The United States has essentially gone through what some may consider a sustained period of corporate reform for more than 30 years from 1978 to 2008. Credit for an era of corporate reform began in the 1970s with one of the largest failed railroad mergers in the Northeast, as well as the Franklin National Bank debacle. The next decade saw the high-flying Wall Street investment banking firm Drexel Burnham Lambert and consumer electronic franchise chain Crazy Eddie rise to prominence and then topple due to participating in illegal activities. In 1998, Long-Term Capital Management a hedge fund in Greenwich, Conn., had purportedly discovered a scientific method of calculating derivative pricing. Ultimately this hedge fund – created by several Salomon bond traders, two future Nobel Memorial Prize in Economic Sciences winners, and a few other principals – failed and required the Federal Reserve Bank of New York to organize a $3.625 billion bailout to avoid a much wider collapse of the financial markets. The next significant wave of corporate scandals occurred in 2001 to 2002 with the likes of Enron and World Com. The decade was not over before another round of corporate criminal activities perpetuated by HealthSouth in 2003 right through 2008 with Bernie Madoff, Bear Stearns and Siemens.
After each cycle of these corporate scandals and criminal activities, new proposed legislation and implemented corporate reforms took place. Each of these corrective measures had with them accounting provisions and implications that affected the financial and accounting professions and mandates on corporate business activities.
In 1977, the U.S. Congress passed the Foreign Corrupt Practices Act. The legislation was intended to strengthen transparency requirements under the Securities Exchange Act of 1934 and to address illegal bribery of foreign government officials.
Beginning in 1978 and completed in 1994, the American Law Institute (ALI) issued a treatise on corporate reform called the Principles of Corporate Governance (Principles). The ALI’s mission was to promote clarification and simplification of the law and its better adaptation of social needs. As noted in the forward to the Principles, Roswell B. Perkins indicated, “The project focused on issues of governance responsibilities and to state existing or recommended ground rules – some to be implemented by the courts, some by legislatures and some by corporations themselves.”
In 2003, in the wake of two of the biggest corporate scandals in decades, the Sarbanes Oxley Act (SOX) created new and enhanced standards for public corporations and the management of public accounting practices. The corporate scandals cost investors billions of dollars as stock share prices of several of the largest public companies collapsed, shattering the nation’s confidence in the public markets. Following shortly thereafter was the demise of one of the largest and most respected public accounting firms, caught in the middle of two of the largest scandals.
No more than a few years since the passage of SOX, another round of ground-breaking legislation aimed at, once more, restoring public confidence in the banking and financial markets (due to more scathing corporate scandals) began. The Dodd-Frank Wall Street Reform and the Consumer Protection Act was passed as a response to the financial crisis in 2008/2009 that propelled the U.S. and many European countries into what has been aptly referred to as “The Great Recession.”
For more than 40 years after 1934, there were no major sweeping corporate reforms, yet in just a 30-year span from 1978 to 2008 the U.S. passed four major significant corporate and financial reforms. Were all of these reforms necessary? And what might the future hold in terms of more corporate scandals and perhaps even more corporate and financial reforms? Read more in Part 2, coming soon.