Corporate reforms have firms changing operations

and Lisa Girion ~ Los Angeles Times

WASHINGTON -- President Bush signed historic accounting reform legislation into law Tuesday as corporate executives, auditors, lawyers and Wall Street analysts braced for a significant change in the way they do business.

At the White House's carefully orchestrated signing ceremony, Bush stressed the punitive aspects of the most far-reaching business reforms since the Depression -- measures that appeared all but dead just a few months ago.

"No more easy money for corporate criminals, just hard time," Bush said.

But while the prospect of tough prison sentences for white-collar criminals has captured the spotlight, experts say the law's most sweeping changes concern corporate governance.

Lawyers, for instance, will have increased responsibility to inform corporate boards of directors of misdeeds. And the boards' audit committees must operate independently of management.

Like much of the law, the audit committee requirements will be spelled out in detail by the Securities and Exchange Commission in regulations that could take three to six months to complete. But the requirements are so substantial that some companies already are scouting for qualified audit committee members.

"Given the things that have to be done, people need to start immediately to comply," said John Harkins, a partner in the Philadelphia law firm of Harkins Cunningham who specializes in corporate litigation and governance. "Companies can't wait until the last minute." Finding qualified financial experts, such as public accountants, auditors or controllers will be hard enough. But finding people willing to devote the time necessary to meet the new duties could be a challenge, he said.

Mixed market signal

In recent weeks, as the reform bill worked it way through Congress, Bush and lawmakers rallied behind it as a way to restore investor confidence that had been shaken badly by a spate of business scandals. But the financial markets sent a mixed signal Tuesday as the measure became law.

The Dow Jones Industrial Average lost 32 points, while Nasdaq and the S&P registered slight gains. Analysts welcomed the results as a sign the market might be stabilizing.

Whether the new law fulfills its promise of restoring integrity to financial markets will depend heavily on the SEC, which has been criticized strongly by some people for not moving aggressively enough to root out corporate misdeeds.

The bill's congressional sponsors promised to keep an eye on the agency. "We'll be watching very closely," Sen. Paul Sarbanes, D-Md., the bill's chief architect, said after attending the signing ceremony.

Investor groups said they also will be monitoring the bill's implementation.

"This new law has the potential to dramatically improve the quality and independence of the audits of public companies and, in so doing, to increase the reliability of corporate disclosures," said Barbara Roper, director of investor protection for the Consumer Federation of America. "But it will only live up to that potential if everyone does their part, starting with SEC chairman Harvey Pitt and the SEC."

The law gives the SEC 90 days to appoint the five members of a new, independent board to oversee the accounting industry. Reform advocates have touted this board as essential to more effectively policing the accounting industry and preventing the type of accounting abuses that have surfaced in recent months.

Tougher penalties

The bill establishes tougher criminal penalties for white-collar crimes, including quadrupling, to 20 years, the maximum prison sentence for mail and wire fraud. It also establishes a new crime of securities fraud, punishable by up to 25 years in jail.

But experts predicted the law's longer sentences for corporate crimes would have little, if any, impact on the behavior of officers, directors and consultants who are inclined to cross the line. And, it is unclear how many more cases federal investigators and prosecutors will be able to take to trial - even with added resources.

The law is expected to hit small companies harder than big ones.

"From a smaller, emerging growth company perspective, it will probably make it more difficult to attract qualified board directors," said Mark Heesen, president of the National Venture Capital Association. With the greater exposure to liability for directors that's in this bill, you could see some people who are already squeamish about sitting on boards saying, `Is it really worth it?`" As a result, he said, small companies might have to spend more time and resources recruiting directors, and they might have to settle for less qualified directors than they have in the past.

Regulatory-wary Republicans - including Bush - initially had resisted some of the law's key measures, which were sparked by the financial collapse late last year of Enron Corp. But the revelations in late June of accounting irregularities by WorldCom roiled the markets, rekindled interest in corporate reform and ultimately created virtually unanimous support in Congress for a tough measure.