Antifraud laws likely to help calm investors

Accounting-oversight viewed as strongest part of new legislation

In places, more bark than bite

But some experts doubt any naughty CEO will feel full teeth of regulations

August 04, 2002|By William Patalon III | William Patalon III,SUN STAFF

Less than 24 hours after President Bush on Tuesday signed into law regulations to toughen oversight of the U.S. financial system, Washington attorney Warren L. Dennis was receiving e-mail from corporate directors whom he represents.

Within the array of new regulations were some stringent requirements demanding that corporate board members adopt a watchdog role to guard against inappropriate actions by top management - a responsibility that directors had often been pressured to abdicate during the go-go days of the 1990s.

The impact was immediate: Some of the e-mail messages were actually copies of letters the directors had started sending Wednesday to the firms of which they were board members, and were critical of - or even challenged - management decisions.

If the new rules spawn a rebirth in activism by corporate boards, that could help rekindle investor confidence in a financial system tattered by fraud and scandal, insist experts such as Dennis. "It is going to flow down [to investors]," said Dennis, a senior partner and litigation specialist with Proskauer Rose LLP, a law firm based in New York. "It's going to bring the balance back from Wall Street to Main Street."

As important as these new rules of director conduct might be, that's not where the political focus has been. Indeed, despite the long list of the changes the new regulations will bring to the U.S. financial system, most of the attention has been centered on the creation of new oversight for accountants, and the longer jail sentences for those who violated securities regulations.

The proposals for financial-system reform were rolled out with huge fanfare by Congress and labeled by the president as the most crucial financial reforms since those passed during the Great Depression.

While experts generally agree that the symbolic nature of the new rules alone should give consumer and investor confidence a boost, some observers see a few of the pieces as having more bark than bite - since the longest fangs will likely never pierce the flesh of offenders.

"This was something done by Congress just so that they could be seen doing something," said Charles H. Roistacher, a former U.S. prosecutor now in private practice as a defense attorney specializing in white-collar crime, describing the new rules that call for the long jail terms for executives who commit fraud.

Individual pieces of the overall regulations are likely to vary in merit. And with the legislation being signed only last week, other pieces have yet to take form. But once finished, many experts say, these additional guidelines and reforms will combine to form a framework of regulation, oversight and accountability that should temper fraud or shackle offenders with stiffer penalties.

Viewed that way, the overall benefits of the newly passed legislation are clear, said Sen. Paul S. Sarbanes, the Maryland Democrat who chairs the Senate banking committee.

"Two things are at work in this bill," Sarbanes said. "From a judicial standpoint, it establishes punishments and sanctions that punish the `bad apples' ... obviously you want to punish the bad apples, but you also want to tighten up the system to the extent that you can in order to prevent the bad apples from ever emerging. You can't get 100 percent [success], but the whole financial system had gotten extremely lax."

The reforms "tighten" the financial system in a number of areas, with most of the focus being on large U.S. public companies. The rules require CEOs to vouch for their corporate financial statements and expose them to possible jail terms and fines for intentional deceptions. Securities fraud in general will carry longer maximum sentences.

Under the new laws, accountants for the first time have independent oversight. In most cases, a firm's outside auditors may no longer double as consultants for the same client. And they call for the Securities and Exchange Commission to draft new rules that will govern the conduct of Wall Street analysts.

All in all, "it's a step," said Richard Yamarone, chief economist for Argus Research Corp. in New York. "It comes at a point when consumers are not opening up their financial statements and not watching the evening news."

The desire to escape this period of listlessness has politicians highlighting - and investors focusing on - two parts of the new rules: One has a full set of teeth, while the other may never even get the chance to bite, experts say.

The new accounting-oversight rules are the ones with teeth, and are viewed as both needed and strong.

The regulations call for the formation of a five-member oversight board - appointed by the Securities and Exchange Commission - who in turn will enforce accounting standards.

"I really believe this oversight is going to become very important," said April Klein, associate professor of accounting at New York University's Stern School of Business.

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