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SEC Chairman Asked to ResignNew York Times by Senator John McCain July 8, 2002
WASHINGTON - In a string of corporate failures and scandals from Enron to WorldCom, we have seen the first principles of free markets transparency and trust fall victim to corporate opportunists exploiting a climate of lax regulation. I have long opposed unnecessary regulation of business activity, mindful that the heavy hand of government can discourage innovation. But in the current climate only a restoration of the system of checks and balances that once protected the American investor and that has seriously deteriorated over the past 10 years can restore the confidence that makes financial markets work.
Congress and the president must move quickly to frame legislation and reform corporate governance and government oversight. And I would add one more suggestion: they should ask for the resignation of Harvey Pitt, chairman of the Securities and Exchange Commission. While Mr. Pitt may be a fine man, he has appeared slow and tepid in addressing accounting abuses, and concerns remain that he has not distanced himself enough from former clients.
The need for government action and oversight is clear. Corporations fabricated revenues, disguised expenses and established off-balance-sheet partnerships to mask liabilities and inflate profits. Executives maximized their compensation with stock option plans that burdened their companies with huge costs hidden from investors. Venerable accounting firms, having looked the other way as companies cooked the books, shredded documents to hide their misdeeds. Although American tax policy encouraged them to do so, corporations that move their legal headquarters offshore to avoid taxes appear conspicuously ungrateful to the country whose young men and women are risking their lives today to defend them.
Reforms must ensure a complete separation of the auditing and consulting services provided by an accounting firm; a firm that audits a company must be prohibited from providing any consulting service ever to that company. Legislation sponsored by Senator Paul Sarbanes would create an Accounting Oversight Board to establish and enforce the standards for audits of publicly traded companies. But this oversight board should be completely independent from the industry, financed either as part of the S.E.C. or a separate agency.
Stock options, while a legitimate and valuable form of employee compensation, must be identified as an operating expense in a public company's financial reports. Top executives should be precluded from selling their own holdings of company stock while serving in that company. Executives should be allowed to exercise their options, but their net gain after tax should be held in company stock until 90 days after they leave the company.
Executives should be required to return all compensation directly derived from proven misconduct. Also, a corporate compensation committee should be made up of members of the board who have no material relationship with the company or personal relationship with its management. Indeed, the entire board should be similarly independent, with the exception of the chief executive.
Top executives should be required to certify personally that the company's public financial reports are accurate and that all information material to the financial health of the company has been disclosed. If their certification is false, they should go to jail.
Government should remove egregious conflicts of interest in "full-service" financial institutions. Investment services, including research, should be separated from lending, underwriting and securities trading.
Even as we take these and other necessary measures, asking for the resignation of Mr. Pitt would help show the public our seriousness. During his first 10 months as S.E.C. chairman, he did not participate in 29 of the commission's votes, most of which involved his former clients. To address corporate misconduct, he seems to prefer industry self-policing to necessary lawmaking. Government's demands for corporate accountability are only credible if government executives are held accountable as well.
What is at risk is the trust that investors, employees and all Americans have in our markets and, by extension, in the country's future. To love the free market is to loathe the scandalous behavior of those who have betrayed the values of openness that lie at the heart of a healthy and prosperous capitalist system.
John McCain, a Republican, is a senator from Arizona.
All the President's EnronsNew York Times by Frank Rich July 8, 2002
(7/6/02) - George W. Bush is so peeved about corporate America's "wrongdoers" not to be confused with "evildoers" that last week he spoke out about them four times in four days. By the time he took a breather, the markets had hit their worst half-year finish since 1970, the Nasdaq was at a five-year low, the dollar was on the skids and, despite much evidence to the contrary, a majority of Americans had told CNN/USA Today pollsters that the country was in a recession.
On Tuesday the president returns to the subject in a full-dress speech on Wall Street. Maybe it's time to try pinning the whole mess on Ann Richards again.
Mr. Bush keeps saying all the right things. He is "deeply concerned." He will "hold people accountable." But words, like stocks, lose value when nothing backs them up. It is now more than six months since the president promised "a lot of government inquiry into Enron." Since then, Playboy has done a better job of exposing the women of Enron than the Bush administration has done at exposing its men. Just as the Justice Department rounded up some 1,000 alleged Sept. 11 suspects and failed to indict a single one of them for terrorist activity, so it has made a big show of its shaky Andersen conviction while failing to indict a single Enron executive or individual Andersen accountant. (Not that all the law-enforcement news is downbeat: last month John Ashcroft's minions held a press conference to boast that a 13-month investigation had led to the arrest of 12 prostitutes in New Orleans.)
The sight of a corporate crook being led away in handcuffs, Giuliani-style, would do far more to restore confidence in Wall Street than any more presidential blather. Mr. Bush says that only "a few bad actors" are at fault. Why is the administration so lax about bringing them to justice?
That may have something to do with who those "few bad actors" are. Speaking on ABC's "This Week," Richard Grasso, chairman of the New York Stock Exchange, tossed out a range of 1 to 15 as the rough count of corporate culprits, "in comparison to more than 10,000 publicly traded corporations." The fact remains that so far at least five members of that theoretically tiny club have direct ties to the Bush administration: Enron, Halliburton, Andersen, KMPG and Merrill Lynch the last three all former clients of the president's choice as Wall Street's top cop, the S.E.C. chairman Harvey Pitt. Five for 15: Mr. Bush could have used a batting average that high when he ran the Texas Rangers.
Despite this record, there has been only balking, not housecleaning, at the White House. Thomas White, who was vice chairman of Enron Energy Services when it allegedly hid $500 million in losses and manipulated the California energy crisis, is still secretary of the Army, despite having been cited by the Senate Armed Services Committee for violating his signed ethics agreement. (Even worse, Mr. White has threatened to bring to the Army his "understanding of best business practices.") The record of Enron contacts by him and countless other administration officials remains incomplete and in constant revision. What information does dribble out often emanates from the White House counsel, Alberto Gonzales, who himself had an attorney-client relationship with Enron while a partner at Vinson & Elkins in Houston.
