The strength of a country depends on the values of its citizens. Honesty, hard work, and compassion are needed to build a society rich in both goods and in goodness. Because our country values freedom so highly, we are especially dependent on the responsibility of our citizens. And our leaders, whether in business, charity, or public service, must reflect the best America has to offer – in both ability and integrity.

Publicly-traded corporations, in particular, need leaders of strong character. Public corporations are an essential part of the American economic system because they allow ordinary Americans to directly own part of the many firms that build our economy, without having to follow the daily operations of the firms. This system allows a single worker to own pieces of hundreds of different companies – creating a diverse and secure investment portfolio. A teacher in Boise can own part of a hospital in Dallas, a share of a manufacturer in Miami, and a piece of a software firm in San Francisco – without ever visiting the companies. America will always be a sound long-term investment, and every American should be able to participate in its success.

This broad-based ownership, however, imposes a special obligation on the officers and directors of a public corporation. Not only must they perform their duties in good faith to the best of their abilities, they must also disclose relevant facts to their shareholders – the real owners of the firm. Without accurate and timely information, investors cannot make informed investment decisions. Therefore, the President believes we must improve corporate disclosure, make corporate officers more accountable, and develop a stronger, more independent audit system – all without inviting endless litigation.

Most of these goals can be accomplished by the Securities and Exchange Commission within its existing authority. The President will work with the Congress to provide any additional legislative authority that the SEC determines that it needs. If these proposals are implemented, and if the leaders of public companies hold themselves to the highest standards of conduct, U.S. companies will reflect our most important values.

Better Information for Investors

Investors base critical investment decisions on the financial information that the company provides. Each investor must have the opportunity to analyze the performance of the company, and the risks associated with an investment. Without proper disclosure, it is impossible for investors to make informed investment decisions, hold senior management accountable, and ensure that capital is efficiently allocated to firms. The American system of corporate disclosure is the best in the world. Yet, sometimes it seems that the needs of the average investor are forgotten by some companies. These disclosure practices can and should be significantly improved to better suit the needs of investors.

Proposal #1:

Each investor should have quarterly access to the information needed to judge a firm’s financial performance, condition, and risks. The SEC should ensure that public companies are responsible for providing investors a true and fair picture of themselves, and that this information is provided in “plain English.” A company should disclose information in its control that a reasonable investor would find necessary to assess the company’s value, without compromising competitive secrets. Today, disclosure practices have fallen behind the advanced techniques of corporate finance, allowing some firms to conceal the true risks faced by investors. And too many firms have mistaken GAAP compliance for proper disclosure.

Proposal #2:

Each investor should have prompt access to critical information. Under this proposal, the SEC would expand the list of significant events requiring prompt disclosure between reporting periods.

Making Corporate Officers Accountable

Unlike shareholders or even directors, corporate officers work full-time to promote and protect the well-being of the firm. The Chief Executive Officer, in particular, has a duty to oversee the entire firm on a full-time basis. Accordingly, the CEO bears particular responsibility for informing the firm’s shareholders of its financial health. This obligation goes well beyond complying with “check-the-box” accounting. The CEO must be held responsible for informing investors about the financial condition of the public company and the risks it faces.

Proposal #3:

CEOs should personally vouch for the veracity, timeliness, and fairness of their companies’ public disclosures, including their financial statements. CEOs would personally attest each quarter that the financial statements and company disclosures accurately and fairly disclose the information of which the CEO is aware that a reasonable investor should have to make an informed investment decision. Currently, CEOs typically sign only a bare-bones certification regarding the annual financial statements.

Proposal #4:

CEOs or other officers should not be allowed to profit from erroneous financial statements. Under this proposal, CEO bonuses and other incentive-based forms of compensation would be disgorged in cases of accounting restatements resulting from misconduct.

Proposal #5:

CEOs or other officers who clearly abuse their power should lose their right to serve in any corporate leadership positions. This proposal, which would require legislation, would authorize the SEC to ban individuals from serving as officers or directors of publicly-held corporations if they engage in serious misconduct. At present, the SEC needs to seek court approval in certain types of cases.

Proposal #6:

Corporate leaders should be required to tell the public promptly whenever they buy or sell company stock for personal gain. This proposal would cause companies to disclose significant transactions involving officers’ and directors’ purchase and sale of the company stock within two business days of execution. Currently, corporate leaders can go as long as a year or more without disclosing personal transactions with the company and as long as 40 days for open-market transactions.

Developing a Stronger, More Independent Audit System

Just as they do with corporate officers, investors depend on the judgment, integrity and competence of independent auditors. While auditors cannot prevent intentional deceit, they are a critical external check on corporate management. Accordingly, a sound audit system is essential to maintain investor confidence.

Accounting firms’ expanded services, including tax planning and the design of information technology systems, are often offered alongside traditional audit services. In fact, the accounting profession is uniquely qualified to offer many services that strengthen corporations’ controls, and the performances of some services can enhance the quality of audits. However, fees from such services must never compromise the integrity of an independent audit.

Proposal #7:

Investors should have complete confidence in the independence and integrity of companies’ auditors. Under this proposal, the SEC would establish guidelines for audit committees to prohibit an external auditor from performing any other service to an audit client, if the service compromises the independence of the audit. The SEC would also set forth prohibitions against the performance by an outside auditor of internal audit functions for the same client. In addition, the client would be forced to disclose in greater detail all fees paid to the auditing firm and its affiliates. Finally, the audit committees would directly report their recommended choice of auditor to the shareholders.

Proposal #8:

An independent regulatory board should ensure that the accounting profession is held to the highest ethical standards. Under this proposal, an independent regulatory board would be established, under the supervision of the SEC, to develop standards of professional conduct and competence. This board would have the ability to monitor, investigate, and where needed, enforce its ethics principles by punishing individual offenders.

Proposal #9:

The authors of accounting standards must be responsive to the needs of investors. Under this proposal, the SEC would exercise more effective and broader oversight of the Financial Accounting Standards Board, insure its independence, and require prompt promulgation of standards that reflect economic reality rather than compliance with technical requirements. This change would help ensure that the accounting standards are more responsive to the needs of investors, rather than based on the interests of professional accountants.

Proposal #10:

Firms’ accounting systems should be compared with best practices, not simply against minimum standards. Under this proposal, auditors would be required to compare the quality of a company’s financial controls with the best practices of the industry and communicate its findings to the audit committee. The audit committee would be obligated to discuss these findings and the improvement of practices with management, the Board of Directors, and the auditor, and to act independently to require improvement where necessary.