Wall Street wants rollback of Enron-era accounting rules
In a hearing before a House Financial Services subcommittee, officials from the New York Stock Exchange (NYSE), the US Chamber of Commerce, and free market advocates urged Congress and the Securities and Exchange Commission (SEC) on Tuesday to loosen rules on a wide variety of areas, according to Reuters.
For years, corporations have called for scaling back a variety of rules for public companies. The main target is the 2002 Sarbanes-Oxley law, put in place following the Enron-era financial scandal, which required firms to hire an auditor to review their internal controls to insure quality accounting.
Tom Farley on keeping U.S. markets healthy: end regulatory mission creep, level the playing field, & focus on small & mid-size companies pic.twitter.com/8lsc2Tjvvs— NYSE (@NYSE) July 18, 2017
It “put such a great cost on corporate America, and the benefits are not entirely clear,” NYSE head Tom Farley said at a hearing of a panel of the House Financial Services Committee, according to the Wall Street Journal. “The data doesn’t show clearly that we have reduced fraud or greatly inspired confidence. But what is clear is we have far fewer public companies.”
The regulation required firms to expand the power of corporate boards and instituted criminal penalties for CEOs and CFOs that signed off on fraudulent accounting statements filed with the SEC.
The Enron scandal began when its shareholders filed a $40 billion lawsuit after the company’s stock price, which had achieved a high of $90.75 per share in mid-2000, plummeted to less than $1 by the end of November 2001.
After the SEC began an investigation, Enron’s rival Dynegy offered to purchase the company at a very low price. The deal failed, and on December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Enron's $63.4 billion in assets made it the largest corporate bankruptcy in US history, until WorldCom's bankruptcy the following year.
Many executives at Enron were indicted on a variety of charges and some were later sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty of illegally destroying documents relevant to the SEC investigation which voided its license to audit public companies, effectively closing the business.
As a consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies. Under the Sarbanes-Oxley Act, increased penalties were introduced for destroying, altering or fabricating records in federal investigations or for attempting to defraud shareholders. The law also increased the accountability of auditing firms to remain unbiased and independent of their clients.
Corporate hopes have been renewed after President Donald Trump nominated a Wall Street deal-making attorney, Jay Clayton, to lead the SEC.
Clayton has already announced he plans to look for ways to ease compliance costs and disclosure burdens that may deter companies from going public or cause them to stay private longer. A bill passed by the House last month would broaden an exemption from the auditor rule that is currently available to firms with less than $1 billion in annual revenue.
The bulk of Tuesday’s hearing was on proposals to scale back the SEC’s rules, but one witness cautioned about going too far to repeal rules over accounting as it would have bad consequences for investors.
“It better insures the accuracy of financial statements,” said Jay Brown, a securities law professor at the University of Denver. “And it benefits officers because they make better decisions when they understand the finances of their own company.”
On Monday, the Wall Street Journal ran a report on a lending retreat occurring at commercial banks, showing a drop in lending from 7 percent at the end of last year to 3 percent this month and asking if it could “herald the end of tepid expansion well into its ninth year.”
“Though major categories from car and home loans to credit cards and business debt are all weakening, many analysts believe it’s early yet to fret about recession,” the paper said.