Perhaps it's Mr. Gonzales who, as the administration's chief ethics maven, advised the White House this week on how to handle the 1991 S.E.C. report showing that Mr. Bush had filed disclosures of his stock trades in Harken Energy, where he was a director, as much as eight months late. The ethical call? Blame Harken's lawyers. A presidential spokesman assured us as well that this infraction amounted to nothing more than driving 60 in a 55-mile-per-hour zone. That will surely bring good cheer to those Harken shareholders who were left holding the stock that Mr. Bush sold, with no insider's knowledge, of course, just before it tanked.
WorldCom is a political boon to the president because it allows him to moralize about epic-scale crime without mentioning Enron, Halliburton or Harken. But the Enron bomb hasn't been defused. Its next detonation may come the day someone outside the administration unearths the as-yet mostly secret names of those buddies of Enron executives who were let into the hundreds of side partnerships that overnight yielded multimillion-dollar plunder on nominal stakes (with ordinary stockholders left paying the bill). "Not in memory has a single major company grown so big in tandem with a presidential dynasty and a corrupted political system," wrote the Republican political analyst Kevin Phillips in The Los Angeles Times five months ago, tracing Bush family favor-swapping with Enron back to 1988 and likening Enron's potential damage to that of the Harding administration's Teapot Dome scandals. "The question now is whether what went up together will come down together."
It's a question only Mr. Bush can answer. He can give the oil cronies within his administration an ethical pass, much as Harding did. He can keep trying to finesse the Wall Street crisis with rhetorical panaceas as empty as his father's "Message: I care" response to his own economic storm. Or he can fulfill a campaign promise and become a reformer with results, a Teddy Roosevelt who cleans up capitalism to make it stronger.
No flowery speeches are required to describe the reforms needed now, from fully independent policing of accounting firms to the complete prohibition of conflicts of interest that encourage both accountants and stockbrokers to cut corners. "No off-balance-sheet or offshore entities, no shell corporations, no sham transactions," adds Robert Morgenthau, the Manhattan district attorney, who is pursuing Enron more aggressively than the administration is. Arthur Levitt, the former S.E.C. chairman, urges legislation that increases the legal liability for investment bankers, lawyers and accountants who aid, abet and also profit from corporate Ponzi schemes.
The president could get real reform "in a heartbeat," says Eliot Spitzer, the New York attorney general, who went after Merrill Lynch while the Pitt S.E.C. slept. "All he has to do is call Oxley" Michael Oxley, who is steering a weak Republican "reform" bill through the House "and say this is the bill we're passing instead." But that's about as likely as Martha Stewart discovering a cure for cancer instead of trying to cash in on one. Mr. Bush has already opposed the notion of requiring corporations to count executive stock options as expenses a simple fix endorsed by Alan Greenspan and Warren Buffett as an antidote to fictional profits. The Treasury Department, Newsweek reports, is hard at work stifling a bill that would end the offshore shenanigans that allowed Enron (with 800-plus such entities) to evade taxes in four out of five years.
Even within existing law, the Bush administration's notion of enforcement is the antithesis of T.R.'s: it speaks loudly and carries a small stick. On Wednesday a judge threw out an S.E.C. action against the accounting firm Ernst & Young because the S.E.C. could not muster the quorum of conflict-free commissioners required by law to bring its case; both Mr. Pitt and another Bush S.E.C. appointee had previously worked for Ernst & Young. Mr. Pitt's conflicts also include meeting privately with Xerox and KPMG executives while their companies are under investigation by his agency. "It's like the mob's consigliere running the F.B.I," in the words of Marshall Wittmann, a T.R.-minded conservative Republican at the Hudson Institute.
As Mr. Bush blames others for his Harken mishaps, so Mr. Pitt's new shtick is to hide behind Bill Clinton, telling Matt Lauer, "this is, unfortunately, a mess that I inherited from the prior administration." But it was Mr. Pitt who invited the likes of WorldCom to play fast and loose by implying last fall that no one need fear the "kinder and gentler" S.E.C. he would install in place of Mr. Levitt's, which initiated the Xerox and Rite Aid cases that Mr. Pitt would now like to take credit for.
It's not that Democrats are clean. When Al Gore blasted Mr. Pitt last weekend for having led the accounting industry's drive "to open up loopholes" in the 1990's, he could have been describing his own ticket mate, Joe Lieberman, who was second to none in doing the accounting industry's bidding. But the Democrats don't have the power to undo the damage anyway. It is Mr. Bush who is C.E.O. If he doesn't bring zero tolerance of corporate cheating to his own White House, it's hard to imagine Americans rushing back into the market trusting that his administration will enforce it anywhere else.
Bushs Success in BusinessNew York Times by Paul Krugman July 8, 2002
(7/7/02) - On Tuesday, George W. Bush is scheduled to give a speech intended to put him in front of the growing national outrage over corporate malfeasance. He will sternly lecture Wall Street executives about ethics and will doubtless portray himself as a believer in old-fashioned business probity.
Yet this pose is surreal, given the way top officials like Secretary of the Army Thomas White, Dick Cheney and Mr. Bush himself acquired their wealth. As Joshua Green says in The Washington Monthly, in a must-read article written just before the administration suddenly became such an exponent of corporate ethics: "The `new tone' that George W. Bush brought to Washington isn't one of integrity, but of permissiveness. . . . In this administration, enriching oneself while one's business goes bust isn't necessarily frowned upon."
Unfortunately, the administration has so far gotten the press to focus on the least important question about Mr. Bush's business dealings: his failure to obey the law by promptly reporting his insider stock sales. It's true that Mr. Bush's story about that failure has suddenly changed, from "the dog ate my homework" to "my lawyer ate my homework four times." But the administration hopes that a narrow focus on the reporting lapses will divert attention from the larger point: Mr. Bush profited personally from aggressive accounting identical to the recent scams that have shocked the nation.
