SEC Chairman Faults Corporate Advisers
Lawyers, Auditors Reminded of Duty
By Carrie Johnson
Washington Post Staff Writer
Saturday, March 5, 2005


Securities and Exchange Commission Chairman William H. Donaldson said yesterday that he was disappointed with lawyers and other corporate advisers who failed to blow the whistle on recent financial abuses, engaged in "rhetorical somersaults" and "lost sight of their basic ethical responsibilities."

Donaldson, speaking to a Washington audience of more than 1,000 securities lawyers, said lawyers and auditors are crucial gatekeepers for the integrity of the markets. Lapses over the past few years by outside advisers directly contributed to financial frauds that devastated thousands of investors, he said.

"I hope you will not expend significant time, money and energy devising structures aimed at evading requirements and trying to achieve an accounting or disclosure result that . . . artfully dodges the rule's purpose," Donaldson said.

The SEC has lodged 76 cases against lawyers in the past 3 1/2 years, chief litigation counsel David L. Kornblau said in a separate Practising Law Institute session yesterday. Kornblau said 18 cases have been filed already this fiscal year.

"These lawyers did not seem to have in their vocabulary the word 'no,' " Kornblau said.

The conduct of auditors at accounting firms of all sizes also remains on the SEC's radar screen. Agency officials said they will continue to scrutinize auditors' relationships with their clients for possible violations of independence rules. They said they expect more enforcement actions to come in cases where auditors have grown too cozy with their clients to render impartial reviews of financial reports.

Separately, SEC chief accountant Donald T. Nicolaisen laid out several of his priorities for 2005. Donaldson said his office soon would release a report about corporate use of off-balance-sheet entities such as those that hid billions of dollars of Enron Corp. debt.

Nicolaisen also said the agency staff would provide guidance later this year for companies on how to value stock options on their financial statements. Accounting standard-setters are mandating that companies for the first time treat stock options, or chances for employees to buy stock at a set price and time frame, as an expense on their books. The move has proved controversial for technology firms, which used stock options heavily as an employee recruitment and retention tool.

But the issue that appeared to generate the most heat at yesterday's conference involves reviews of corporate financial controls, one of the most expensive and controversial changes mandated in the 2002 Sarbanes-Oxley law. The SEC will host a public roundtable next month to hear suggestions about how to streamline the rules, sometimes referred to as Section 404 of the law. The rules require corporate executives to personally vouch for the effectiveness of their fiscal checks and balances.

SEC Enforcement Division chief Stephen M. Cutler nodded to the controversy when he said the agency was considering its own reality-based TV show, "Corporate Fear Factor," where "big-time executives have to eat worms, jump out of a moving car, and for a final test, they have to sign a Sarbanes-Oxley 404 certification."