WASHINGTON – President Bush wants to create a watchdog agency to monitor the accounting industry and would strip chief executives of bonuses in certain misconduct cases under a package of initiatives meant to enforce corporate responsibility following the Enron collapse.
Bush is pressuring companies to come clean with investors and auditors to be objective in the aftermath of the Enron bankruptcy, which threatened to inflict political damage on the White House. The energy-trading company, the most generous corporate backer of Bush's career, hid more than $1 billion in debt and its auditors blessed its financial statements.
Many investors have been unnerved by the Enron debacle and distrustful of the accuracy of the financial reports of big companies, and their skepticism has hurt the stock market in recent weeks.
On Thursday, Bush was releasing a 10-point plan that bundled various proposals made recently by the head of the Securities and Exchange Commission and by lawmakers. Bush was to outline them in a speech Thursday.
"Reform should improve investor confidence and help our economy grow," Bush said in remarks prepared for delivery Thursday morning. "It is important to provide regulation and remedies where needed, without inviting a rush of new lawsuits that exploit problems instead of solving them."
Among Bush's proposals is one that would create an independent regulatory board under the supervision of the SEC to "develop standards of professional conduct and competence." The board would monitor, investigate and enforce its "ethics principles" by punishing offenders.
Lawmakers, the SEC and the Justice Department are investigating Enron and the role of its longtime auditor, the Arthur Andersen accounting firm, in Enron's collapse. The company entered the biggest corporate bankruptcy in U.S. history on Dec. 2.
SEC Chairman Harvey Pitt, who was appointed by Bush, had proposed a new private-sector body to regulate the accounting profession, which would be dominated by executives and experts from outside the accounting industry.
But some experts say a new federal regulatory agency should be created for the accounting profession, which is currently self-policing.
Under Bush's proposal, the government would bar external auditors from performing any other services such as consulting for the same corporate client, if that other service "compromises the independence of the audit." Anderson performed both auditing and consulting for Enron.
Bush also proposed that CEOs be forced to pay back bonuses and other "incentive-based" compensation in cases of accounting restatements stemming from misconduct. The White House didn't say who would investigate or enforce this. Some of Bush's proposals would require new laws; others could be simply implemented by the SEC.
Enron executives got hundreds of millions of dollars in bonuses — totaling some $320 million last year alone — as rewards for hitting stock-price targets. The targets were reached at the same time investigators say Enron officials were improperly inflating company profits by hundreds of millions of dollars, thereby buoying share prices.
The company issued restatements that sliced nearly $600 million off its earnings.
Pitt floated this idea last month, not mentioning Enron but saying there were cases in which executives reaped the benefit of falsely reported profits but did not suffer the consequences when the profits subsequently had to be restated — as investors did. Bonuses and stock options rise in value with the company's stock price.
Pitt said the SEC could start doing this by adopting new rules or using its existing powers. The idea would be to recover the money from the executives — if there was misconduct — to give it to investors who were defrauded. The SEC now does this in cases of insider trading, but bonuses would be new.
It wasn't clear whether this proposal could apply retroactively to Enron executives.
Bush would also force CEOs to personally vouch for the veracity of information in their financial statements. Top executives who "clearly abuse their power" could be banned from any corporate leadership positions.
Moreover, they would be forced to tell the public "promptly" when they sell or buy company stock for "personal gain." Currently, the lag time can be 40 days for open-market transactions, and more than a year for personal transactions with their companies.
The White House also proposed that investors have quarterly access "in plain English" to corporate information needed to judge a firm's financial performance and risks. Currently, firms must release an array of financial disclosure reports quarterly; it wasn't apparent what Bush would change.
Bush would also expand the list of "significant events" requiring prompt disclosure between reporting periods.