House OKs Accounting Reforms
In the strongest congressional response yet to Enron Corp.’s collapse, the Republican-led House passed a bill Wednesday that would give investors a fuller and more accurate picture of a company’s finances, especially from outside auditors.
But Democrats who control the Senate contended the House bill doesn’t go far enough, setting up an election-year fight that could hinder chances of far-reaching reforms.
The measure, approved after months of hearings on Enron’s descent into bankruptcy and the role in its fall played by its indicted auditor, Arthur Andersen, would create a new accounting oversight board and impose new financial disclosure requirements on publicly traded companies.
“We need to encourage greater corporate responsibility,” said Rep. Michael Oxley (R-Ohio), chairman of the House Financial Services Committee and one of the bill’s authors. “We need to strengthen and modernize accounting oversight. We need to make sure that investors have timely and clear information.”
The 334-90 vote in support of the measure underscored the bipartisan resolve to deal with the economic and political consequences of Enron’s meltdown. But an earlier, largely party-line vote of 219-202 against a tougher Democratic measure signaled the difficulties that may thwart compromise on a final bill.
Influential Senate Democrats have proposed stronger measures, such as restricting accounting firms from providing most consulting services for audit clients to prevent conflicts of interest. The House bill would prohibit only some types of consulting.
Like the House bill, Senate proposals call for creating a new watchdog panel for accountants. But there is disagreement over the panel’s makeup and whether Congress or the Securities and Exchange Commission should determine its powers.
The Senate also is considering a broader package of reforms, including new protections for corporate whistle-blowers and stiffer penalties for document shredding.
President Bush praised the House for its “reasonable approach” to providing better information to investors, making corporate officers more accountable and developing a more independent audit system.
Prospects for Agreement Uncertain
The American Institute of Certified Public Accountants, an industry trade group, said the bill includes “unprecedented and rigorous reforms” in the discipline and oversight of the accounting profession.
But experts disagree over the prospects for House and Senate cooperation on reform legislation.
“I don’t expect that Congress will ultimately agree on anything before the November elections,” said Patrick Basham, senior fellow at the Cato Institute, a libertarian think tank in Washington.
“The Republicans feel politically compelled to do something, anything, to keep any Enron-related fallout away from their candidates, but many GOP congressmen are instinctively suspicious of government overreach in this area and, therefore, will be satisfied with having rhetorically demonstrated their concern,” he said.
Robert E. Litan, economic studies director for the Brookings Institution in Washington, said, “There is a good chance that the Senate-passed bill will be a bit tougher on the accounting profession than the House bill, but what happens in conference [negotiations] is anyone’s guess. What isn’t too difficult to guess, however, is that the president almost surely will sign any accounting reform bill that Congress puts on his desk.”
The bill is the second one approved by the House in response to the accounting irregularities at Enron that led to the largest corporate bankruptcy filing in U.S. history.
This month the House approved a measure to give employees new rights to sell company stock and diversify investments in their 401(k) retirement accounts. Enron employees lost as much as $1 billion in retirement savings when the value of the company stock--which made up more than half the total in their accounts--plummeted and they were restricted from selling it. But the pension measure, like the accounting bill, faces an uncertain fate because the Senate favors stricter legislation.
Supporters of the accounting bill passed by the House said its provisions would have helped prevent Enron’s collapse by requiring companies to disclose off-balance-sheet transactions.
Enron used off-the-books partnerships to hide hundreds of millions of dollars in losses. Andersen was consultant and auditor for Enron at the same time, an arrangement that critics say led to a conflict of interest that ultimately may have delayed the timely disclosure of the energy giant’s financial weakness.
The accounting firm is under criminal indictment for alleged obstruction of justice in connection with the destruction of Enron-related documents.
Other Enron-inspired aspects of the legislation approved Wednesday include a ban on corporate executives’ trading stock when employees are locked out of making changes in their company stock retirement portfolios and a prohibition against company officials’ interfering with outside auditors.
Under the House bill, an accounting oversight board would be created at the SEC, replacing a largely self-regulating system for the industry. The five-member board would include two accountants, a member of the public and two others, who could be former but not current accountants.
It would prohibit accounting firms from offering two types of consulting for firms they audit--internal auditing and computer services.
Democrats favor an accounting oversight board with no ties to the industry and contend the Republican bill gives the SEC too much discretion in setting rules for the new watchdog panel.
They also advocate requiring companies to switch auditors every four years and a “cooling-off” period forcing auditors to wait two years before taking jobs with former clients.
In Wednesday’s House debate, some Democrats characterized the GOP-backed legislation as an example of Republican coziness with big business.
“The Republican leadership, once again, is selling out to special interests,” said Minority Leader Richard A. Gephardt (D-Mo.).
Republicans responded that the bill seeks to strike a balance between the need for more regulation and protecting corporations from too many rules.
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