In 1986, one would have had to consider Mr. Bush a failed businessman. He had run through millions of dollars of other people's money, with nothing to show for it but a company losing money and heavily burdened with debt. But he was rescued from failure when Harken Energy bought his company at an astonishingly high price. There is no question that Harken was basically paying for Mr. Bush's connections.
Despite these connections, Harken did badly. But for a time it concealed its failure sustaining its stock price, as it turned out, just long enough for Mr. Bush to sell most of his stake at a large profit with an accounting trick identical to one of the main ploys used by Enron a decade later. (Yes, Arthur Andersen was the accountant.) As I explained in my previous column, the ploy works as follows: corporate insiders create a front organization that seems independent but is really under their control. This front buys some of the firm's assets at unrealistically high prices, creating a phantom profit that inflates the stock price, allowing the executives to cash in their stock.
That's exactly what happened at Harken. A group of insiders, using money borrowed from Harken itself, paid an exorbitant price for a Harken subsidiary, Aloha Petroleum. That created a $10 million phantom profit, which hid three-quarters of the company's losses in 1989. White House aides have played down the significance of this maneuver, saying $10 million isn't much, compared with recent scandals. Indeed, it's a small fraction of the apparent profits Halliburton created through a sudden change in accounting procedures during Dick Cheney's tenure as chief executive. But for Harken's stock price and hence for Mr. Bush's personal wealth this accounting trickery made all the difference.
Oh, and Harken's fake profits were several dozen times as large as the Whitewater land deal though only about one-seventh the cost of the Whitewater investigation.
Mr. Bush was on the company's audit committee, as well as on a special restructuring committee; back in 1994, another member of both committees, E. Stuart Watson, assured reporters that he and Mr. Bush were constantly made aware of the company's finances. If Mr. Bush didn't know about the Aloha maneuver, he was a very negligent director.
In any case, Mr. Bush certainly found out what his company had been up to when the Securities and Exchange Commission ordered it to restate its earnings. So he can't really be shocked over recent corporate scams. His own company pulled exactly the same tricks, to his considerable benefit. Of course, what really made Mr. Bush a rich man was the investment of his proceeds from Harken in the Texas Rangers a step that is another, equally strange story.
The point is the contrast between image and reality. Mr. Bush portrays himself as a regular guy, someone ordinary Americans can identify with. But his personal fortune was built on privilege and insider dealings and after his Harken sale, on large-scale corporate welfare. Some people have it easy.
Bush Brushes Off QuestionsReuters July 3, 2002
(7/2/02) - MILWAUKEE (Reuters) - President Bush brushed off a question on Tuesday about whether he may have benefited from a sweetheart deal as a Texas oil man more than a decade ago, saying "everything I do is fully disclosed."
New York Times columnist Paul Krugman on Tuesday suggested that Bush's dealings may bear similarities to the accounting scandals at Enron Corp and other companies that have undermined faith in corporate America and dragged the stock market down.
Enron has been accused of misleading investors about its accounts and there have been questions about whether executives may have benefited by selling shares inflated by the misleading financial information.
Krugman cited a story in March in the Wall Street Journal reporting that Harken Energy paid $2 million for Spectrum 7, a small, money-losing energy company with large debts where Bush was chief executive officer.
The columnist said Harken was losing money but hid most of these losses in 1989 with profits it reported by selling a subsidiary, Aloha Petroleum, to a group of Harken insiders who borrowed much of the money from Harken for the purchase.
Krugman said the Securities and Exchange Commission (SEC) ultimately ruled that this was a phony transaction and forced the company to restate its 1989 earnings.
Before this ruling, however, Krugman said Bush, who served as a Harken board member and on its audit committee, sold two-thirds of his stake for $848,000 and did not inform the SEC for 34 weeks despite laws requiring prompt disclosure of insider sales.
The columnist said an internal SEC memorandum concluded that Bush had broken the law but no charges were filed.
Asked by a reporter about the column and the possibility that his sale amounted to the corporate misbehavior that he himself is now criticizing, Bush curtly replied: "Everything I do is fully disclosed, it's been fully vetted."
Bush, who has railed against corporate misdoing in recent weeks, is expected next week to unveil a proposal for tougher penalties for company executives that mislead investors about their company's accounts.
See the mentioned article below:
Everyone Is OutragedNew York Times by Paul Krugman July 3, 2002
Arthur Levitt, Bill Clinton's choice to head the Securities and Exchange Commission, crusaded for better policing of corporate accounting though he was often stymied by the power of lobbyists. George W. Bush replaced him with Harvey Pitt, who promised a "kinder and gentler" S.E.C. Even after Enron, the Bush administration steadfastly opposed any significant accounting reforms. For example, it rejected calls from the likes of Warren Buffett to require deduction of the cost of executive stock options from reported profits.
But Mr. Bush and Mr. Pitt say they are outraged about WorldCom.
Representative Michael Oxley, the Republican chairman of the House Financial Services Committee, played a key role in passing a 1995 law (over Mr. Clinton's veto) that, by blocking investor lawsuits, may have opened the door for a wave of corporate crime. More recently, when Merrill Lynch admitted having pushed stocks that its analysts privately considered worthless, Mr. Oxley was furious not because the company had misled investors, but because it had agreed to pay a fine, possibly setting a precedent. But he also says he is outraged about WorldCom.
Might this sudden outbreak of moral clarity have something to do with polls showing mounting public dismay over crooked corporations?
Still, even a poll-induced epiphany is welcome. But it probably isn't genuine. As the Web site dailyenron.com put it, last week "the foxes assured Americans that they are hot on the trail of those missing chickens."
The president's supposed anger was particularly hard to take seriously. As Chuck Lewis of the nonpartisan Center for Public Integrity delicately put it, Mr. Bush "has more familiarity with troubled energy companies and accounting irregularities than probably any previous chief executive." Mr. Lewis was referring to the saga of Harken Energy, which now truly deserves a public airing.
My last column, describing techniques of corporate fraud, omitted one method also favored by Enron: the fictitious asset sale. Returning to the ice-cream store, what you do is sell your old delivery van to XYZ Corporation for an outlandish price, and claim the capital gain as a profit. But the transaction is a sham: XYZ Corporation is actually you under another name. Before investors figure this out, however, you can sell a lot of stock at artificially high prices.
