[Congressional Record (Bound Edition), Volume 148 (2002), Part 10]
[Senate]
[Pages 14162-14163]
[From the U.S. Government Publishing Office, www.gpo.gov]




 STRENGTHENING CORPORATE ACCOUNTABILITY WHILE STRENGTHENING CORPORATE 
                               INNOVATION

  Mr. HATCH. Mr. President, the Senate accomplished two significant 
feats last week. First, this body took strong action to ensure that 
candor and accountability will be watchwords in the world of corporate 
accounting. We have given the Securities and Exchange Commission the 
tools it needs to better do its job of ensuring that financial 
statements tell investors, in plain English, how our nation's 
corporations are really doing. And we crafted 21st-century criminal 
statutes and tougher penalties for those corporate wrongdoers who 
willfully mislead investors about corporate finances, and we are still 
working on that language.
  Second, and more important, we resisted to a great extent the 
temptation to turn this bill, on which Senator Sarbanes and Senator 
Gramm worked so hard, into a tool for demagoguery. With the continuing 
reports of shoddy bookkeeping at some of our biggest companies, with 
terrible news coming from Wall Street these past few weeks, and with 
continuing layoffs at major corporations, it is no wonder that many 
pundits across the country, and even a few of our colleagues, were 
tempted to cast about, looking for a bill to support--any bill at all--
that could make them look tough on white-collar crime.
  But the battle is not over yet. We know that here in Congress, as 
well as in the regulatory agencies and in State governments, there are 
still moves afoot to impose more rules, more regulations, and more 
punishments on American businesses. There are those who are predicting 
that this wave of corporate scandals could give rise to a new era of 
big government, much like the Progressive Era or even the Great 
Depression.
  I rise today, to say that this Nation must not return down that 
failed path. A new era of ``re-regulation'' would, without a doubt, 
damage or destroy the twin engines of innovation and capital formation 
that have made the American people the richest people the world has 
ever known. A new era of re-regulation, however well-intentioned, would 
put us on the path that Europe and Japan have recently trod. We would 
be playing a constant game of catch-up with whatever country was in the 
economic lead. People in the leading countries would have access to new 
inventions today, and then, years later, citizens of the sluggish 
United States would finally be able to afford them. That is the kind of 
trickle-down we need to avoid, and that is the kind of trickle-down 
that the good people of Europe and Japan live with every day.
  I have faith that the American people will not be led down that path. 
Instead, I believe that they will remember that in the late 1990s, the 
forces of competition gave birth to modern wonders in the fields of 
medicine and telecommunications while Congress cut capital gains taxes 
and balanced the budget. We saw the promise of venture capital 
unleashed, as many new start-ups tried out their new ideas in the 
marketplace even though we knew in advance that only a few would 
succeed.
  And as investment and innovation increased, our workers became more 
productive, and higher productivity led, as always, to higher wages and 
better living standards. Census figures show that since 1980, the share 
of families earning over $100,000 per year doubled, even after 
adjusting for inflation. The number of people living in poverty has 
declined, and the only reason it has not declined faster is because 
this land of opportunity draws in poor immigrants from throughout the 
world. In many cases, however, within a generation these immigrants 
will rise into the middle and upper ranks of income-earners.
  And, most saliently, this prosperity reached into almost every part 
of American life. Overall unemployment rates reached the lowest levels 
in 30 years, and every race and every age group saw its fortunes 
improve. Just as the 1980s debunked the pessimists who thought that 
