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EDITIONS
Thursday, 15 August, 2002, 12:20 GMT 13:20 UK
Q&A: US corporate clean-up rules
The deadline has just passed for corporate America to clean up its act. At least in theory, Wednesday was the day by which all big US firms had to swear to the accuracy of their accounts.

Most did, but will it make a difference? BBC News Online investigates

What is the point of this exercise?

For pretty obvious reasons, investor faith in the sort of reports companies traditionally put out - annual results, quarterly earnings and ad hoc statements - is at an all-time low.

Some bright spark at the Securities and Exchange Commission (SEC), the US stock market regulator, had the idea of forcing firms to nail their colours to the mast.

Company bosses - chief executives and chief financial officers - are required to provide a sworn statement to the effect that there was nothing fishy in their results.

Roughly 700 of the biggest 947 US firms were required to have done so by Wednesday night, and almost all did so.

Part of the reasoning is simply to ratchet the already tough investor protection law up a notch.

But it also contains a heavy dose of psychology: by linking corporate integrity with the personal reputation of the boss, the SEC hopes to enforce a little voluntary discipline.

So do these rules have teeth?

Not really.

It remains to be seen just what action the SEC can or will take against delinquents.

Companies that fail to file their quarterly results on time can be punished by, for example, forced delisting from the stock market, but the process is a cumbersome one.

In practice, the rules are likely to strengthen the arm of disgruntled shareholders who plan to sue errant bosses - something they were perfectly able to do in any case, at least in the US.

Confusingly, the US Congress has also just waved through a separate law, the Sarbanes-Oxley Act, which promises fierce penalties for chiefs who sign misleading statements, including fines of up to $5m and up to 20 years' imprisonment.

What exactly have these firms signed up to?

Nothing that a clever lawyer couldn't drive a coach and horses through.

Taking one of the statements at random, Eastman Kodak chief executive Daniel Carp promises that no report "contained an untrue statement of a material fact.... [or] omitted to state a material fact necessary to make the statements in the covered report".

The key phrase in the 200-word filing is the first: "To the best of my knowledge" - possibly allowing the dodgy to plead ignorance.

The same statement, witnessed by a notary and delivered via Kodak's lawyers, is signed by Robert Brust, the firm's chief financial officer.

The statements made by the bosses of hundreds other firms read nearly identical, including the vital "best of my knowledge" disclaimer.

Will this do anything to restore investor faith?

Sadly, like many clever-seeming regulations, the only likely effect is a negative one.

Firms that miss the boat with their sworn statements will certainly be punished by the markets, but it is hard to see the goody-goodies earning more than a cursory nod from investors.

The statements commit firms to nothing more arduous than the law already requires, and the near-uniform compliance with the rule offers no way of sorting the good from the bad.

For investors weary of the evasions of a typical annual report, these new statements have the comfort value of novelty.

But if a company is determined to deceive, it will take more than one little piece of paper to make a difference.


Politics of regulation

Worldcom goes bust

Enron fall-out

Andersen laid low

FORUM
See also:

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