Now to the story of Harken Energy, as reported in The Wall Street Journal on March 4. In 1989 Mr. Bush was on the board of directors and audit committee of Harken. He acquired that position, along with a lot of company stock, when Harken paid $2 million for Spectrum 7, a tiny, money-losing energy company with large debts of which Mr. Bush was C.E.O. Explaining what it was buying, Harken's founder said, "His name was George Bush."
Unfortunately, Harken was also losing money hand over fist. But in 1989 the company managed to hide most of those losses with the profits it reported from selling a subsidiary, Aloha Petroleum, at a high price. Who bought Aloha? A group of Harken insiders, who got most of the money for the purchase by borrowing from Harken itself. Eventually the Securities and Exchange Commission ruled that this was a phony transaction, and forced the company to restate its 1989 earnings.
But long before that ruling though only a few weeks before bad news that could not be concealed caused Harken's shares to tumble Mr. Bush sold off two-thirds of his stake, for $848,000. Just for the record, that's about four times bigger than the sale that has Martha Stewart in hot water. Oddly, though the law requires prompt disclosure of insider sales, he neglected to inform the S.E.C. about this transaction until 34 weeks had passed. An internal S.E.C. memorandum concluded that he had broken the law, but no charges were filed. This, everyone insists, had nothing to do with the fact that his father was president.
Given this history and an equally interesting history involving Dick Cheney's tenure as C.E.O. of Halliburton you could say that this administration is uniquely well qualified to chase after corporate evildoers. After all, Mr. Bush and Mr. Cheney have firsthand experience of the subject.
And if some cynic should suggest that Mr. Bush's new anger over corporate fraud is less than sincere, I know how his spokesmen will react. They'll be outraged.
Follow the link below to Mr. Krugmans previous article:
Bush: Criminal CEOs Need JailCNN Money July 2, 2002
(6/29/02) - NEW YORK (CNN/Money) - President Bush vowed Saturday to protect the economic security of Americans and called for new rules to enforce corporate responsibility, following this week's disclosure of massive accounting irregularities at WorldCom.
In his weekly radio address, which is pre-recorded, Bush said he would press Congress to pass the 10-point plan he proposed in March to improve corporate responsibility, including forcing executives to lose all money they gain by fraud and serving jail time, if found criminally negligent.
"When bad accounting practices make the company appear to be more successful than it actually is, corporate executives should lose their phony profits gained at the expense of employees and stockholders," he said.
Bush's March proposal was prompted by the scandal involving energy giant Enron, which filed the biggest bankruptcy in U.S. history last December. Thousands of Enron employees lost their retirement savings when the company went under. Its accounting practices have been the focus of a Justice Department inquiry.
Calling WorldCom's revelations "deeply troubling," Bush noted that the Security and Exchange Commission immediately filed suit against the company to preserve documents. The SEC's action should help ensure that a thorough investigation can take place, and that the company cannot give massive payments to its executives during the probe, Bush said.
WorldCom, the nation's No. 2 long-distance phone company, revealed late Tuesday that it had masked $3.8 billion in expenses, thereby inflating its pretax earnings in what the SEC called accounting irregularities that were "unprecedented."
Bush's concerns about WorldCom and other problematic companies also were addressed Saturday by Sen. Paul Sarbanes, D-Maryland, who delivered the weekly Democratic radio address. "We are facing a crisis of confidence that is eroding the public's trust in our markets, and poses a real threat to our economic health," Sarbanes said. "The strain on the economy is deep and spreading."
Earlier this week, Bush sharply criticized WorldCom, which is set to lay off 17,000 employees due to its financial problems, and called the revelations "outrageous."
Meanwhile, WorldCom President and CEO John Sidgmore said Friday that the company's management was equally surprised and outraged by the $3.8 billion accounting scandal. Sidgmore, in a letter to Bush, reaffirmed his commitment to working with the president and appropriate agencies to investigate the matter and will take further decisive action.
"Yesterday, you rightly expressed outrage and concern about past accounting irregularities at WorldCom," Sidgmore said in the letter. "I am proud that our own people discovered these irregularities and had the courage and professionalism to act quickly."
WorldCom has retained William McLucas, former chief of enforcement at the SEC, to investigate the accounting irregularities, and is in talks with its banks to secure additional lines of credit. It is also looking to sell assets and Friday started laying off 17,000 people in a bid to survive. Details
WorldCom spokesman Brad Burns said Friday one of McLucas' charges is to determine something not yet clear: when the accounting discrepancies began. "We're looking at everything to make sure we get to the bottom of exactly what's happened," Burns told the Associated Press. "Everything is on the table on that front."
In its civil suit against WorldCom, the SEC gave the Clinton, Miss.-based company until Monday morning to file a detailed report on the "circumstances and specifics of these matters."
In New York, State Attorney General Eliot Spitzer is looking at possible criminal conduct in connection with Salomon Smith Barney analyst Jack Grubman and the collapse of WorldCom, a spokesman told CNNfn. The criminal investigations bureau of the attorney general's office will be leading the investigation of Grubman, who cut his rating on the company a day before it announced its accounting problems.
Separately, investigators looking at WorldCom have found no records to support the shift of $3.8 billion in expenses, according to a published report.
The New York Times reported Friday that the lack of records increases the likelihood that the transactions involved criminal fraud. The newspaper also said that just enough expenses were shifted during the past five years to allow WorldCom to exactly meet its profit goals over that period.
The paper also quoted unnamed people close to the company as saying that Scott Sullivan, who was fired as chief financial officer when the accounting scandal broke earlier this week, told the company's board that he shifted the expenses without consulting the company's former outside auditor, Arthur Andersen, and also implied that he did not consult other top company executives, either.
The lack of documentation also raises questions as to why the problems were not detected by auditors from Andersen, the Chicago-based accounting firm that was found guilty earlier this month of obstructing justice for destroying documents related to Enron, whose books it also audited.
