In a year when the power of deep-pocketed and well-connected groups that influence finance and accounting surged, a 37-year-old professor in Iowa City rocked the business world with nothing more than a sharp mind, an Internet connection, some savvy data analysis and a couple of telephone calls. Research on stock options backdating by University of Iowa associate professor of finance Erik Lie demonstrated that an inquisitive academic's work can be just as influential as hefty political contributions, access to legislators, entrenched networks and stout rolodexes.

Lie's May 2005 article in an academic journal helped propel some 120 companies into the regulatory spotlight as a result of past stock option grants. The list includes Brocade Communications Systems Inc. and UnitedHealth Group (where CEO William McGuire resigned in October as a result of backdating issues).

Lie's findings and the chain reaction of responses they sparked will continue to influence the realm of finance and accounting in the coming months. "This issue has legs because of the continuing lawsuits and the fact that there are new cases popping up every week," Lie says. "There are a lot of [backdating] cases where the circumstantial evidence is rather strong, but those cases have not come to the surface yet."

Influence in the Age of Transparency

In a forthcoming article co-authored with Indiana University associate professor of finance Randall Heron, Lie shows that backdating largely ceased thanks to the Sarbanes-Oxley Act's rule that stock option grants must be reported within two business days.

The impact of the backdating research demonstrates the growing power of transparency in several ways. First, like many other business observers, Lie began with a simple desire to see below the surface of choices to understand what influences management behavior. "I wanted to know what kind of impact stock option grants had on the decisions that executives were making," Lie says. "Do options change their behavior the way they are intended to?" The conclusion Lie's research points to is that in numerous cases options were less of a pay-for-performance lever and more of a maximize-the-bonus opportunity -- until a clause in the Sarbanes-Oxley Act clamped down on backdating.

Second, the raw material of the research was easily accessible. "The data is always becoming more and more readily available," says Lie, who used Standard & Poor's ExecuComp and Thomson Financial's information services to electronically access executive compensation and options filing data.

Third, Lie shared his knowledge with other influencers after completing his research. He finished his first backdating article in 2004, and it was accepted for publication soon thereafter. But the piece would not appear in print until May 2005 in the academic journal Management Science. Rather than waiting for a year, Lie sent his findings to the SEC, which worked with him on their implications over the next several months.

Fourth, Lie also reached out to the media. After spotting a report of questionable options-grant timing in The Wall Street Journal, Lie contacted the newspaper to point out that the practice was widespread. In November 2005, the Journal's special projects editor Mark Maremont described Lie's research in a front-page article. Four months later, in March 2006, Lie provided groundwork to the newspaper that seeded a much larger front-page exposé.

By that time, other influencers were responding to the backdating brouhaha. The SEC and the U.S. Department of Justice had commenced investigations of possible regulatory and legal violations involving backdating at Mercury Interactive Corp., Comverse Technology and other companies. The Public Company Accounting Oversight Board (PCAOB) and the SEC had published fresh guidance on stock options for management and auditors, respectively. Institutional Shareholder Services (ISS) had circulated a white paper titled "An Investor Guide to the Stock Option Timing Scandal." And U.S. Senator Charles Grassley (R-Iowa) had sent an open letter to reporters and editors assuring the public that he had "asked the Justice Department to let me know whether the tax laws on the books are adequate to rein in and prosecute stock option backdating."

Welcome to the Age of Transparency. What follows is a compendium of influential individuals and organizations whose decisions and behavior Business Finance will closely monitor in the coming year to provide readers with a clear picture of the future of corporate finance and accounting.

Watchdogs and Industry Experts

The stock options research and the new executive compensation proxy disclosure rules it helped shape cropped up at a time when other influencers were warning that business regulations are hampering competitiveness. The Committee on Capital Markets Regulation, a group formed last September, consists of leading academic, business, finance and corporate governance figures who are scrutinizing liability and regulatory issues affecting the competitiveness of U.S. capital markets and, more specifically, the costs and benefits of business regulations, such as the Sarbanes-Oxley Act.

