Risk & Compliance

Donaldson Slams “Pendulum Pushers”

The former SEC chairman says advocates of deregulation in financial reporting hold too much sway in the post-Sarbox era.
David KatzFebruary 7, 2008

William Donaldson, the former Securities and Exchange Commission chairman, asserted on Wednesday that the regulatory pendulum has swung too far toward deregulation, criticizing the movement toward “vague, principles-based” financial reporting.

Just as soon as the reforms instituted under the Sarbanes-Oxley Act of 2002 restored investor confidence, “there began a concerted effort to roll back” the new finance and accounting rules, said Donaldson, who served as SEC chairman from February 2003 through June 2005.

The regulatory pushback is coinciding with the burgeoning of the subprime crisis, he noted, suggesting that in its scope and its potential for revelations of fraud and ethics abuses, this latest crisis echoes the corporate scandals of the early days of this century. Further, he noted, the recent wave of options-backdating violations was able to crest only because the Financial Accounting Standards Board hadn’t yet stiffened its rules on the reporting of option expenses.

The “pendulum pushers” who have sought to loosen the rules mistakenly argue that the high costs of regulatory compliance — particularly with Sarbox 404, which mandated CFO and chief executive signoffs on a company’s internal controls over financial reporting — have caused issuers to flee from U.S. exchanges to overseas equity markets, he said at a Professional Liability Underwriting Society on directors’ and officers’ liability insurance in New York.

But, he claimed, any success by overseas exchanges is not the result of over-regulation, but of tantalizing new markets. The advocates for deregulation have “missed the point that major new centers of capital market trading” are attracting U.S. issuers, he said. “New York is not the only sector.”

Donaldson contended, however, that companies are still willing to pay a premium to gain a listing for their securities on U.S. exchanges because of their high regulatory standards. Recalling his days as a businessman — Donaldson served as chairman and CEO of Donaldson, Lufkin & Jenrette, the investment bank he founded, and chairman and chief executive of Aetna, the insurance company — he said that “we joined the New York Stock Exchange because we wanted the regulation, the oversight, the Good Housekeeping Seal of Approval.”

Calling the deregulation advocates’ assumption that it’s the markets that should decide how to rule themselves “naive,” he said that the need for financial regulation is as basic as the need for “stoplights on a highway.”

Donaldson also said he expects the SEC to move swiftly to allow domestic U.S. companies to have the choice of using International Financial Reporting Standards or the Generally Accepted Accounting Principles they use now. But regulators, he said, have “a long way to go” in resolving the differences between the principles-based and rules-based systems.

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