Accounting Reform Bill Gets a Boost

Legislation to toughen rules for the accounting industry cleared a key congressional hurdle Tuesday as federal regulators prepared to move ahead with their own measure, giving fresh momentum to corporate reforms inspired by Enron Corp.’s collapse.

By a surprisingly strong 17-4 bipartisan vote, the Senate Banking Committee approved an accounting industry reform bill that had recently been given up for dead. The bill limits the amount of consulting that accounting firms could provide to companies they audit and creates a new oversight board with the power to discipline auditors.

Separately, the Securities and Exchange Commission prepared to formally propose on Thursday a parallel measure by Chairman Harvey L. Pitt that is tougher than many outsiders had expected.

The dual efforts, coming on the heels of the conviction Saturday of Enron’s auditor, Arthur Andersen, of obstruction of justice, improves the prospects that Washington will take meaningful steps to ensure that investors receive a fuller and more complete picture of public companies’ finances.

Although Enron’s descent into bankruptcy--and revelations of its accounting irregularities--triggered numerous cries for action, the push for reforms appeared to be waning amid business opposition.

The bipartisan committee vote “considerably raises the odds of President Bush having an accounting reform bill cross his desk before the November election,” said Robert Litan, economic studies director for the Brookings Institution in Washington.

Still, difficult negotiations lie ahead. The Democratic-sponsored bill passed Tuesday is tougher than an industry-backed measure approved by the Republican-controlled House in April, and getting a compromise is no sure thing in a closely divided Congress.

But the reform bill authored by Sen. Paul S. Sarbanes (D-Md.) may be getting a boost from continuing allegations of crime in the corporate world--including the indictment two weeks ago of Tyco International Ltd.’s former chief executive on sales-tax evasion charges and the arrest of ImClone Systems Inc.’s founder on insider-trading charges.

Senate Majority Leader Tom Daschle (D-S.D.) warned that corporate responsibility will be an issue in the fall election “with or without legislation.”

The Senate bill would create a five-member Public Company Accounting Oversight Board, to be overseen by the SEC, to establish auditing standards and ethics rules for auditors and to mete out discipline. Two members must be accountants, but no more than two could have an accounting background.

The Senate bill also would establish new requirements for financial disclosure by public companies, establish new rules to prevent conflicts of interest by securities analysts and impose new responsibilities on corporate officers. It also authorizes an increase in the Securities and Exchange Commission budget, to $776 million in fiscal 2003, up from $481 million in Bush’s proposed budget.

Sen. Phil Gramm (R-Texas), top Republican on the Senate Banking Committee, voted against the measure, contending that Congress should leave the details of accounting rules to the new oversight board.

“If we are going to be setting up this independent panel, we ought to let the panel set the standards as to what represents a conflict of interest,” Gramm said.

Sarbanes, the committee chairman, worked with Sen. Mike Enzi (R-Wyo.), an accountant, late into the evening Monday in an effort to gain GOP support. Although the bill still puts limits on auditors doing consulting work, it now allows the oversight board to make exemptions on a case-by-case basis.

The lucrative consulting fees Andersen received from its audit client Enron were seen as a factor that prevented the firm from aggressively challenging Enron’s questionable accounting.

Patrick Basham, senior fellow at the Cato Institute, a Washington think tank, said the Sarbanes bill received “so much support because Senate Republicans have decided, three days after the Arthur Andersen conviction, that it’s time to waive the white flag on the accounting portion of this debate.”

Frank Torres, legislative counsel for Consumers Union, said the committee vote “reflects the lack of confidence among investors and members of Congress that the SEC and the marketplace can get the job done.”

Pitt is calling for a nine-member board that would have broad powers to conduct investigations and discipline accounting firms.

His proposed Public Accountability Board would include at least six independent members not tied to the accounting industry--a key issue with critics who fear that a panel stocked with accountants would tilt toward the industry. The three industry representatives would be blocked from voting on disciplinary matters.

To ensure the board has authority to conduct thorough investigations, his proposal would force accounting firms and public companies to give their full cooperation.

Companies and auditors also would have to finance the board’s operation through the payment of fees.

Pitt’s proposal would take effect in the event Congress fails to pass a law establishing a similar oversight board.

For Pitt, the call for a new accounting board has been a highly charged political issue that has dogged him all year.

Shortly after broaching his original idea in January, the industry’s current monitor, the Public Oversight Board, abruptly announced it would disband in protest. Although the POB was itself blasted as being ineffectual, critics decried the fact that Pitt had consulted with accounting-industry leaders before introducing his idea.

Critics said it showed that Pitt, a former securities lawyer who represented big accounting firms, was beholden to the industry. He has tried to shake that reputation.

Although critics said Pitt’s latest proposal has some flaws, they nonetheless labeled it as far stricter than his first plan.

“We see dramatic improvements in this proposal over what the SEC chairman has said on this topic in the past,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “We’ll need to see the details, but in general it looks [to be] a big improvement over the existing system.”

The proposals overlap in many areas, but there are differences.

For example, Pitt’s nine-member board would have no more than three accountants, whereas Sarbanes envisions a five-person body with up to two accountants.

The nine-member plan would better insulate the board from the accounting profession, Roper said. With five people, the industry could hold sway if just one other member is sympathetic to its position, she said.

But Lynn Turner, the SEC’s former chief accountant who is now a college professor, was unimpressed with Pitt’s proposal. It contains various loopholes, such as that the board would work part-time, Turner said.

“Pitt’s proposal is improved over what he put forth in January, but it’s still a weak proposal.”

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Simon reported from Washington and Hamilton from New York.