The Committee on Capital Markets Regulation is directed by Harvard Law School's Hal Scott and co-chairs R. Glenn Hubbard and John L. Thornton (chairman of the Brookings Institution board of trustees). The committee includes at least 17 other experts, including Donald Evans, CEO of The Financial Services Forum; Weil, Gotshal & Manges LLP's senior partner Ira Millstein; two Big 4 CEOs and the CEOs of Office Depot, CIT Group Inc. and DuPont.

In a Wall Street Journal op-ed piece introducing the Committee's mission in October, Hubbard and Thornton stated that "rolling back the Sarbanes-Oxley law wholesale is not the answer." However, Scott, as well as The Nasdaq Stock Market Inc.'s president and CEO Robert Greifield, President Bush, Vice President Cheney, and U.S. treasury secretary Henry Paulson, each made public comments last year that questioned the cost of Sarbanes-Oxley in its current form. The President told CNBC that he would like to see some facets of the legislation relaxed. Cheney told the same outlet the law may have gone too far.

The SEC continues to feel pressure from both sides of the regulatory divide. Early last year, the U.S. Chamber of Commerce, a powerful business lobbying organization led by president and CEO Thomas J. Donahue, published a paper criticizing the SEC's enforcement policies and practices as too stringent. And a non-profit and non-partisan organization of business leaders and university presidents, the Committee for Economic Development (CED) -- where former SEC chairman Roderick Hills serves as co-chair and chair of the subcommittee on corporate governance -- released recommendations for strengthening corporate oversight.

Critics of potential regulatory rollbacks point out that a large portion of the costs associated with listing on U.S. stock exchanges has little to do with regulatory burdens and much to do with initial public offering fees, which amount to about 7 percent of the money raised in a typical offering in the United States -- compared with about 3 percent in several European markets. These are points that NYSE Group Inc. CEO John Thain and Greifield must contend with.

Other industry experts, watchdogs and even U.S. Congressional leaders worry that the SEC is not doing enough in the way of enforcement. In September, Grassley, who chaired the Senate Finance Committee at the time, wrote a letter to the U.S. Comptroller David M. Walker at the U.S. Government Accountability Office (GAO) asking the intrepid federal watchdog to determine whether the SEC "is effectively managing the substantial increase in funds" it receives as part of a budgetary increase mandated by Sarbanes-Oxley.

The request followed allegations from a former SEC attorney, Gary Aguirre, who reportedly indicated that part of his insider-trading investigation at a New York-based hedge fund was stymied by supervisors. The GAO's audit coincided with news that the SEC's enforcement actions in 2006 declined by about 10 percent from 2005.

The ongoing public discourse on U.S. competitiveness will be shaped next year by the Business Roundtable -- led by president John Castellani and chairman Harold McGraw III (the chairman, president and CEO of The McGraw-Hill Companies) -- one of the most powerful business lobbying groups in the United States. The organization's Institute for Corporate Ethics has co-published a white paper, one promoted by former SEC commissioner William H. Donaldson, that proposes a method for reducing short-term earnings pressure. The paper advises corporate leaders, asset managers and analysts to lessen their reliance on quarterly earnings guidance; develop more effective long-term incentives for corporate executives and asset managers (to replace the "earnings guidance game" with a much stronger focus on long-term value creation); enhance corporate communications on strategy and long-term value drivers; and promote the benefits of long-term thinking while warning against the costs of short-term approaches.

Traditional shareholder watchdogs, including Institutional Shareholder Services (ISS), Glass Lewis & Co. LLC and The Corporate Library continue to influence their constituents. At ISS, executive vice president and special counsel Patrick McGurn continues to be an influential and remarkably busy governance speaker. Last July, a Glass Lewis report titled "Mum's the Word," co-authored by managing director and editor of financial research Jonathan Weil, provided an analysis of how often and why public companies switch auditing firms. The primary conclusion of the study was that "no reason given" is by far the most common response companies offer. In 2004, 58 percent of companies failed to provide an explanation for switching firms; in 2005, that figure jumped to 72 percent. The report concludes that this "code of silence" is unhelpful to investors and "companies that are trying to do right." Glass Lewis also urged the SEC to revise its rules so that companies are required to specify the reasons behind changes.