In other developments, WorldCom was set to start laying off 17,000 employees Friday, as its financial situation worsened Thursday when major lenders refused to extend additional loans, and talks on its $5 billion in loans coming due were halted.
Also, a judge issued a restraining order Thursday to WorldCom's former CEO Bernie Ebbers, ex-CFO Sullivan, and officials from Arthur Andersen to ensure they don't destroy documents related to the telecom company. An earlier order from the SEC prevented current WorldCom employees, officers and auditors from destroying documents.
The restraining orders followed a vote from a House of Representatives panel Thursday to subpoena four people to testify about the accounting scandal at WorldCom, including Ebbers, Sullivan, the current CEO, Sidgmore, and Salomon analyst Grubman.
Bush Weighs Criminal PenaltiesLos Angeles Times and The Washington Post June 30, 2002
(6/29/02) - The drumbeat of corporate misdeeds grew louder yesterday when Xerox disclosed that it had improperly booked $6.4 billion in revenue over a five-year period, far more than the $3 billion estimated in April when federal regulators slapped the photocopier giant with the largest fine for fraud in corporate history.
The restated financial results, ordered in April as part of Xerox's $10 million settlement of fraud charges with the Securities and Exchange Commission, center around the practice of booking revenue from equipment-leasing contracts before Xerox actually received payments.
Meanwhile, administration officials said yesterday that President Bush is considering using an appearance on Wall Street next month to recommend new criminal penalties for chief executives who certify misleading financial statements.
Currently, executives face only civil penalties.
The Xerox news follows a string of corporate accounting scandals that have engulfed Fortune 500 companies. From Enron in December to WorldCom on Tuesday, each week has brought new disclosures of financial mismanagement involving billions of dollars.
"These numbers have gotten so large that it's akin to auditors driving past Mount Everest and saying they never saw it. How can you miss $6 billion?" said Lynn Turner, former Securities and Exchange Commission (SEC) chief accountant and a professor at Colorado State University.
"It's a shame that corporate America has somehow gotten into the mind-set that this is OK."
The steps the administration is considering, to be explained in a major speech to Wall Street executives July 9, would be a considerable toughening of the shareholder protections Bush proposed in March, when he was under pressure to respond to the bankruptcy of the Enron.
The SEC currently must receive court approval before barring executives from serving as officers or directors of publicly held corporations if they engage in serious misconduct. Bush had proposed allowing the SEC to take such action on its own. Both are civil, not criminal, procedures.
Now, key administration officials are recommending that executives be prosecuted by the Justice Department if they lie on financial statements. Some of those officials said details are to be worked out next week, and Bush has not signed off on the idea.
But they said a consensus had emerged on the question among officials at the White House, Commerce Department and Treasury Department.
"We need a bigger stick," a senior administration official said. "This would mean jail time instead of fines. The consensus is that the penalties need to be harsher."
The administration had previously emphasized self-policing by the business community and had warned that new laws could be harmful to the economy.
But Democrats have recently decided to make corporate abuse a major issue in the fall elections, painting Republicans as coddlers of big business.
Bush said yesterday that he feels strongly that "if somebody is running a corporation, if somebody has got responsibilities to shareholders and employees, they have the responsibility to be aboveboard at all times, to be frank and honest with all numbers."
"Our Justice Department will hold people accountable," Bush said during a Washington fund-raiser for Rep. Constance Morella, R-Md. "But corporate America has got to understand there's a higher calling than trying to fudge the numbers, trying to slip a billion here or a billion there and may hope nobody notices that you have a responsibility in this country to always be aboveboard."
He also will devote today's radio address to corporate responsibility.
A difficult chapter
Xerox, best known for developing the modern photocopier in 1949, for decades has been a technology icon, developing pioneering technologies including the computer mouse, laser printing and desktop icons.
In the restatement filed yesterday with the SEC, Xerox reduced its revenue by $1.9 billion, or about 2 percent of sales, to $91 billion between 1997 and 2001. The amount is the difference between the $6.4 billion improperly booked and the $4.5 billion it actually received. The company will receive the $1.9 billion in future years.
In addition, the Stamford, Conn.-based company slashed its pretax income over the five-year period by $1.4 billion.
"Xerox today closes a difficult chapter in the company's history," Xerox Chief Executive Officer Anne Mulcahy said in a statement. Since the SEC launched its investigation two years ago, Xerox has replaced its chief executive and chief financial officer.
Yesterday's announcement "falls under the scope of our original investigation," which found that Xerox "misled and betrayed" investors, said Paul Berger, the SEC's associate director of enforcement. "We found what we considered to be a pattern of pervasive fraud over the course of four years."
The SEC said Xerox engaged in the accounting scheme to meet earnings targets expected by Wall Street investors, and noted that "compensation of Xerox senior management depended significantly on their ability to meet targets."
The SEC has said it will continue to look into Xerox executives involved in the scandal along with the company's former auditor of 30 years, KPMG. Xerox fired KPMG in October, and retained PricewaterhouseCoopers to conduct the restatement.
KPMG defended its audit of Xerox, saying yesterday's restatement "defies economic reality."
"We continue to stand behind our audit work," KPMG said in a statement.
Investors, already shaken by a series of corporate shenanigans, pushed shares of Xerox down $1.03, or 12.9 percent, to $6.97 yesterday on the New York Stock Exchange.
Although the SEC allegations involve several accounting practices, the most substantial involve two.
One is the recognition of revenue from multiyear leases on office equipment. Xerox improperly booked revenue that was not yet received in order to "burnish and distort operating results," the SEC said in April.
The second practice was setting aside "cookie jar" reserves to cover restructuring costs, and then improperly adding them back later to embellish earnings, the SEC alleged.
Xerox neither admitted nor denied the allegations in its settlement with the SEC.
Despite the magnitude of yesterday's write-off, Xerox is likely to survive financially, analysts said.
