story.

Analysts and journalists who violate the rule will trigger a ban on anybody from the analyst's firm speaking to anybody from the journalist's news organization. News organizations don't like this rule because they feel that it interferes with their editorial discretion.

The SEC, which has already required this kind of disclosure for radio and television, concluded its comment period on this rule proposal last Monday. It did not indicate when it would vote on final rules.

In The States
Texas
Package of legislation would create a Corporate Integrity Office

A corporate reform package filed last week in the Texas State Senate would create a Corporate Integrity Office in the attorney general's office and an "Open Corporations Law" that requires companies with state contracts to report any financial irregularities and submit to annual audits.

The Corporate Integrity Office would be charged with assisting state agencies and attorneys of all levels in prosecuting corporate fraud.

"We all remember what happened last year with Enron, WorldCom and other corporate scandals in Texas and around the country," said Sen. Rodney Ellis (D-Houston), who introduced the legislation. "The eyes of the nation were and remain on the state of Texas."

Ellis's proposal also calls for unlicensed investment advisors to be fined up to $5,000 and spend 10 years in jail for giving advice.

In Business
Accounting
FASB votes to overhaul options rules

The push to expense stock options got a boost last week when the Financial Accounting Standards Board (FASB) unanimously voted to overhaul current options rules. Though FASB did not commit to expensing options, it said it would focus on formulating rules similar to international standards. International standards have moved to counting options as expenses. FASB will discuss options at its next meeting this Wednesday.

Perhaps equally significantly, major accounting firms have reversed their position and are now supporting counting options as an expense. As Northwestern University accounting professor Lawrence Revsine told the Washington Post, "Given the scandals of 2001 and 2002…the firms are under great near-term and long-term pressure to restore the credibility of the U.S. economy. It is in their best interest. (for more on accounting firms' positions, see "New Option Rule Has Key Backers As Panel Meets," by Jackie Spinner of the Washington Post, http://www.washingtonpost.com/wp-dyn/articles/A12710-2003Mar11.html

Meanwhile, SEC chairman William Donaldson said at a press conference last week that he thought companies should account for stock options granted to executives, though he said he wasn't sure whether expensing was the proper way to account for them.

Gretchen Morgenson of the New York Times reports that a popular proposed SEC rule to give shareholders veto power over stock option grants remains stalled: (see "Plan Restricting Stock Options Stalls at the SEC": http://www.nytimes.com/2003/03/13/business/13OPTI.html)

Stock options, the so-called "steroids of corporate greed," have been repeatedly cited as a key fuel for reckless corporate behavior. Companies are not required to expense options in financial reports, which means they can give out as many as they like. As a result, executives receive massive options grants, a powerful incentive to cook the books to keep stock prices high.

For more on FASB, visit http://www.fasb.org

Also see "Stock Option Vote Nears," by Deepa Babington of Reuters: http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=2387996

Scandals
Securities fraud lawsuits were up 31% in 2002

Securities fraud lawsuits jumped to 224 in 2002, up 31% from a year ago, according to a study by Cornerstone Research and the Stanford Law School. Only 1998 saw more lawsuits, with 238.

The companies sued in 2002 lost $1.9 trillion in stock market value, and analysts blame the market losses as a key reason for the rise in suits. Analysts also blame the suits on the number of restatements -- there were 225 financial restatements last year, according to the General Accounting Office.


Enron execs charged in $111 million broadband deal

A pair of senior Enron executives were charged by federal prosecutors with securities fraud last week. The two executives, Kevin Howard and Michael Krantz, allegedly helped to create fraudulent earnings of $111 million from a video-on-demand deal with Blockbuster Inc. by booking future earnings in the present and then hiding debt in a secretive off-the-books partnership nicknamed "Project Braveheart."

The Securities and Exchange Commission, which filed civil charges, called the deal " a sham from its inception."

