Scandals changing how America does its business

By Matthew Mogul
Associated Press

NEW YORK — Doing business is different now, after the scandals at Enron, Worldcom and other companies produced an unstoppable push for reform.

Some changes designed to clean up accounting, insider trading, executive pay arrangements and other corporate activities have already been enacted, including many in the so-called Sarbanes-Oxley Act passed by Congress last summer. Others are still being formulated by a variety of regulators. Here is a glance of some of the major reforms.

• Insider trading

Executives and directors of publicly held companies used to have as many as 40 days to report their trades of company shares. Now they have two business days. Reformers want still other rules, including a ban on trading during certain blackout periods.

• Stock options

While any effort to legislate handling of stock options probably would fail, many publicly held companies are beginning to treat the stock options given to executives and workers as a business expense. Although some big companies such as Coca-Cola and GE now include options as an expenses, most corporations still only mention them in the footnotes of reports. The biggest resistance is from tech firms: Cisco Systems said its first-quarter profit would have been reduced by 60 percent had it treated stock options as an expense.

• Director independence

Regulators may soon require a company's board to have a majority of outside directors, who would have to take their independence seriously. Conflicts of interest, such as company donations to directors' pet projects, have abounded in cases of companies hit by scandal such as Enron and Tyco.

• Stock research

Tougher guidelines are being formulated to try to make sure a firm's evaluations of stock aren't biased by a desire to win more investment banking business. Some companies appear to be trying to pre-empt formal regulation by putting more distance between their research and investment-banking divisions. Regulators want more disclosure by analysts of any conflicts of interest, and want to bar companies from giving them bonuses or compensation for helping win business.

• Accounting for earnings

Many companies use their own formulas for so-called pro-forma earnings, which are supposed to show how much money a company's real business operations are making or losing. Too often they are tailored to make profits look better. New rules prohibit pro forma statements from stripping out too many of the negative numbers required by Generally Accepted Accounting Principles, which will have to be plainer in future quarterly and annual statements. Even tighter regulations are expected by late January.

• Who's accountable and when

Top executives have to certify the financial reports of publicly held companies, under penalty of fines and imprisonment. And these companies must report more quickly: They used to have 45 days after the end of a quarter to report on their performance; it's now 30. For annual reports the period has shrunk from 90 days to 60. Statements must now also include substantial off-balance sheet transactions — a vehicle used by Enron to hide debt.

• Auditor conflicts

A new federal oversight board will monitor the practices of big accounting firms, which can no longer conduct audits and provide the same client with some non-audit services such as bookkeeping and actuarial work. Moves to completely separate audit from non-audit work like tax consulting, however, will meet stiff resistance, as such work provides the lions share of industry revenue.

• Executive loans

Executives can no longer take out personal loans from a company. These loans were often used to buy company stock, and if share prices fell, executives would demand the loans be forgiven.