In the traditional publishing world, New York Times chief financial correspondent Floyd Norris and assistant business and financial editor and columnist Gretchen Morgenson continue to expose lapses in executive judgment. Norris has warned against regulatory complacency on spring loading -- the granting of options on the cusp of good news that gooses the share price -- while Morgenson has exposed a broad range of questionable practices, focusing heavily on executive compensation issues. At The Wall Street Journal, Maremont deserves credit for his own reportage as well as cultivating a relationship with Lie. The Journal's editorial page, under editor Paul Gigot, knows a thing or two about strong stands on business issues, and the opinions expressed there demonstrate that opposing ideas can often thrive within a single organization.

Regulators and Legislators

The SEC, led by chairman Christopher Cox, has been simultaneously criticized for being overly aggressive and lax in its enforcement policies. The lax-enforcement criticism sparked a GAO audit, whose conclusions will be available by June, and suggests that it should reconsider the costs and benefits of certain regulations, including Section 404 of Sarbanes-Oxley. The aggressive-enforcement criticism seemed to reach for targets beyond the SEC, possibly serving as a preemptive strike against prosecutors who want to become the next Eliot Spitzer, current New York State attorney general, who will take the governor's seat this month. Spitzer, who demonstrated uncanny influence in recent years by exposing problems among some of the world's most powerful companies in the investment banking, mutual fund and insurance sectors, continues to serve as a rallying symbol for groups that oppose regulatory and enforcement rollbacks. It seems fair to say that Cox's tenure through late 2006 disproved concerns that the SEC, under his leadership, would be too "pro-business."

Following last November's mid-term elections, which could affect the commission's future dealings with Congress, the SEC faces some big questions. How will it enforce the sweeping executive compensation proxy disclosure rules that took effect in December? What sort of guidance will it issue on the methods management should use to assess internal controls in accordance with Section 404? Will it adjust its rule on shareholder proposals related to board of director elections? How aggressively will the SEC pursue existing cases of backdating -- some of which may have been illegal -- and new cases that may come to light this year? And how will it work, on that issue and others, with U.S. Attorney General Alberto R. Gonzales' staff at the U.S. Department of Justice, which actively polices violations of finance and accounting regulations?

The rest of the commissioners will help find answers. Veterans Paul Atkins and Roel Campos are joined by Annette Nazareth, who was appointed in 2005, and Kathleen Casey, the lawyer who was appointed by President Bush to the commission last July. Casey previously served as staff director and counsel of the Senate Banking, Housing, and Urban Affairs Committee and also as the legislative director and chief of staff for U.S. Senator Richard Shelby (R-Ala.) -- promising experience, given Shelby's strong and balanced leadership of the committee. Last November's elections turned over that committee chair post to U.S. Senator Christopher Dodd (D-Conn.).

Of the 20-plus "office" leaders within the SEC, chief accountant Conrad Hewitt; director of the division of corporation finance John White; and director of the division of enforcement Linda Chatman Thomsen warrant close attention. Hewitt, whose lengthy experience includes stints as audit committee chair at various companies and who possesses public-accounting credentials, has also worked for the FASB. He assumed his SEC post last July. The scrutiny of the commission's enforcement practices puts Thomsen in the hot seat. White has proven to be a dedicated and articulate advocate of principles-based financial disclosures.

Another recent Cox appointment, Public Company Accounting Oversight Board (PCAOB) chairman Mark Olson, faces challenging questions this year: To what extent will Auditing Standard 2 be revised? What progress will the board make in providing guidance on fraud? And will the reports pertaining to the board's inspection of accounting firms be conducted more efficiently?

Olson, previously a member of the Federal Reserve Board of Governors and the Federal Open Market Committee, already has earned his staff's trust and developed a healthy working relationship with Cox and the SEC. Both organizations have reached out to corporate executives, public accountants, academics and investors for input in shaping their agenda, standard-setting and enforcement activities.

After an early stumble out of the gates, Ben S. Bernanke, chairman of the board of governors of the U.S. Federal Reserve, has demonstrated an understanding of the value of a steady hand and, perhaps even more important, carefully-crafted formal communications. Last May, Bernanke apologized to the U.S. Senate Committee on Banking, Housing and Urban Affairs for his "lapse of judgment" in making an offhand remark to a CNBC anchor that caused stocks to temporarily plunge.