For more, see: "Maybe the Most Dubious of the Deals," by Floyd Norris of the New York Times: http://www.nytimes.com/2003/03/13/business/13PLAC.html

GOP strategist Reed got $300,000 from Enron

GOP strategist and former Christian Coalition leader Ralph Reed received $300,000 in consulting fees from Enron, according to a Federal Election Commission ruling last week that absolved him of any violations of campaign finance laws

Reed did work for Enron as far back is 1997, mostly to push electricity deregulation. The FEC noted "an apparent lack of work for the money" in 1998. In 2001, just months before Enron's bankruptcy, Reed was hired as a $30,000 a month consultant for "ongoing advice and counsel to Enron."

A New York Times article a year ago reported that Bush advisor Karl Rove had recommended Reed's firm to Enron. The FEC concluded that Reed's work was "bona fide," not designed to hide contributions to President Bush.

KMPG pays $200 million to settle Rite Aid and Oxford Heath suits

Accounting firm KPMG is paying $125 million for not noticing that Rite Aid overstated earnings by $1.6 billion and $75 million for not noticing problems that led to Oxford Health's $225 million restatement in 1997. As the companies' auditor, KPMG was responsible for flagging these problems, lawsuits alleged.

KPMG did not admit any wrongdoing in the suits.

For more, see "KPMG settles Rite Aid, Oxford suits for $200 million" by Deepa Babington of Reuters: http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=2360719

ImClone's Waksal pays a fraction of what he made to settle insider trading charges

Former ImClone chief executive Samuel Waksal agreed to pay $800,000 and never serve as a corporate officer again to settle insider trading charges with the Securities and Exchange Commission.

Waksal is accused of selling shares worth $5 million on insider information that federal regulators would reject the company's experimental cancer drug or more than six times the settlement. He is also charged with notifying family and friends, including Martha Stewart, of the impending bad news.

See: "Former ImClone CEO Waksal, SEC Reach Deal," by Gail Appleson of Reuters:
http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=2364375

ACTION
Fighting Back

Ohio activists ask Ohio House members to stipulate that the 14th Amendment only apply to people

Two pro-democracy/anti-corporate activists have sent an Open Letter to all 99 members of the Ohio House of Representatives calling on them to enact legislation that stipulates that the 14th Amendment only apply to human beings.

Since corporations received constitutional protections as the result of an 1886 Supreme Court decision, they have used these constitutional protections time and again to counteract attempts by citizens and governments to regulate their actions, using the 14th Amendment far more often than the real persons the law was intended to protect.

The two activists, Greg Coleridge of the Northeast Ohio American Friends Service Committee and Mike Ferner of the Program on Corporations, Law & Democracy, are hoping to call attention to this problem as the Ohio House prepares to ratify the 14th Amendment, which guarantees equal protection and due process rights to all citizens. Ohio, which did not ratify the amendment 135 years ago, is the only state never to have done so.

"In voting to finally ratify the 14th Amendment, the Ohio House of Representatives has much more than an opportunity to erase an embarrassment from its past," reads the letter. "It also has the opportunity, as no other democratically-elected body in this nation has ever had -- to be a prophetic voice supporting the 14th Amendment as a vehicle to advance the interests of all human persons rather than so-called corporate persons."

Citizens Prepare for 2nd annual Big Business Day

On Saturday, April 5th, hundreds of communities will participate in Big Business Day by organizing local events that communicate our message of challenging corporate power. This year's theme is Stop the Corporate War on Democracy. You can add your voice to a host of others by organizing an event in your community. Check out www.citizenworks.org/corp/bbd03.php to download posters, fact sheets, organizing materials and (soon) national map of local events.