Bush Calls for Corporate HonestyNew York Times by Elisabeth Bumiller June 30, 2002
WASHINGTON, June 28 President Bush said today that American executives had the responsibility to be honest about their balance sheets, as the White House announced that Mr. Bush would make a major speech on corporate responsibility July 9 on Wall Street.
"Corporate America has got to understand there's a higher calling than trying to fudge the numbers, trying to slip a billion here or a billion there and may hope nobody notices," Mr. Bush said today at a fund-raiser here for Representative Connie Morella, Republican of Maryland.
Mr. Bush's remarks were yet another presidential criticism of WorldCom, the nation's second-largest long-distance provider, whose financial collapse this week has left the White House and Republicans struggling to limit the political risks. Today was the third straight day that Mr. Bush had spoken out about WorldCom, the latest in a string of corporate financial scandals.
Mr. Bush promised again that there would be consequences for those engaged in wrongdoing. "Our Justice Department will hold people accountable," Mr. Bush said. He added that "we expect high standards in our schools, we expect high standards in corporate America as well."
In another move showing the administration's eagerness to hold corporate executives responsible for their actions, the Securities and Exchange Commission today published a list of companies with reported annual revenue of more than $1.2 billion that will have to meet new reporting requirements. Chief executives and chief financial officers from those 945 companies must personally certify under oath that their most recent reports filed with the S.E.C. are complete and accurate, the commission said.
The list of companies has been posted on the commission's Web site, www.sec.gov.
Employee Advocate: Duke Energy Corporation is on the list.
A Case for 'Capital' PunishmentCBS.MarketWatch.com by Rex Nutting June 28, 2002
WASHINGTON -- Osama bin Laden couldn't hold a candle to Bernie Ebbers, Ken Lay and the other corpo-terrorists who've undermined faith in the American way.
President Bush, darling of the boardroom, seems clueless about how to halt the erosion of trust in America's companies, markets and economy.
Trust is a fragile commodity. Once lost, it can take years to restore.
Bush expresses outrage at the criminal conduct unfolding virtually every week, but his words fall far short of what's needed.
We need an FDR, but we're stuck with a Hoover, a well-meaning man who, faced with what became known as the Great Depression, denied to the end that anything was wrong.
Instead of modest reforms, we need dramatic actions that will tell investors, workers and taxpayers that Wall Street's shenanigans are a thing of the past. This goes beyond throwing a few bad apples in jail or changing a few accounting laws.
The White House ought to declare war on Wall Street's liars.
If the government can hire 200,000 airport guards to go through little old ladies' purses, it can certainly hire enough accountants and lawyers to sort through Corporate America's books with a fine-toothed comb.
Which, after all, presents a greater threat to the nation? An 80-pound grandmother or an $800 million-a-year CEO?
Bush should reinstate the draft for this war.
If the Securities and Exchange Commission can't handle the tremendous task of ferreting out every single lie and misstatement, it should enlist the help of every other federal agency, temporarily, until the job's done.
The thousands of accountants and lawyers who work for the General Accounting Office, the Federal Reserve, the Federal Communications Commission, the Justice Department and a hundred other departments and agencies should be assigned to the job. Most of them already have working knowledge of a particular industry; let's use it.
And, if that's not enough, there are a few thousand innocent ex-Andersen people who are ready and very willing to help us catch the crooks who've fleeced the public.
We could create a new, temporary Cabinet-level agency: the Restoration of Trust in Corporations Department.
The goal should be to back-audit every major corporation within three months. And to keep up the pressure until the accounting-standards bodies can come up with simple, straightforward rules that are easy to enforce and easy to comply with.
Once the enemy has been surrounded, tough peace terms should be imposed. Individuals found to be lying or cheating should go to jail, of course. The worst offenders should also be banned -- for life -- from holding corporate or public office. Their wealth should be confiscated.
Corporations, accounting firms, brokerage houses or others that have a history of dishonesty should be liquidated, with the assets turned over to the victims.
"Capital" punishment could be just the deterrent that's needed.
Unlike past financial scandals, the victims this time number in the tens of millions. They will not soon forget the fraud perpetrated upon them.
If the government doesn't act boldly, a whole generation of growth could be imperiled.
Without honest capital markets, the American economy will lose its edge, and the robust economy of the past 20 years will be remembered, if at all, as a cautionary fairy tale of greed and corruption.
Rex Nutting is Washington bureau chief of CBS.MarketWatch.com.
Bush Vows Full WorldCom ProbeCBS.MarketWatch.com by W. Watts, M. Andrejczak June 27, 2002
(6/26/02) - WASHINGTON (CBS.MW) -- U.S. political leaders from lawmakers to President Bush expressed outrage Wednesday over WorldCom's devastating misstatement of earnings, vowing aggressive action aimed at restoring investor confidence at a time of seemingly endless corporate accounting scandals.
"We will fully investigate and hold people accountable for misleading not only shareholders but employees, as well," Bush said.
Speaking at the G-8 summit in Canada, he termed the WorldCom revelations "outrageous" and said they're the latest evidence that corporate irresponsibility has hurt the U.S. stock market. Read Bush's comments.
On Capitol Hill, Senate Majority Leader Tom Daschle said he would accelerate a planned vote on accounting reform legislation that would trump a recently announced SEC plan to boost oversight of the accounting industry.
Daschle, who had previously said he planned a vote on the measure some time this year, scheduled the Senate to begin debate on the legislation after returning from the weeklong Independence Day recess that begins Friday.
WorldCom said Tuesday night that an internal audit uncovered $3.8 billion in expenses had been improperly booked as capital expenditures for all of last year and this year's first quarter. The company, which is the second-biggest U.S. long-distance phone carrier, said it would restate results for the past five quarters, wiping out all profits it had recorded in that period.
Authored by Senate Banking Committee Chairman Paul Sarbanes, D-Md., the pending legislation on accounting reform would create a five-member independent oversight board funded by publicly traded companies to police the accounting industry.
"I believe this bill will get 80 votes on the floor, if not more," Daschle said. "There's just a handful of people who are going to make us go through all the procedural hoops ... and we'll do that if we have to get the job done."