Also dropping are the prospects for well-funded retirement among Americans nearing their golden years, despite the passage of the Pension Protection Act of 2006. The GAO is studying the funding status of public pension plans. And private-sector pensions remain in the spotlight. While the bill's sponsor, former U.S. house majority leader John Boehner (R-Ohio) described it as "a major victory for workers, retirees and taxpayers," the legislation's numerous critics argue that a pension crisis still looms. The ongoing debate further elevates the importance of the Pension Benefit Guaranty Corp. (PBGC), which at press time remained in desperate need of a full-time director.

Finally and perhaps most notably, the new Democratic majority in the U.S. House means that U.S. Representative Barney Frank (D-Mass.) assumes leadership of the U.S. House Committee on Financial Services from the retiring Rep. Michael G. Oxley (R-Ohio). One of Frank's top priorities involves executive compensation, and he may revive legislation which, among other provisions, allows shareholders to approve executive pay packages.

Standard Setters, Finance Executives And Accounting Firms

For years U.S. GAAP has been expected to "go international" by converging with international accounting standards, but soon the rules may be going private. In June the American Institute of Certified Public Accountants (AICPA) and the FASB issued a joint proposal intended to improve the financial reporting process for private companies. At press time, the joint initiative was evaluating some 160 responses to the proposal, which posed a big question: Should the FASB consider establishing different accounting standards for private companies within GAAP?

Both the AICPA, which represents more than 142,000 CPAs who work for public and private companies and some 140,000 CPAs in public accounting practices, and the FASB continue to address other questions with significant implications for corporate finance and accounting. AICPA president and CEO Barry Melancon testified in front of a subcommittee of the U.S. House Committee on Financial Services in March. The subject of his talk was accuracy and transparency in financial reporting, and he used the occasion to promote the development and adoption of eXtensible Business Reporting Language (XBRL) -- a standard also supported by Cox through the SEC's voluntary XBRL filing program. The AICPA has also helped promulgate the Enhanced Business Reporting (EBR) framework, which aims to strengthen financial reporting methodologies to better show the links between accounting and shareholder value, through its support of the EBR Consortium. The Consortium's mission is to promote "high quality, transparent disclosures" from companies to the public.

There are rumblings that the FASB may revisit revenue recognition this year, which would qualify as an important and far-reaching undertaking. The FASB also continues to provide fair-value accounting guidance in many of the standards it tackles. Chairman Robert Herz's first five-year term concludes this year, and board member Edward Trott will retire in June.

The FASB and the International Accounting Standards Board (IASB) continue to work on accounting-standards convergence at a measured pace. Early this year, the two organizations will examine measurement-related topics in their effort to develop compatible standards. The influence of two other global accounting organizations, the International Federation of Accountants (IFAC) and the Global Accounting Alliance (GAA), also continues to rise. The IFAC, whose latest standards provide guidance on financial statement audits, often works closely with the GAA, which was formed at the end of 2005. The GAA consists of nine of the world's top professional accounting organizations, including the AICPA, and influences by sheer membership heft: It represents more than 700,000 accountants in Canada, the United Kingdom, Australia, New Zealand, South Africa, Hong Kong and the United States.

The Institute of Internal Auditors (IIA), led by President Dave Richards, boasts a global membership 120,000 strong. The IIA serves its constituency well by holding informative conferences and publishing a wide range of useful research and information that has helped strengthen the internal audit function. A link on the IIA's Web site directs visitors to the results of numerous membership surveys, including everything from the function's recruiting and retention practices to compliance costs and governance practices.

The Committee of Sponsoring Organizations of the Treadway Commission (COSO), which counts the IIA as a member, published guidance in June designed to help smaller public companies monitor and strengthen their internal controls over financial reporting. COSO also has begun collecting input and insights for formal guidance, to be published this fall, designed to help organizations monitor the quality of their internal control systems.

The Open Compliance & Ethics Group (OCEG), a nonprofit actively promoting the concept of aligning governance, risk management and compliance, continues to build on an impressive start. Chairman & CEO Scott Mitchell's OCEG has published an exposure draft of an internal audit guide designed to help executives understand exactly what should be involved in an internal audit of compliance and ethics programs.

