Ex-SEC Chairman Urges CUs To Comply With SarBox

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In a time when many credit unions are clamoring for regulatory relief, the former head of the Securities and Exchange Commission advises federal CUs to voluntarily adopt some of the strenuous audit, transparency and disclosure requirements of the Sarbanes-Oxley Act of 2002.

Harvey Pitt, who served as chairman of the SEC earlier this decade and oversaw the passage of the Sarbanes-Oxley Act, delivered his message to attendees at WesCorp's recent Future Forum conference here. As not-for-profits, credit unions are not required to comply with Sarbanes-Oxley, although State Employees Credit Union in North Carolina recently announced it would voluntarily comply.

Pitt noted his counsel for federal credit unions to consider improving their corporate governance echoed a similar call to action by JoAnn Johnson, chairman of the National Credit Union Administration. On May 5, Johnson recommended CUs review NCUA's "Letter to Credit Unions" regarding Sarbanes-Oxley, which was distributed in October 2003.

Pitt's company, Kalorama Partners, provides regulatory advice to corporate board members and audit committees regarding the obligations of the Sarbanes-Oxley Act. He said the "breathtaking" scandals of the last 40 years by both businesses and individuals have created the current environment confronting U.S. companies- including CUs.

"Credit unions play a valuable role in our society. I began my savings career when I participated in the SEC's federal credit union 40 years ago," he said. "Federal credit unions have an enviable perch: they are not expressly governed by Sarbanes-Oxley, so they can ignore certain provisions. But, they should know they ignore SOX, as we affectionately call it, at their peril."

The three common elements of U.S. business scandals in recent decades are: a failure to discern and avoid conflicts of interest, a failure to maintain fiduciary duty, and elevating short-term gratification over long-term goals, Pitt said. Some of the most spectacular corporate failures -including Enron and WorldCom-have occurred as more Americans than ever were investing in the stock market.

In response, the people demanded action, he said.

The Sarbanes-Oxley Act was intended to assure excesses, oversights and other forms of corporate malfeasance had even less justification, Pitt explained. "Bernard Ebbers was the hands-on CEO of WorldCom. But when the scandal broke, he invoked the 'Poor Monkey' defense- he didn't know anything, didn't see anything and didn't do anything. SOX was enacted specifically to exclude this defense."

Ebbers was convicted March 15 of nine counts of accounting fraud by a federal jury.

Restoring Trust

According to Pitt there has been much "whining" in corporate America about regulation in general and SOX in particular, which he termed "counterproductive." He said considerable damage has been wrought by the many scandals, and restoration of the public's trust is and will be used as justification for increased regulation by Congress-even before federal agencies get involved.

In the long term, Pitt argued, compliance costs will be reduced by transparency. He said companies lacking transparency will be abandoned by the Big Four accounting firms, banks and other financial institutions, and even their own directors.

"SOX doesn't apply to FCUs, and I certainly hope there won't be a problem with FCUs, but bad things happen to good companies. If there is a problem, there will be a clamor for FCUs to be held to the same standards as other companies. It is better to be ahead of the curve than behind the eight ball, just to mix metaphors.

"Voluntary compliance really isn't-don't be lulled," he continued. "Because if there is a problem, companies will be asked why they did not adopt provisions of SOX."

It is not necessary for FCUs to adopt all parts of Sarbanes-Oxley, but they should at least consider all provisions, said Pitt. Once a review of SOX is undertaken, FCUs should have a sound rationale for each provision not adopted, he advised.

Pitt listed several mistakes for federal credit unions to avoid. These included:

* Don't think when reading of another company's misery it is "them." It is happening to "us." Scandals affect all companies.

* Know that regulators have concluded SOX should apply to financial institutions under their jurisdiction.

* Just because things appear to be going well does not mean they are. Look at what comparable institutions are doing and use that as a guide.

* It is essential for a business to look for problems before they find it.

* Actively play out crisis scenarios, because a lack of crisis preparation hurts companies.

* Companies should do the right thing, and be able to prove they did the right thing by proper record keeping.

"I am aware of the increased regulatory burden on all companies," he said. "But this is not a time to wallow in despair. In this different environment, tough standards and exacting procedures will be rewarded. You can count on it."

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