The measure, written largely by Maryland’s Sen. Paul Sarbanes, a Democrat, was given final approval by both houses of Congress just a day after a committee compromise was announced. Initially, the White House and Republican critics had initially favored a more limited approach. But after stocks tumbled and additional corporate scandals emerged, the tide turned. President Bush indicated he would support a more strongly worded bill, even though it includes a provision that would ban the type of corporate loan he received while serving on the board of Harken Energy. The bill also imposes longer prison sentences for corporate fraud and document shredding, creates an independent board to oversee the accounting industry, limits the consulting services accounting firms can provide to clients and gives the Securities and Exchange Commission more money and more teeth. NEWSWEEK’s Jennifer Barrett spoke with Sarbanes about the bill.
Sen. Paul Sarbanes: Well, a considerable momentum had built up to move the legislation through. When we came out of committee with the 17 to 4 vote, that was a very significant step forward because it represented all Democrats and a majority of Republicans, so it was truly a bipartisan bill.
The market was falling badly and the White House finally came around to saying they had to have a bill sooner rather than later, which was an evolution in their thinking. Now they are saying they’ll sign what we’ve passed. What the committee brought back was essentially the Senate-passed bill with some additions and minor revisions that I think helped to improve the bill. But the basic bill is the bill that passed initially in the Senate.
The committee harmonized the criminal penalties between the different bills. We addressed some overlap, some internal contradictions, and the House had an idea for a fund to reimburse investors, and that seemed fine. The House also had a real-time disclosure provision [for sales of company stock] that we took and a standard that CEOs and CFOs would have to meet if they were going to certify the financial statements. There were other things like that-each important in itself but not of major consequence.
Oh yeah, I think this is a very good piece of legislation. We were very careful that it not overreach, and we were careful to work it out so it is a well-integrated package and one section works with the others. It was important to do that along the way because, of course, there was a lot of strong opposition initially. We understood from early on that we would have to have a very strong and balanced package to withstand the kind of efforts we would encounter either to water it down or to prevent any enactment at all.
The overall objective of it was to restore integrity to financial reporting and to corporate governance and to ensure that we have a system in place that has the appropriate oversight and that the people that are supposed to be the gatekeepers, or the watchmen, are operating within a framework or a structure that will maximize the likelihood that they’ll carry out their responsibilities.
I just take people to the bill and walk them through it step by step and try to show that that is not the case. I don’t think it is.
I’ve always said that punishing the bad apples and punishing them severely-which I’m in favor of doing-is not enough. This was a difference initially with the White House. I said, fine, punish the bad apples but you also have to strengthen the system and heighten the likelihood that you won’t have any bad apples. By the time you catch the bad apples, an extraordinary amount of damage has already been done. They also saw the way the bill was moving in Congress. Any specifics they put forth either we’d already taken care of or we took care of. So the things they expressed in most instances, we were able to say “No, you don’t fully understand how the bill works” or “Yes, we’ll take care of that.”
I just became chairman of this committee a year ago. My ability to set the agenda of the committee has only been present since last June, and in that time we have tried to move on a number of issues that heretofore had not been addressed: predatory lending and money laundering, which was part and parcel with September 11 and the antiterrorism bill, and then Enron precipitated an examination of this issue.
SEC Chairman Harvey Pitt has required almost 1,000 of the largest companies to submit a signed statement from CEOs about their financial reporting. That’s not only moving forward but they have to certify past statements. We may well get a number of restatements. That’s all going to have to be shaken out of the system.
The effort to re-establish that reputation for integrity in our markets and the restoration of investor confidence, is not going to happen overnight. It’s going to be a process at which we are going to have to work with determination and perseverance. But the first extremely important step is to put in place this statute, and create this framework, to tighten the system so we are really making substantial changes.
A full commission and a full appropriation and then the SEC has to go to work and do their job. They need to set up the oversight board and it has to do its job. Meanwhile, these changes have to take place in the corporate sector: those that are required by the bill, those being instituted by the exchanges and those that the corporate world itself is instituting recognizing the need to strengthen corporate accountability. So there is work to be done by the regulators, by the private sector. We’ll continue to monitor and provide oversight, but I think it was important for Congress to get this statute into place with the authorities and structure that came with it.
As soon as they start perceiving that this thing is really being dealt with in a serious and a thorough way, even while there may be some bumps along the road as I mentioned with these CEO and CFO certifications that have to come in that may give us another spate of stories about misstated earnings. I think there is still a perception that we are now really moving to institute a system that we can have confidence in, and that in itself will help. And as that system begins to work, that will also help.
