strength of a country depends on the values of its citizens.
Honesty, hard work, and compassion are needed to build a society
rich in both goods and in goodness. Because our country values
freedom so highly, we are especially dependent on the responsibility
of our citizens. And our leaders, whether in business, charity, or
public service, must reflect the best America has to offer – in
both ability and integrity.
corporations, in particular, need leaders of strong character.
Public corporations are an essential part of the American economic
system because they allow ordinary Americans to directly own part of
the many firms that build our economy, without having to follow the
daily operations of the firms. This system allows a single worker to
own pieces of hundreds of different companies – creating a diverse
and secure investment portfolio. A teacher in Boise can own part of
a hospital in Dallas, a share of a manufacturer in Miami, and a
piece of a software firm in San Francisco – without ever visiting
the companies. America will always be a sound long-term investment,
and every American should be able to participate in its success.
broad-based ownership, however, imposes a special obligation on the
officers and directors of a public corporation. Not
only must they perform their duties in good faith to the best of
their abilities, they must also disclose relevant facts to their
shareholders – the real owners of the firm. Without accurate and
timely information, investors cannot make informed investment
decisions. Therefore, the President believes we must improve
corporate disclosure, make corporate officers more accountable, and
develop a stronger, more independent audit system – all without
inviting endless litigation.
of these goals can be accomplished by the Securities and Exchange
Commission within its existing authority. The
President will work with the Congress to provide any additional
legislative authority that the SEC determines that it needs. If
these proposals are implemented, and if the leaders of public
companies hold themselves to the highest standards of conduct, U.S.
companies will reflect our most important values.
Information for Investors
base critical investment decisions on the financial information that
the company provides. Each investor must have the opportunity to
analyze the performance of the company, and the risks associated
with an investment. Without proper disclosure, it is impossible for
investors to make informed investment decisions, hold senior
management accountable, and ensure that capital is efficiently
allocated to firms. The American system of corporate disclosure is
the best in the world. Yet, sometimes it seems that the needs of the
average investor are forgotten by some companies. These disclosure
practices can and should be significantly improved to better suit
the needs of investors.
investor should have quarterly access to the information needed to
judge a firm’s financial performance, condition, and risks. The
SEC should ensure that public companies are responsible for
providing investors a true and fair picture of themselves, and that
this information is provided in “plain English.” A company
should disclose information in its control that a reasonable
investor would find necessary to assess the company’s value,
without compromising competitive secrets. Today, disclosure
practices have fallen behind the advanced techniques of corporate
finance, allowing some firms to conceal the true risks faced by
investors. And too many firms have mistaken GAAP compliance for
investor should have prompt access to critical information. Under
this proposal, the SEC would expand the list of significant events
requiring prompt disclosure between reporting periods.
Corporate Officers Accountable
shareholders or even directors, corporate officers work full-time to
promote and protect the well-being of the firm. The Chief Executive
Officer, in particular, has a duty to oversee the entire firm on a
full-time basis. Accordingly, the CEO bears particular
responsibility for informing the firm’s shareholders of its
financial health. This obligation goes well beyond complying with
“check-the-box” accounting. The CEO must be held responsible for
informing investors about the financial condition of the public
company and the risks it faces.
should personally vouch for the veracity, timeliness, and fairness
of their companies’ public disclosures, including their financial
statements. CEOs would personally attest each quarter that the
financial statements and company disclosures accurately and fairly
disclose the information of which the CEO is aware that a reasonable
investor should have to make an informed investment decision.
Currently, CEOs typically sign only a bare-bones certification
regarding the annual financial statements.
or other officers should not be allowed to profit from erroneous
financial statements. Under this proposal, CEO bonuses and other
incentive-based forms of compensation would be disgorged in cases of
accounting restatements resulting from misconduct.
or other officers who clearly abuse their power should lose their
right to serve in any corporate leadership positions. This proposal,
which would require legislation, would authorize the SEC to ban
individuals from serving as officers or directors of publicly-held
corporations if they engage in serious misconduct. At present, the
SEC needs to seek court approval in certain types of cases.
leaders should be required to tell the public promptly whenever they
buy or sell company stock for personal gain. This proposal would
cause companies to disclose significant transactions involving
officers’ and directors’ purchase and sale of the company stock
within two business days of execution. Currently, corporate leaders
can go as long as a year or more without disclosing personal
transactions with the company and as long as 40 days for open-market
a Stronger, More Independent Audit System
as they do with corporate officers, investors depend on the
judgment, integrity and competence of independent auditors. While
auditors cannot prevent intentional deceit, they are a critical
external check on corporate management. Accordingly, a sound audit
system is essential to maintain investor confidence.
firms’ expanded services, including tax planning and the design of
information technology systems, are often offered alongside
traditional audit services. In fact, the accounting profession is
uniquely qualified to offer many services that strengthen
corporations’ controls, and the performances of some services can
enhance the quality of audits. However, fees from such services must
never compromise the integrity of an independent audit.
should have complete confidence in the independence and integrity of
companies’ auditors. Under this proposal, the SEC would establish
guidelines for audit committees to prohibit an external auditor from
performing any other service to an audit client, if the service
compromises the independence of the audit. The SEC would also set
forth prohibitions against the performance by an outside auditor of
internal audit functions for the same client. In addition, the
client would be forced to disclose in greater detail all fees paid
to the auditing firm and its affiliates. Finally, the audit
committees would directly report their recommended choice of auditor
to the shareholders.
independent regulatory board should ensure that the accounting
profession is held to the highest ethical standards. Under
this proposal, an independent regulatory board would be established,
under the supervision of the SEC, to develop standards of
professional conduct and competence. This board would have the
ability to monitor, investigate, and where needed, enforce its
ethics principles by punishing individual offenders.
authors of accounting standards must be responsive to the needs of
investors. Under this proposal, the SEC
would exercise more effective and broader oversight of the Financial
Accounting Standards Board, insure its independence, and require
prompt promulgation of standards that reflect economic reality
rather than compliance with technical requirements. This change
would help ensure that the accounting standards are more responsive
to the needs of investors, rather than based on the interests of
accounting systems should be compared with best practices, not
simply against minimum standards. Under this proposal, auditors
would be required to compare the quality of a company’s financial
controls with the best practices of the industry and communicate its
findings to the audit committee. The audit committee would be
obligated to discuss these findings and the improvement of practices
with management, the Board of Directors, and the auditor, and to act
independently to require improvement where necessary.