Citizen Works is also organizing discussion groups on this and related topics in communities across the country. For information about either of these projects, contact Jennifer Tucker ([email protected]) or Katie Selenski ([email protected]) at Citizen Works, 202-265-6164

This Week's Action Item:
Tell FASB to require companies to expense stock options

The Financial Accounting Standards Board has said that they will overhaul current options rules. But they have not committed to calling for options to be expensed yet. They will meet on Wednesday to discuss stock options. We know that lots of corporate interests will be encouraging them to leave options expensing rules the same and continue to allow corporations to give away options for free while getting a tax deduction for them. That's why it's important that FASB members here from you!

As this week's action items, tell FASB to put an end to the steroids of corporate greed and require stock options to be counted as what they are - an expense.

Here are the e-mail addresses of FASB's board members:
G. Michael Crooch: [email protected]
Neel Foster: [email protected]
Robert Herz (Chairman): [email protected]
Gary Schieneman: [email protected]
Katherine Schipper: [email protected]
Edward Trott: [email protected]
John Wulff: [email protected]

Plug into Big Business Day

Citizen Works' second annual Big Business Day is April 5. This year's theme is Stop the Corporate War on Democracy. Hundreds of communities will participate by organizing local events that challenge corporate power. But Big Business Day will only be as good as you make it. That's why Citizen Works is calling on communities across the country to organize local events for Saturday, April 5.

We encourage you to begin planning an event in your community. Citizen Works will provide materials and assistance. To get involved, contact Jennifer Tucker ([email protected]) or Katie Selenski ([email protected]) at Citizen Works, 202-265-6164

RECOMMENDED READING:
Final Accounting: Ambition, Greed and the Fall of Arthur Andersen
By Barbara Ley Toffler
New York, Broadway Books, 2003. $24.95

Those who have followed the accounting profession's role in the recent corporate scandals have been waiting for a book like this - an informed account of how Arthur Andersen's culture of fee-stalking greed and arrogance led to its own demise.

It helps that Barbara Ley Toffler was trained as a social scientist, with years of experience teaching at some of the country's top business schools. Thus she can describe the "cultlike" culture at the Firm (she uses that Grisham-esque word deliberately) with some objectivity.

Hired by Andersen as a business ethics consultant, she is immediately exposed to business pressures that threaten her professional integrity. Her second day on the job, she was asked to put together an ethical argument on behalf of a client firm being sued for a faulty product. "It was a natural request, I suppose, but I certainly did not believe my job was to justify other companies' bad ethics. I was there to help them improve their business practices."

But no one rocks the boat too much if they want to stay anywhere for a while. "One of the powerful personal lessons of my Arthur Andersen experience is that, despite my self-image as a debunker … I basically went along with the culture. I was older, had a lot of experience, and had a natural inclination to challenge the status quo. But if I got caught up in much of the culture, what can we expect from young people entering an organization with no idea whether what is happening is normal or not?"

We're led to understand how warped the priorities of the profession became and how easy it was for young recruits to absorb those priorities, through a description of the employee indoctrination process, what she calls the "the making of an Android," whereby new employees come to understand the importance of such eminent accounting principles as "billing your brains out."

Much of that internal culture is traceable, as one would suspect, to external pressures from the 1990s new economy, particularly the growth in lucrative consulting opportunities. These helped Andersen maintain its leadership position, but ultimately destroyed the integrity the world's most respected accounting firm had built its reputation upon.

"We were greedy and the constant struggle to sell more and more work caused us to neglect the core reason we existed - to protect the investing public," one Andersen ex-employee acknowledged recently in a response to the book.

The book probably could have used some explanation of the political policies that exacerbated the accountants' greed. E.g. since she had little contact with the company's government affairs operations there is only passing reference to its role in tort reform. But the Private Securities Litigation Reform Act was critical to letting the accountants off the hook for aiding and abetting their corporate clients who committed fraud. Without that piece of the puzzle, apart from a nod to the need for more campaign finance reform, we get only tepid ideas for what should be done that fall within the framework of management culture and business ethics.
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News summaries based on original reports in other publications are prepared by Citizen Works staff and are not created, sponsored, approved or endorsed by the publications to which the original reports are attributed.