As investors continue to fret over the quality of financial reports provided by the nation’s publicly traded companies, regulators and lawmakers moved Wednesday to close accounting loopholes and push for more rigorous corporate reporting requirements in the aftermath of the Enron Corp. bankruptcy.
Among a raft of proposals, the Securities and Exchange Commission suggested cutting the time publicly traded companies have to file their 10K, or annual report, to 60 days after the end of their fiscal year from 90 days.
The SEC move came as the Financial Accounting Standards Board said it would set tougher guidelines aimed at making it more difficult to create off-balance sheet partnerships–also known as “special purpose entities”–like the ones that Enron used to hide debt and inflate profits.
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And in a separate development, lawmakers are attempting to scrap an accounting rule that allowed the failed energy trader and other companies to offer tax-deductible stock options without listing the expenses on company balance sheets.
The SEC proposals, which update rules dating to the 1930s, could take four months to enact.
Among other disclosure requirements under the proposed regulations, companies would have to file their quarterly statements within 30 days rather than 45 days. Corporate executives would have to report their stock purchases and sales much faster, and the list of significant events that require companies to formally warn investors of operational changes would be expanded.
“These steps will provide significant improvements quickly while other proposals are considered,” said SEC Chairman Harvey Pitt. “We anticipate further reform proposals covering financial reporting and disclosure requirements, accounting standard setting, regulation of the auditing process and profession and corporate governance.”
Draft guidelines from FASB suggest increasing the independence threshold or so-called 3 percent rule for consolidating special purpose entities to 10 percent.
In general, companies can keep special purpose entities such as partnerships off their books if an independent third party holds at least a 3 percent stake.
FASB wants to raise the threshold and ensure that any third party would take losses right away if they occur, said Ray Simpson, who heads the board’s consolidation policy project.
Stock option bill introduced
Separately, Sen. Carl Levin (D-Mich.) introduced a bill Wednesday that would force companies claiming tax deductions for stock options to also report them as expenses against their earnings.
“We’ve got to make sure that financial statements are credible,” said Levin. Joining him were GOP co-sponsors Sen. John McCain of Arizona and Sen. Peter Fitzgerald of Illinois, and Democratic Sen. Dick Durbin of Illinois.
The bankrupt Houston-based energy trader, which is the focus of several federal investigations, claimed almost $600 million in tax deductions for stock options it offered employees between 1996 and 2000.
Stock options do not have to be reported as expenses against company profits, unlike other forms of employee compensation. In Enron’s case, Levin said, the effect was an overstatement of company earnings and complete elimination of federal taxes during those years.
The efforts to tighten the rules governing companies came as investigations into Enron’s activities continued to deepen.
The Federal Energy Regulatory Commission announced that its staff would investigate whether Enron’s energy trading practices contributed to the dramatic utility rate spikes experienced by Western states last year.
A number of Western senators have already asked FERC to conduct a formal investigation, which would require the four-person commission to review and vote on proceedings.
Instead, the commission said it will have its staff, “gather information on whether any entity, including Enron Corp. [through any of its affiliates or subsidiaries], manipulated short-term prices for electric energy or natural gas in the West.”
Two weeks ago, Western senators asked FERC Chairman Pat Wood to open a formal, commission-led investigation into Enron’s possible influence over utility rates last year. Such inquiries are known as Section 206 investigations. During Senate testimony, Wood agreed. But the commission decided Wednesday to authorize only a lower-level staff review.
“An investigation of this magnitude is neither easy nor fast, so it may take several months before staff has completed its work and presents its results to the commission, the Congress, and American energy customers,” Wood wrote Wednesday in a letter to the Senate Committee on Energy and Natural Resources.
Enron has generally declined to cooperate with a State of California investigation into energy shortages and price increases last year.
It filed suit last summer to stop one state legislative investigation. FERC’s role during the rate crisis also caused controversy. The commission chose not to intervene with rate price caps, instead arguing that market forces would curb the inflated utility rates that consumers in California, Oregon and Washington were enduring.
Enron to cooperate with FERC
An Enron spokesman defended the company’s track record when it came to probes into its business practices. He said the company would “cooperate” with FERC but added: “Taxpayers have funded numerous state investigations of Enron and none has so far yielded a thing.”
On Tuesday, a California Senate committee, convinced that the bankrupt energy trader has destroyed financial documents under legislative subpoena, voted to seek criminal charges against Enron for concealing evidence and conspiracy.
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Committee members also voted to ask the full state Senate to find Enron in contempt of two legislative subpoenas–one issued in June seeking documents related to California’s energy market and the other for testimony about destruction of documents.
Last month, Enron officials ignored a committee request to testify about which documents may have been destroyed.
Meanwhile, the company also said a date has been set for the bankruptcy court to review insurance claims relating to a 1996 explosion at a San Juan gas pipeline operated by an Enron subsidiary.
On March 7, lawyers representing approximately 1,400 plaintiffs claiming damages as a result of the pipeline explosion are expected to ask the bankruptcy court to lift a stay on insurance claims and other related proceedings halted by Enron’s decision to file for Chapter 11 bankruptcy in December.