The National Association of Corporate Directors (NACD) and Finance Executives International (FEI) face new challenges this year; their respective leaders, NACD president and CEO Roger Raber and FEI president and CEO Colleen Cunningham, have announced their departures. The FEI's Sarbanes-Oxley Section 404 blog continues to provide timely information, not to mention excellent links, on regulatory matters. The FEI's committee on corporate reporting (CCR) also counts as members a trio of corporate finance executives who qualify as influencers: Lawrence Salva, senior vice president, chief accounting officer and controller of Comcast Corp. (CCR chair); Arnold Hanish, CAO of Eli Lilly and Co. (vice chair); and Connie McDaniel, vice president and controller of The Coca-Cola Co.

The Big 4 accounting firms remained relatively quiet last year, as did their largest competitors, most notably Grant Thornton LLP (which could be one major acquisition away from creating a "Big Four and a Half" or even restoring a Big 5) and BDO Seidman LLP. These firms strengthened and streamlined their post-Sarbanes audits; amplified their governance practices; prepared to roll out Section 404 audits to smaller public companies; and, most recently, joined forces to consider whether and how their audits should include forensic techniques.

Academics and Universities

The public accounting sector also must deal with a shrinking supply of accountants. The American Accounting Association, an organization comprised of academic accounting experts, is working to identify and correct the root causes of this shortage.

Finance executives, external auditors and rules-makers can digest a semester's worth of practical insights from any one of the papers published by Baruch Lev, professor of accounting and finance at New York University; Eugene Comiskey, associate dean of faculty and research and professor at Georgia Institute of Technology; or William Kinney, professor of accounting at The University of Texas. In August, the American Accounting Association honored Kinney with the Wildman Medal, an award for publications that advanced the practice of accounting during the past five years, for his 2006 paper, "Auditor Independence, Non-Audit Services and Restatements: Was the U.S. Government Right?"

Academics' contributions are stimulating more informed discourse on business ethics, financial reporting and other crucial business topics. For example, a convenient option backdating link on Lie's University of Iowa Web page takes visitors to an excellent summary of the topic and his research.

An example of valuable cross-pollination between academia and regulatory bodies emerged in August when the SEC named Zoe-Vonna Palmrose as its deputy chief accountant. The former auditing professor at the University of Southern California's Leventhal School of Accounting and Marshall School of Business is on leave from academia. We note her contributions here because her dedication to strengthening financial reporting and auditing processes and recent appointment might serve as inspiration to other professors.

Several academics hold similar role-model credentials, including COSO chairman Larry E. Rittenberg, a professor of accounting and information systems at the University of Wisconsin, who helped draft the National Association of Corporate Director's "Report of the NACD's Blue Ribbon Commission on Audit Committees: A Practical Guide (1999)." Joseph Carcello, director of research at The University of Tennessee Corporate Governance Center, is a member of the PCAOB's standing advisory group and COSO's small business control guidance advisory group task force. And Kenneth A. Merchant, the University of Southern California chair of accountancy, is a long-time influencer who currently serves on the AICPA's business and industry executive committee.

Count Stanford University, the University of Delaware, The University of Tennessee and the University of Wisconsin among the growing number of top colleges that host corporate governance conferences at which executives, board members, consultants, academics, leaders of institutional shareholder organizations and regulators gather to compare notes and hash out current issues. In November, for example, Delaware's John L. Weinberg Center for Corporate Governance co-sponsored a two-day ISS-accredited event with PricewaterhouseCoopers.

Five other universities deserve notice: the University of Notre Dame and Santa Clara University for their business-ethics programs; the Georgia Institute of Technology, whose Financial Analysis Lab produces objective and eye-opening stock market research; Yale University, where Weil, Gotshal & Manges' Millstein directs The Millstein Center for Corporate Governance and Performance; and Columbia University. Columbia's faculty includes two influencers, Columbia Graduate School of Business dean R. Glenn Hubbard and law professor Harvey J. Goldschmid, who often take opposing positions on matters pertaining to corporate finance and governance.

Let's hope that Glenn Hubbard (former chairman of the President's Council of Economic Advisors) and Goldschmid (former SEC commissioner) -- along with other influencers on opposite sides of key issues -- discuss their perspectives constructively. Practical dialogue is a valuable commodity in an increasingly contentious time.