Message To House: Don't Allow Mini-Madoffs

The financial reform effort was dealt a significant setback in the House Financial Services Committee today when the committee approved a regulatory bill (HR 3817) that would exempt firms with a market capitalization of as much as $75 million from accounting rules designed to prevent Enron-style corrupt practices. But that fight is not over.

The issue is the application of the Sarbanes-Oxley law, which was passed in 2003 in the wake of the Enron scandal to require publicly traded firms to conduct independent audits of their finances to expose fraud and accounting errors. Ever since the law was passed, the small business lobby (with considerable help from their big-business buddies) has complained that the law imposes an undue burden on them, and Congress has deferred enforcing the law for firms worth less than $75 million while the Securities and Exchange Commission studies the issue.

The truth is that, as the Consumer Federation of America said in a statement it issued last week, the amendment "ignores the fact that both the SEC and PCAOB [the Public Company Accounting Oversight Board, a private, nonprofit entity created under Sarbanes-Oxley] have already extensively revised these requirements to make them more scalable based on company size and complexity and have reported dramatic implementation cost reductions as a result."

Committee members Scott Garrett, R-N.J., John Adler, D-N.J., and Carolyn Maloney, D-N.Y., have been the leaders in the effort to dilute accountability and disclosure requirements for these smaller firms. These three member happen to be receiving significant campaign contributions this cycle from companies that the committee oversees. So far in this election cycle, based on data from OpenSecrets.com, Maloney has received more than $329,000, Adler about $169,000 and Garrett about $140,000.

The consequence of the amendment these members backed is that while these companies can't individually do the damage Enron did through its fraudulent accounting and its manipulation of energy markets, millions of investors who have small-cap stocks in their portfolios could be ripped off by hordes of mini-Bernie Madoffs. These companies should not be considered too small to play by the rules.

This bill, however, still has to get through the House floor. Heather Booth, the director of Americans for Financial Reform, is one of the activists who has been working the phones today to mobilize opposition to the exemption and to other provisions in the legislation that fall short of the robust reform needed to protect consumers and the Main Street economy.

"It's stunning that at a ime when we're looking for greater regulation, there woiuld be a reversal of the kinds of protections that we need to prevent another Enron-type disaster," Booth told me. "This is moving in the wrong direction."

The full House of Representatives could reject this amendment, however. But to do that the voices of ordinary people are going to have to be loud and strong to compete with the millions of dollars the financial services sector is spending to fight virtually any form of regulation that would curb their reckless behavior. Anyone who has lost a job because the company they worked for can't get credit, anyone who has seen the value of their retirement funds shrink, anyone who has faced a home foreclosure or a sharp drop in their home value—in short, anyone affected by this financial crisis—has a reason to contact Financial Services Committee Chairman Rep. Barney Frank and the members of the House Democratic leadership and tell them not to go along with dilutions to financial reform like the Sarbanes-Oxley exemption written into the bill the Financial Services Committee approved today.

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future