Congress in Accord on Business Reform Bill

House and Senate negotiators reached agreement Wednesday on legislation to tighten oversight of the accounting industry and increase criminal penalties for corporate fraud. President Bush will receive the bill today, after final votes in the House and Senate, and is expected to sign it.

The measure authorizes the most far-reaching new business regulation since the 1930s. It creates an independent board to set auditing and ethics rules and to discipline auditors, and it makes corporate officers more accountable for their companies’ financial statements.

The unusually swift action and nearly unanimous vote by negotiators from the Republican-controlled House and Democratic-led Senate underscored the anxiety in Washington about the potential economic and political repercussions of the rash of business scandals that have cost investors billions of dollars.

The legislation was drafted in response to the collapse last year of Enron Corp. and to the role played by its auditor, Arthur Andersen, in helping conceal the company’s precarious financial condition. After languishing for months, the bill gained momentum from disclosures of accounting abuses at several other big companies--and finally took off after reports emerged in late June of WorldCom’s nearly $4-billion accounting misstatement.

The compromise legislation closely resembles the Senate measure, which was regarded as tougher than the bill approved by the House. But it includes provisions approved by the House to mandate prison sentences of as long as 25 years for corporate wrongdoers, to set up a fund to reimburse defrauded investors from fines paid by corporate wrongdoers and to require companies to disclose material changes to their financial conditions in a more timely manner.

Bush, who called the legislation crucial to restoring investor confidence in financial markets, hailed the agreement. “Today was a day of action and a day of accomplishment in Washington, D.C.,” said Bush, whose aides are worried about the possibly negative effect the recent rash of corporate scandals could have on the president’s approval ratings.

Press Secretary Ari Fleischer used the word “accomplishment” a dozen times in his regular briefing for reporters. He sought to link the White House to the work of Congress, while urging both houses to complete work on the measure before they begin their summer recess.

“The president looks forward to signing it into law,” he said.

Sen. Paul S. Sarbanes (D-Md.), a principal author of the legislation, said it “reflects our determination to see that the confidence of investors in our capital markets is restored.”

Rep. Michael G. Oxley (R-Ohio), who presided over the negotiations, added that the bill “goes a long way in solving some of the egregious problems that have arisen as a result of corporate misconduct and accounting scandals.”

Sen. Phil Gramm (R-Texas), who cast the only conference committee vote against the measure, complained that the politics of the issue had overtaken reason.

“In the environment we’re in, virtually anything could have passed the Congress,” he said. He objected that the bill creates a “one-size-fits-all prescription” by imposing new rules on 16,254 public companies, regardless of size.

Opinions varied about what effect the legislation would have on the markets.

“I think Congress had to act,” said Sen. Robert F. Bennett (R-Utah). “But I think all of us should take a somewhat sobering dose of humility and recognize that the markets don’t pay as much attention to us as we pay to ourselves.”

Frederick M. Richardson, an accounting professor at Virginia Polytechnic Institute and State University, said: “If market participants believe that the bill will increase accounting independence and get management attention with the stronger penalties for using accounting methods to inflate results, then confidence should improve and the markets improve accordingly.”

Greg Valliere, chief strategist for Schwab Washington Research Group, said the bill could provide an important “psychological plus for investors who want to see something, anything, get done.”

The legislation will fundamentally change the way public companies--and accountants--do business, experts say.

“For the first time in the history of financial regulation in this country, the legislation will create a truly independent accounting oversight board to enforce rules and prosecute violators,” said James Hamilton, an expert in securities law at CCH Inc., a provider of information on tax and business law.

That oversight board will replace the accounting industry’s self-policing approach to discipline. It will be funded by publicly traded companies. The Bush administration had expressed concern about jurisdictional conflicts between the new board and the Securities and Exchange Commission. The agreement would strengthen SEC oversight of the board.

The American Institute of Certified Public Accountants, an industry trade group that lobbied against some provisions of the bill, said changes required by the legislation will be “dramatic and challenging.” The group pledged to “work cooperatively” with firms auditing public companies to help them adapt to the changes.