Under the bill, the accounting oversight board would have the power to impose fines or sanctions on accounting firms that violate rules relating to public company audits and who obstruct investigations. The bill would also require companies to get pre-approval from their boards for consulting services provided by their auditors unless the services constitute no more than 5 percent of the total revenue paid to the accounting firm.
Opponents of the bill, led by Sen. Phil Gramm of Texas, the panel's ranking Republican, and Wyoming's Mike Enzi, another Republican committee member and the Senate's only accountant, contend it amounts to congressional micromanagement of the regulatory process.
Gramm said WorldCom's woes reinforce his belief in the need for an accounting oversight body, but don't justify the Senate bill's approach.
WorldCom "in no way changes my opinion about the undesirability of having Congress set accounting standards or write into law a one-size-fits-all mandate that would force the smallest incorporated business in the smallest town to employ the same myriad of accounting firms that are required for General Motors," Gramm said.
The Senate measure imposes more reforms on the accounting industry than Republican-backed legislation passed by the House in late April.
Kim Wallace, a Washington-based policy analyst with Lehman Brothers, said the WorldCom debacle may give Democrats an upper hand in shaping the final bill and other corporate reform measures.
"I think it is undeniable that Americans generally and investors specifically think that some of the practices employed by corporate boards and their officers were not strongly policed and were certainly not enforced in a way that the general investor was protected," Wallace said. "That level of distrust could lead to an opportunity for advocates of stronger change in corporate governance rules."
Last week, the Securities and Exchange Commission also proposed a framework for a new accounting oversight board that congressional Democrats and consumer groups attacked as a toothless measure.
Daschle, speaking to reporters at the Capitol, skewered SEC Chairman Harvey Pitt's handling of the nation's wave of accounting scandals.
"He is not doing the job, in my opinion. I think he ought to be doing a lot more," Daschle said. "I don't see the kind of aggressive activity, the kind of attitude in the SEC that we need to do this right."
Daschle said he wasn't calling for Pitt's resignation, but said that restoring investor confidence would require a more independent and aggressive tone at the SEC.
Meanwhile, House investigators are also set to take a close look at WorldCom's books and actions. House Energy and Commerce Committee Chairman Billy Tauzin, R-La., likening the company's bookkeeping "to the accounting hocus-pocus" at Enron, said his panel's investigators would look into all aspects of the case.
"This was not a simple bookkeeping mistake," Tauzin said. "Clearly, it was an orchestrated effort to mislead investors and regulators, and I am determined to get to the bottom of it."
The Age of AcquiescenceNew York Times by Maureen Dowd June 27, 2002
(6/26/02) - WASHINGTON A friend of mine over the weekend was recalling her days as an idealistic child of the 60's. Students sitting around the dorm, amid the water bongs, water beds, strobe lights and Che posters, listening to Led Zeppelin and Dylan, dreaming about remaking the world in their own image, trading nightmares about spying Big Brother and soul-robbing corporations.
"We thought America was being run by the corporate-military-industrial white male power structure," she said. "We were certain there was a right-wing conspiracy. We thought civil liberties and free speech were imperiled. We were suspicious of rich people. We had reason to believe there was corporate malfeasance and Wall Street was bad. We worried that the government was backing coups in Latin America. We figured the administration wanted to topple all the overwrought, self-appointed messiahs who didn't know how to run their own little societies. We assumed that powerful people were rigging elections. We feared there were people who wanted to blast roads through forests and rip up the tundra."
She recalled all the old leftist tracts in the Nixon years about a secret government plan to suspend the Constitution and declare a national security emergency and round up people without charges, and that the oil companies and banks would plunge us into nuclear war.
"And now," she concluded with a rueful smile, "all our worst paranoid nightmares are coming true. We wake up in our 50's and our enemies from the 60's have crept back into power. And we were the empowerers, because we've turned into the same selfish people we thought we were against. We forgot to be suspicious."
The times they ain't a-changin'. The passionate activists from the Age of Aquarius have grown up to be the new Silent Majority.
"Our young hunches are now becoming mature realities," said Bobby Rush, the Black Panther who became a Chicago Congressman. "Yet we are paralyzed in the headlights. We don't know exactly how to react to the right wing trampling our Constitution and dictating to the world who their leadership can be. The American people have been scared beyond all imagination because of Sept. 11. But now we are getting to the point where we can't use a library card without opening ourselves up to Big Brother."
Ralph Nader said the phrase he coined in 1970, "corporate crime," is the new catch phrase in business magazines.
Three and a half decades ago, the mantra among young people who railed against capitalist pigs and government lies was "the fix is in."
"The fix is now institutionalized," Mr. Nader says. "When Congress won't double the S.E.C. budget in the middle of a corporate crime wave, it shows that the system is irreversibly decayed. As Brandeis said, we can have a democratic society or we can have a concentration of great wealth in the hands of a few, but we cannot have both."
Of course some Democrats regard Ralph Nader as part of the problem and not part of the solution.
People used to be shocked when a member of an administration said that what's good for General Motors is good for the United States. But with the Bush administration, the sinful synchronicity of business and government is just a day's work, and nobody is reeling from the spectacle.
Some convictions of the love-bead era have been turned on their heads. The police are not regarded as "pigs" anymore. And, given their woeful performance, the F.B.I. and C.I.A. are not seen as scarily omniscient anymore.
And it is not going to be so easy for women to get as much power and sexual freedom as men. Alpha women, like Martha Stewart who got rich being an όber-hausfrau, just the image women were running away from in the 60's are crashing and burning out every day.
Those who came of age in the 60's and lived through the plum decades of the 80's and 90's gave up a long time ago on John Lennon's wish that they could "imagine no possessions . . . no need for greed or hunger in a brotherhood of man." (Even Mr. Lennon, in the bosom of the Dakota, found his own fantasy hard to live by.)
And now, faced with the evil of Osama bin Laden, they can no longer imagine there's "nothing to kill or die for, and no religion too."
These utopian sentiments were buried in the rubble in Lower Manhattan.