stagflation and malaise were the waves of the future, so the 1990s, 
with unemployment rates getting down to 4 percent, debunked those who 
thought that unemployment rates below 6 percent inevitably spark 
inflation.
  Despite the fact that the American people have endured a year of high 
energy prices, a painful recession, waves of corporate accounting 
scandals, and the horrific attacks of September Eleventh, our economy's 
foundations remain strong. Innovation and capital formation have 
continued even during the depths of the recession, to the amazement of 
the pessimists. Despite the many buffetings our nation has endured, 
America's workers are more productive today than they were just a year 
ago. That continued the trend of the last few years, where we saw 
productivity grow at an annual rate of 3.1 percent.
  We have seen the unemployment rate shoot up from its 30-year low of 
3.9 percent up to 5.9 percent in June. Mere numbers, of course, can 
never convey the real cost of losing a job. And tragically, recessions 
continue to hurt workers months and months after sales pick up. But 
clearly, this recession is like no other that we have seen: 
manufacturing has been hit hard, very hard, by this recession. Workers 
in those industries, and people who live in towns that rely on those 
industries, have paid a heavy price.
  But our economy's resilience and flexibility is amazing, and this 
resilience shows in our labor markets, where our nationwide average 
unemployment rate of 5.9 percent, while still too high, would have been 
hailed during most of the 1980's and 1990's. And if Congress acts to 
restore the economy to its potential, enacting policies that encourage 
innovation and capital formation, we can continue to improve our 
standard of living, get the unemployment rate back down, and make our 
economy more resistant to the inevitable economic shocks of our modern 
world.
  As Chairman Greenspan noted last Tuesday, Congress can strengthen our 
economy's long-run potential through strong fiscal discipline, so that 
more of our economy's resources are in the hands of our innovating 
private sector. And since capital formation and technical innovation 
are keys to productivity growth, we should move aggressively toward 
expensing capital equipment and finally making the research and 
development tax credit permanent.
  The accounting reform bill we passed last week is a good bill, and 
once it comes out of conference, I hope it is even better. The Senate 
bill reduces the potential for conflicts of interest between auditing 
and consulting services. It ensures that the government will vigorously 
scrutinize audits to ensure that the balance sheet is telling the real 
story. And it modernizes the criminal codes to deal with the corrupt 
few who knowingly break the rules outright.
  But once the final version of this bill becomes law, that is by no 
means the end of the story. Once the regulators get ahold of the final 
bill, it will, once again, become a target for anti-corporate 
activists, those who distrust bigness, who distrust success, and who 
distrust the competitive spirit of the American people. They will seek 
to pressure the SEC and the Financial Accounting Standards Board to 
enact rules that express their hostility toward corporate America. And 
however well-intentioned the goals of these activists, they could have 
disastrous consequences.
  Let us consider an example that sounds reasonable enough. I started 
off by noting that the Sarbanes bill would ensure that financial 
statements tell investors, in plain English, how our nation's 
corporations are really doing. There are good reasons for reporting 
financial statements in language that ordinary investors can 
understand, and the SEC has done a good job encouraging corporations 
and financial services companies to avoid unneeded jargon in their 
official statements. But at the same time, we need to remember that 
while corporate finance is not rocket science, it is not that far from 
it.
  Some issues will be hard to understand, and they should stay that 
way. If we insist that every financial dealing be completely 
understandable to the