Bruce Josten, executive vice president of the U.S. Chamber of Commerce--which also objected to certain provisions, such as extending the time frame for plaintiffs to bring securities fraud lawsuits against companies--said, “Creating a new class of corporate criminals, inviting attorneys into boardrooms and reducing the ability of business owners to make decisions about their companies’ operations could have significant, unintended consequences.”

On the other hand, the Business Roundtable, a lobbying group for chief executives of major corporations, called the agreement “the right bill at the right time.”

Experts said the measure would prevent future Enrons. It will require companies to disclose off-balance-sheet transactions and conflicts, such as the ones used by the energy giant to hide hundreds of millions of dollars in losses.

It would bar accounting firms from providing most consulting services to companies they audit but give the watchdog panel for the accounting industry authority to grant exemptions.

The lucrative consulting fees Enron auditor Andersen got from the firm were seen as a factor that prevented auditors from aggressively challenging Enron’s questionable accounting.

The bill also would accelerate the reporting of stock trades by company insiders, a measure that would have alerted other Enron investors sooner of what Enron insiders were doing with their stock.

The measure prohibits public companies from making loans to executives, but the ban won’t apply retroactively or to credit cards issued by businesses to their employees or to margin loans for employees at securities firms.

The negotiators removed a provision from the Senate-passed legislation that would have subjected corporate officers to criminal penalties for recklessly filing false financial statements. “You shouldn’t be sent to jail for bad management,” Bennett said. Corporate officers still will be subject to prosecution if they willfully file misleading information.

The measure includes criminal penalties for securities fraud and document shredding, and protections for corporate whistle-blowers.

It also bars senior executives from selling company stock during periods when lower-ranking employees cannot sell company stock in their retirement accounts.

The agreement did little to slow the political maneuvering over who is responding more aggressively to the accounting scandals.

House Majority Whip Tom DeLay (R-Texas), noting that the House approved its bill months before the Senate, said, “If the Senate had acted earlier, the markets wouldn’t be where they are today.”

Rep. John J. LaFalce (D-N.Y.), noting that the bill includes a number of measures Republicans previously resisted, said the agreement represented “the Republicans’ unconditional surrender.”

Rep. Barney Frank (D-Mass.) added: “This is a bill for more regulation. This is a bill for more government.... What we see here is a consensus that increasing regulation is in no way inconsistent with respect for the private sector; that in fact, the role of sensible regulation ... is to enhance the capitalist system.”

Senate Majority Leader Tom Daschle (D-S.D.) renewed his call for SEC Chairman Harvey L. Pitt’s resignation after hearing of Pitt’s efforts to amend the bill to raise his pay from $138,200 to $166,700 a year and to elevate his office to Cabinet status.

“Of all the things that he has to think about, it is amazing to me that this is what he’s spending his time thinking about,” Daschle said. The amendment was not included in the final version of the bill.

Consumers Union called the legislation a “major step forward” but said more legislation is needed.

“We need pension reforms,” the group said in statement. “More is needed to help employees and investors whose savings were wiped out by scandals like Enron and WorldCom recoup their losses. We support legislation in California to deter accounting fraud by imposing a cooling-off period on individual accountants handling audits of public companies, as well as a California anti-shredding law.”

*

(BEGIN TEXT OF INFOBOX)

*

Major Provisions

* Establishes a new oversight board, funded by publicly traded companies, to monitor the accounting industry and forbids accounting firms from performing many other services for their public company audit clients.

* Mandates that activities of the oversight board are ‘sub-ordinated’ to the enforcement division of the Securities and Exchange Commission. The SEC also would be guaranteed access to all of the board’s investigative records and would have the authority to inspect the board and require it to keep its own records.

* Sets a host of new reporting and disclosure requirements for publicly traded companies.

* Requires money from civil penalties in securities fraud cases, as well as profits and bonuses paid back by corporate executives under an existing provision, to be put into a fund for defrauded investors.

* Requires immediate disclosure by public companies of material changes in financial conditions, as well as stiffer criminal penalties for securities fraud.

* Prohibits loans to corporate executives but makes clear that the provision will not apply retroactively or to margin loans for personal securities brokerage accounts of a brokerage’s employees or to credit cards that businesses issue to their employees.

* Publicly traded companies would be allowed to use the same accounting firm for outside audits and for audits required by state insurance regulators.

*

Times staff writer James Gerstenzang contributed to this report.