Later crises strengthened disclosure requirements. In the 1960s, the scope of disclosure was broadened when an unprecedented wave of conglomerate mergers followed by a sudden collapse of their stock prices created pressures for better information. Congress responded in 1968 with the Williams Act, which required disclosure of cash tender offers that would change ownership of more than 10 percent of company stock; Congress strengthened the law two years later by lowering the threshold for reporting to 5 percent and adding disclosure of product-line data.
In 1969 and 1970, the Accounting Principles Board, an outdated instrument of accounting industry self-government, was replaced with the current Financial Accounting Standards Board (FASB) as one way to improve investors’ confidence in the disclosure system. The new private-sector board had authority to set accounting standards and featured broader representation and funding, a larger professional staff, and a better system of accountability. Over time, the board substantially tightened accounting standards.
In the late 1970s, congressional investigations raised new questions about FASB’s domination by big business. In response the board opened meetings, allowed public comment on proposals, provided weekly publication of schedules and decisions on technical issues, framed industry-specific accounting standards, analyzed economic consequences of proposed actions, and eliminated a requirement that a majority of its members be chosen from the accounting profession.
Over the years, other crises broadened the scope of disclosure and improved the accuracy and use of information. In 1970, for example, after 160 brokerages failed, Congress required new disclosures from broker-dealers concerning their management and financial stability. In 1977, Congress broadened transparency in response to publicity about bribes and illegal campaign contributions by corporate executives. Lapses in management in some of the nation’s largest corporations led the SEC to issue rules in 1978 and 1979 that required new disclosures concerning the independence of board members, board committee oversight of company operations, and failure of directors to attend meetings. In the 1990s, increases in individual investing and the rise of online investing led the SEC to adopt "plain English" disclosure rules, which required prospectuses filed with the agency to be written in short, clear sentences using nontechnical vocabulary and featuring graphic aids.
The sudden collapse of Enron Inc. in December 2001 once again created a crisis-response scenario that generated pressures to improve corporate financial reporting. Shareholders lost their savings and employees lost retirement funds when the nation's largest energy trader filed for bankruptcy.
Enron’s collapse pointed to systemic problems with the United States' most trusted public disclosure system. The SEC charged executives of Waste Management, WorldCom, Adelphia Communications, Tyco International, Dynergy, Safety-Kleen Corp., and other large companies with a variety of offenses related to withholding information from the public. Executives of Enron, WorldCom, and other large companies were indicted for fraud and other offenses. Ten large investment firms settled with the SEC, the New York State attorney general, and other regulators for permitting improper influence of their research analysts by their investment banking interests. Arthur Andersen, Enron’s auditor, was charged with obstruction of justice for destroying auditing documents, a blow to the firm’s reputation that drove it out of business. Evidence of collaboration by accounting firms that also earned huge consulting fees, stock boosting by analysts, and inadequate oversight by company boards, as well as a declining stock
- We discuss this evolution in detail in Chapter 5.
- Seligman, 1995, pp. 431–437.
- FASB was governed and financed by the new Financial Accounting Foundation, a non-profit organization whose trustees were nominated by five leading accounting organizations (though still elected by the board of the Association of International Certified Public Accountants, AICPA). Task forces drawn from a spectrum of interested groups as well as a broad-based advisory council gave FASB broader accountability. Unlike the previous board, its seven members held full-time positions and did not have other business affiliations. Soon after the board began operation, the SEC issued a policy statement recognizing its opinions as authoritative. Pacter, 1985, pp. 6–10. See also Seligman, 1995, pp. 452–466 and 554.
- Pacter, 1985, pp. 10–18; Seligman, 1995, pp. 555–557.
- One response was the Securities Investor Protection Act of 1970. It produced new SEC disclosure rules that required broker-dealers to give notice when new capital was insufficient or records were not current. Seligman, 1995, pp. 451–465.
- The scandal led to the 1977 Corrupt Practices Act, which required companies to maintain new accounting controls to assure that transactions were authorized by management. This additional transparency was designed to discourage illegal transfers. Seligman, 1995, pp. 539–549.
- Seligman, 1995, pp. 549–550.
- See http://www.sec.gov/pdf/handbook.pdf. Commission chairman Arthur Levitt emphasized the importance of constant vigilance to produce clear and accurate information. Floyd Norris, "Levitt to Leave SEC Early; Bush to Pick 4," New York Times, December 21, 2000, p. C1. See also Plain English Disclosure, 63 Fed. Reg. 6370, 6370 (February 6, 1998) (to be codified at 17 C.F.R. pts. 228, 229, 230, 239, and 274 (Release Nos. 33–7497; 34–39593; IC-23011; International Series No. 1113; File No. S7–3 –97)).