Executive Pay RestraintBloomberg News June 26, 2002
WASHINGTON, June 23 The Treasury secretary, Paul H. O'Neill, said today that people should be "outraged" by recent corporate scandals, as President Bush's administration continues to seek a way to bolster investor confidence.
Mr. O'Neill, speaking on ABC's "This Week" program, also called for better disclosure of the cost of stock options and said corporate boards should show restraint on executive pay.
The administration has been emphasizing corporate responsibility as financial markets react to scandals that have enveloped corporations like Enron, Tyco International and Adelphia Communications.
"I think anyone who's paying attention ought to be outraged about the things that keep tumbling out," Mr. O'Neill said. "The amount of money some of these people have taken out and gotten away with is just unconscionable, and we need a law so we can get it back."
Watergate SurpassedNew York Times by Richard Reeves June 23, 2002
President Richard Nixon would have loved the coverage of the 30th anniversary of the Watergate break-in last week. The scandal that drove him from office has been pretty much reduced to a little guessing game about who did or didn't whisper in the ear of a young Washing- ton Post reporter that there were some bad things going on in the White House. Who was Deep Throat? Who cares? The press cares, that's who.
Nixon wanted Americans to think of Watergate as a third-rate burglary just another White House melodrama, like Bill and Monica and he may get his wish. Journalists' predilection for putting ourselves at the center of history and tacking "gate" onto the names of later scandals, great and small, is gradually trivializing the events of the late 1960's and early 1970's.
Watergate was not just a burglary. It was not about personal finances like Whitewater. It was not about a president's knowledge of clandestine foreign operations as in the U-2 affair or Iran-contra. Watergate was a clandestine domestic operation in which a determined president secretly plotted what amounted to a coup d'ιtat against American constitutional government.
The real story and lessons of Watergate are in peril of being lost or forgotten. Thirty years of research, scholarship and confession millions of documents, thousands of tapes have made it perfectly clear that the botched break-in of June 17, 1972, at the Democratic National Committee offices was actually a small incident in Nixon's deliberate, if sometimes clumsy, effort to secretly create a new kind of all-powerful presidential government that reflected his own contempt for democracy and for the Constitution's checks and balances designed to restrict the power of presidents.
Richard Nixon was a strange and gifted man and, in his own words, an introvert in an extrovert's business. In his years at the White House, he spent more and more time alone, writing out his thoughts and frustrations late at night on yellow legal pads or scheming with the two men he saw most, his chief of staff, H. R. Haldeman, and his national security adviser, Henry Kissinger. He was not kidding when he said that he envied Mao Zedong because the Chinese Communist dictator could rule a vast country with only two or three other men involved in critical decision making.
If Nixon's personal desire was to be alone with his thoughts, his presidential goal was to decide and act alone. One of the more amazing documents uncovered in recent years was the secret contract he forced Cabinet members to sign after he was re-elected in 1972. He retreated to Camp David to craft a plan to reorganize the executive branch. One of the 15 clauses of the contract read: "No policy-making resides in any Policy Council, Policy Group, Assistant to the President, Counselor to the President, or Cabinet Secretary, except as expressly designated by the President. . . . A Cabinet Secretary should not be encouraged to anticipate either free access or frequent consultation with the President."
He operated behind screens of secrets and layer upon layer of lies, big and small, a strategy that worked in his first term. Nixon was able to make great decisions, world-changing decisions, without the advice or interference of Congress, the courts, the federal bureaucracy, the press and certainly without the knowledge or consent of the governed.
Take two of the great milestones of the Nixon years: the opening to China in 1972 and taking the United States dollar off the gold standard in 1971, which changed the economy of the world. Both of those momentous initiatives were created on his yellow pads or in secret meetings involving fewer than two dozen people. There was no public debate or discussion. Both were presented to the American people as faits accomplis in television announcements by the president.
Nixon had learned to govern by surprise. His most important role model was Charles de Gaulle, another antidemocratic elected president, who governed more or less by edict. But surprise in the American system required enormous secrecy. Protecting the secrecy required lies so many that some of the most important officials of the country had no idea what the truth was and neither, it could be argued, did Nixon at the end. By then the military was tapping White House telephones and sending its own operatives to the building at night to empty wastebaskets, steal documents and photograph National Security Council records.
The baffles of deceptions began not with a burglary, but with a murder in June 1969. Nixon dictated lies to the Central Intelligence Agency to prevent the court-martial of six Green Berets for murdering one of their own spies. It happened that the man, Thai Khac Chuyen, was involved in target selection and damage evaluation for secret bombing in Cambodia. Any legal process would have revealed the bombing, which was being kept secret from Congress and the public by phony Air Force record-keeping ordered by the president.
A year later, Nixon approved a secret plan, the so-called Huston Plan, authorizing domestic electronic surveillance and lifting restrictions on surreptitious entry. He had to back down on that plan because the F.B.I. director, J. Edgar Hoover, refused to cooperate, saying the press or Congress would eventually discover what was happening. Then Nixon decided to do the same thing from inside the White House in 1971, creating an extra-legal secret operation that included the unit called the Plumbers. By early 1972, Nixon, his re-election committee and the Republican National Committee were using illegally collected cash to pay the Plumbers, a group of low-lifes capable of breaking into offices and embassies to plant telephone taps and to photograph papers.
Three years after the Green Beret cover-up, the Plumbers were caught in the Watergate building. Whether Nixon himself ordered that particular operation may never be known, but he tried to use the Central Intelligence Agency to cover up the incident. The details of what he knew don't matter that much now. He was the one who made the decision to pay off the burglars for their silence in court, committing the crime that eventually crushed him.
There will always be political scandal revealed in a country with a healthy free press. But Watergate was unique as the climax of a presidency that believed that governance required lies and deception. Though Nixon was pardoned, his legacy was the destruction of American faith in government and its elected leaders. And that not the heroics of the press is what should be remembered about the episode called Watergate.
Richard Reeves is the author of, most recently, ``President Nixon: Alone in the White House.''