[[Page 14163]]

average investor, then you know what we will end up with. Corporations 
that the average investor would not want to invest in. Investors want 
their companies to be run by people who know more about finance than 
they do, just as they want our homes built by people who know more 
about construction than they do. Sure, it is good to know the broad 
outlines about how a house is built. But we expect construction workers 
to use their specialized knowledge, knowledge that is difficult to 
convey to a layperson.
  The same holds true in the world of corporate management. Even after 
these accounting reforms are up and running, accounting is still going 
to sound like a foreign language to most people, and plenty of run-of-
the-mill business decisions are going to sound complex to outsiders. 
Critics will accuse anything with a footnote of being a loophole, just 
another example of ``crony capitalism.'' They will put pressure on 
America's businesses to simplify their businesses so that it can be 
``transparent'' to outsiders. But we cannot give in to the urge to 
insist that corporate finance be intelligible to high-school students, 
and we cannot allow pressure groups to dictate how to organize a 
business.
  We have seen unjustified awards destroy the careers of many good 
doctors who can no longer get malpractice insurance just because juries 
end up being swayed by emotion and genuine human suffering rather than 
by the difficult medical issues at hand. We cannot let the same thing 
happen to corporate America.
  Finally, I want to address an overarching question: Do we really live 
in a world where a couple of crafty and unscrupulous executives can 
destroy an entire Fortune 500 company? Is our market economy really a 
house of cards that needs the ever-present support of the Federal 
Government to keep from falling down? I do not believe the evidence 
supports these pessimistic conclusions. The companies that have been in 
the news made bad business decisions generated by what Chairman 
Greenspan called ``infectious greed,'' which they covered up with 
accounting chicanery. It was the bad business decisions that were the 
root cause here, made far worse by the fact that the mistakes were 
successfully covered up for so long.
  By tightening the auditor's scrutiny of business decisions, we expect 
that in the future, bad decisions will be uncovered sooner, before too 
much damage is done to the company and to its stock price. But business 
decisions will continue to be made, both good and bad, and companies 
will continue to rise and fall as customers and shareholders vote with 
their dollars. That, as Secretary O'Neill noted, is the ``genius of the 
market.''
  And that brings me to my final point. If auditors uncover a serious 
problem with a company's books, who will fix it? Surely, in most cases, 
the board of directors will act aggressively to sack the problem 
executives and install a new team that will work hard to put things 
right. Especially with the incentive of stock options and stock 
ownership, the new management team, facing auditor scrutiny, will have 
strong reasons to do the best they can to boost shareholder value. The 
punishments dealt by the stock market are already giving corporations a 
strong incentive to reform, as stockholders press for clarity and 
boards of directors interrogate their CEOs and demand answers.
  But what about those occasional situations where the directors are 
either incompetent or out of touch? In practice, it is very difficult 
for shareholders to replace directors on their own. There are sometimes 
millions of individual shareholders, each of whom has little incentive 
to put in the time and effort of replacing their directors. It is 
almost always easier to sell the badly-performing stock than it is to 
replace incompetent directors. At this point, our last best hope is 
that much-maligned character from the 1980s, the hostile takeover 
artist.
  The Sarbanes bill uses the phrase ``protection of investors'' over 20 
times. But who protects investors better than someone who invests a 
large sum of cash into a failing company, kicks out the old, 
ineffective, perhaps even corrupt management, and installs new leaders 
dedicated to maximizing long-run shareholder value? But while we have 
seen numerous large mergers over the last decade, why have we not seen 
as many genuinely hostile takeovers? The answer, of course, is 
legislation. In this case, it was not federal law but state laws that 
stemmed the tide of hostile takeovers, as laws made it easier for 
sloppy management to fend off takeover advances. So even if improved 
audits uncover corporate incompetence or worse, shareholders could 
still be left with bad managers and worthless investments.
  The accounting reform legislation on which we have worked will break 
new ground in the realm of investor protection. It will increase 
transparency and punish wrongdoers. But that is only half the battle 
against corporate mismanagement. The second half of the battle comes 
when directors and shareholders take action to purge the ineffective 
executives and restore the profitability of their investments. In time, 
I hope Congress takes action to assist them. The combined calls by the 
President and the Senate for directors with greater independence is a 
strong step in that direction.
  In closing, I want to draw attention again to the true foundation of 
our nation's prosperity--our nation's workers, the most productive in 
the world. Whether they work in a factory, behind a desk, or on a farm, 
the American worker can produce more in an hour than any other worker 
in the world. That is because they have access to better tools, better 
knowledge, better education, and in particular, better organizations. 
From old-economy stalwarts such as Ford to new-economy innovators like 
Intel to our ever-modernizing agribusiness sector, our economy's large 
organizations help to coordinate the activities and innovations of 
countless numbers of people so that we can accomplish more with our 
scarce time. The quality of American automobiles, the speed of 
American-designed microprocessors, and the produce of America's farms 
keep increasing each and every year. I am confident that our accounting 
reforms, if enforced prudently, will help to strengthen the American 
corporation's ability to innovate. And by doing so, all Americans will 
reap the rewards.
  Mr. President, I yield the floor.

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