Acting under pressure
Published: Thursday, August 1, 2002 at 6:01 a.m.
Last Modified: Friday, August 2, 2002 at 12:23 p.m.
Who knows what makes the stock market go up and down?
But on the same day that John Rigas, the founder of the cable television giant Adelphia Communications Corp., his two sons and two other company executives were led away in handcuffs, the Dow Jones Industrial Average soared 489 points. It was the best percentage rise (6.3) since 1987.
The indictments are pretty straightforward: The family used the company as its "personal piggy bank," with John Rigas using more than $252 million to cover margin calls on family loans. Investors lost billions of dollars.
The handcuff scenario topped off several weeks of stories about WorldCom's accounting shell game that sent the second-largest long-distance carrier into bankruptcy.
Add to that the fall of Enron, in which accountants were paid lucrative consulting fees -- while not seeming to notice that shareholders' value was disappearing down a black hole -- and you have a nation ripe for reform.
It is ripe because a lot of Americans are watching their retirement nesteggs ooze into the nests. Members of Congress, with an election only months away, knew they had better do something.
And, finally, Congress did. It didn't seem as if the bill sponsored by Sen. Paul Sarbanes, D-Md., had much of a chance of passing when it was introduced. The Senate Banking Committee didn't like the regulatory aspects of it and the Republican-controlled House didn't care for it interfering with free enterprise.
What a difference a few corporate scandals make. By late last week, it was nearly impossible to find anyone who didn't support Sarbanes' legislation, which passed both houses with nearly unanimous support. This week, President Bush signed into law the legislation that he had once opposed.
"This law says to every dishonest corporate leader: You will be exposed and punished," Bush said in a signing ceremony on Tuesday. "The era of low standards and false profits is over."
Auditors will no longer be able to serve as accountants while collecting consulting fees -- which may be even higher than their accounting fees. A new board of accountancy will be formed, and the Securities and Exchange Commission will oversee it.
The bill did not require that stock options given to executives be reported as expenses. It's a shortcoming, but one that companies seem to be rushing to correct voluntarily. Last week, Coca-Cola announced it would report them on its books.
The major shortcoming in the law, however, is that instead of trying to prevent a catastrophe in the private sector, Congress had to rush legislation to passage in response to one.
Such haste can mean that unintended consequences weren't considered. It may result in corporate executives doing jail time for something of which they weren't aware.
But, then again, Congress has been considering such reforms for years, and has had ample time to address such issues -- if it had only acted. Legislation hammered out during the heat of the moment is always less perfect than laws deliberately crafted.
An overworked SEC will pick up added money for additional enforcement officers. And, perhaps, the White House and Congress can get on with business and fill two empty seats on the SEC as well as give confirmation to two other appointees. A more aggressive chairman than incumbent Harvey Pitt wouldn't be a bad idea either.
The new law should help restore public confidence in the American free enterprise system. But what really makes the difference -- and will make CEOs think twice -- are the images of John Rigas and his sons walking away in handcuffs.
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