KEY PRINCIPLES TO RESTORE PUBLIC TRUST AND CONFIDENCE IN CORPORATE AMERICA
July 11, 2002
Proposed by Senator John McCain
July 11, 2002
National Press Club
1. Prohibit any firm that serves as the auditor of a company from providing any consulting service to that company. Only a complete separation of auditing and consulting services will safeguard the integrity of audits.
2. Establish an accounting oversight board completely independent from the industry to establish and enforce the standards for audits of publicly traded companies. The board should be financed as an independent agency or, if as part of the SEC, it should possess considerable autonomy. It's appropriate to have a minority of board members with professional expertise in the industry they regulate. But they should be at least five years removed from the practice of accounting to completely guard against conflicts of interest.
3. Require stock options to be reported as an operating expense. Options are no less tangible a cost than depreciation, another non-cash expense. Like depreciation, option costs should be run through the income statement.
4. Require that disciplinary hearings before the auditing oversight board be public. Exposing the misdeeds of registered public accountants and corporations is essential to reinvigorating our system of checks and balances, discouraging misbehavior and restoring public confidence.
5. Preclude directors and executive officers from selling their holdings of company stock while serving in that company. They can 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.
6. Prohibit all members of corporate boards of directors from having a material stake in the company, with the exception of the CEO. The purpose of the board is to represent shareholders, not themselves and not the management.
7. Require corporate pension fund committees, and the funds they manage, to function independently of management and be appointed in the same manner as directors of mutual funds.
8. Require corporate executives to return all compensation directly received from their proven misconduct.
9. Require top corporate officers to certify personally to the SEC that the company's financial reports are accurate and that all information material to the health of the company has been disclosed. Executives who intentionally misstate their companies' financial reports should go to jail.
10. Require executives to provide with the certification, a narrative statement of the factual basis for the correctness of the statements, and disclose any "close calls" management made with respect to accounting treatment. This will help the SEC to determine whether there has been intentional wrongdoing.
11. Place analysts where they belong - with the investment groups advising and serving the public - and house investment services in companies separate from those conducting investment banking and securities trading. The overriding public interest demands that we legislate that separation so that the most egregious of those conflicts is eliminated.
12. Harvey Pitt should resign as SEC Chairman. Mr. Pitt began his tenure with an assurance that under his leadership the SEC would offer "kinder and gentler" oversight. His past association is with leading accounting firms and this has contributed to his sitting out 29 SEC decisions in less than a year. A fine man though he may be, the circumstances today require a new leader of the SEC whose background and record leave no questions that he or she will proactively assure the independence and authority of the SEC to protect the integrity of our markets.