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Campaign to Deregulate Set the Stage for Corporate Scandals

July 18, 2002

Campaign to Deregulate Set the Stage for Corporate Scandals

Crime Wave in Boardrooms Springs From Weak Oversight, Public Citizen President Joan Claybrook Tells Lawmakers

WASHINGTON, D.C. ? The recent wave of corporate scandals results directly from a decades-long campaign waged by Corporate America to diminish or eliminate executive accountability and dismantle vital safeguards for consumers, workers and pensioners, Public Citizen President Joan Claybrook told lawmakers today.

The Bush administration and Congress are talking tough about cleaning up corporate crime, but unless the deregulatory drive is stopped, meaningful reforms are made and members of the administration ? most notably Army Secretary Thomas White ? are held accountable for their actions in the corporate world, those words will ring hollow, Claybrook said.

“To put an end to the crime wave, Congress and the White House must stand up to the corporate lobbyists and start legislating and governing on behalf of the American people,” Claybrook said. “We need strong regulation of corporations ? standards that will prevent wrongdoing and punish executives who violate the public trust.”

The cascade of corporate criminal accounting scandals and its negative impact on Wall Street are forcing members of Congress for the first time in decades to pass strong financial accounting legislation long blocked by the industry, Claybrook said.

During testimony before the subcommittee on Consumer Affairs, Foreign Commerce and Tourism of the Senate Committee on Commerce, Science and Transportation, Claybrook renewed her call for the resignation of White, whom she called a “poster boy for corporate abuse.” White headed an Enron Corp. subsidiary that manipulated energy markets and prices during the California energy crisis and used questionable accounting methods to inflate profits. He also has been late in reporting stock sales to the Securities and Exchange Commission (SEC), as required by law, was slow to divest his Enron holdings, and flew on an Army jet at taxpayer expense to sign papers on the sale of his Colorado estate.

Claybrook praised the Sarbanes accounting reform bill, passed by the Senate on July 15 but said it should be stronger. While Public Citizen supports the bill and many of its reforms, it still allows many consulting services to be performed by companies in charge of audits, at the very least creating conflicts of interest for accountants.

Claybrook released a new Public Citizen analysis of consulting fees paid by the top 20 companies in the United States and another 29 companies that are embroiled in accounting scandals. The analysis found that there was a close parallel between these two groups in terms of the percentage of total accounting fees that went to non-audit consulting. In 2001, the top 20 group paid a total of $880 million to accounting firms, and of that, $636 million, or 72 percent, went for consulting services rather than auditing. The 29 companies in trouble paid a total of $378 million in fees ? 75 percent of which went for non-audit services. Arthur Levitt, former head of the SEC, sought to end this conflict in the 1990s, but amid the deregulatory climate and a hailstorm of lobbying and campaign contributions by accounting firms, his proposal was quashed.

“The weak financial regulatory system has failed the American people,” Claybrook said. “But we have seen politicians of both parties rush to assuage their campaign contributors by whittling away vital protections at the behest of the powerful corporate entities that fill their campaign coffers.”

Many of the scandals now coming to light would not have occurred without the poor enforcement of some existing regulations, the sharp curtailment of others and the stymieing of new regulations by well-funded corporate lobbying campaigns. Not nearly enough is being done to slow the deregulatory drive, Claybrook said. For example:

  • Recently approved Senate energy legislation would repeal the Public Utility Holding Company Act (PUHCA), currently the most important protection the federal government provides for electricity consumers. The act restricts utility companies from investing ratepayers? money in areas that do not contribute directly to the provision of reliable, affordable electricity. Had the act not been punched with loopholes at the encouragement of Enron, undermined by a 1992 deregulation law and poorly enforced by the SEC, Enron?s fraud against shareholders and consumers could not have occurred.
  • The Sarbanes bill doesn?t address one of the major underlying incentives for crooked executives to cook the books ? the practice of granting stock options. Current laws do not require that these be counted as expenses on profit and loss statements, resulting in vast amounts being distributed to executives, who then have enormous incentives to create short-term increases in stock prices so they can cash out the options before prices plummet.
  • Victims of securities fraud lost a vital tool in the 1990s with the gutting of their rights under liability laws. The Private Securities Litigation Reform Act, passed after the Republican takeover of Congress in 1995, gave protection to accounting firms that approved false earning statements and allowed immunity from private lawsuits for accountants that failed to spot or disclose fraud. Laws passed in 1996 and 1998 severely limited the possibility of recovery by defrauded investors and forced class actions to be tried in federal courts under weakened federal laws.

Claybrook made specific recommendations to improve investor recovery for fraud, limit corporate executives? abuses of stock options and increase their accountability, increase auditor responsibility, prevent pension abuses so that employees will not lose their life savings because of executive corruption, and increase the staffing and funding of the SEC, while ensuring the transparency of the agency?s actions.

Click here to view a copy of Claybrook’s testimony.?Click here to view a?copy of the analysis of corporations spending on non-audit services.