Special Report: impact of new regulations on Corporate America.

• Author: Heffes, Ellen M.
• Position: Financial Reporting - Column

Corporate America is experiencing extraordinarily difficult the stock market's swift and deep downward spiral, corporate and accounting scandals, televised images of handcuffed executives hauled off to jail and the quickly-enacted bipartisan legislation, the Sarbanes-Oxley Act of 2002 (the "Act").

Financial Executive asked Jerry L. Arnold, a frequent contributor, to comment on the impact of the situation from the financial practitioner perspective. Arnold is a professor in the Leventhal School of Accounting at the University of Southern California and the founding director of the USC School of Accounting's SEC and Financial Reporting Institute. He instructs SEC reporting and compliance courses, serves as an expert witness and consults to both large and small corporations. An edited version of his comments follows.

Situation Overview

We are clearly in an unprecedented period, not seen since the Crash of 1929. A broad brush is being applied to all work that conveys information about corporations to the public -- by investors, by the media, by politicians -- which basically says: "don't believe what you read."

I think it is unfortunate, and overstated. It is a widely held perception -- not what I believe to be the facts -- that there is a major systemic problem with the credibility of our reports. We have to deal with the reality that this mindset is permeating the economy and suppressing the markets.

Forty years ago, in 1962, President John F. Kennedy got into the discussion about the Investment Tax Credit and accounting for it. I can't remember an incident since then where a President of the United States has made accounting, reporting and corporate responsibility a centerpiece of his agenda. Until now, that is.

There are several areas where actions are necessary to remedy existing problems and thus create the perception that there's been a floor put under what's being depicted as a bottomless pit of problems.

As an overview, everything now has got to be considered in the context of "we haven't see this before in most of our professional lifetimes." What would be off the table in the past and considered inconceivable is already happening. The Securities and Exchange Commission is the point entity -- adopting the rules, requirements and perspectives that will be pushed within financial statements and, very importantly, beyond the financial statements.

The importance and potential impact of the Act must be considered not only in the context of...