Senators to Battle Over Accounting

A battle over accounting industry reform is building in the Senate Banking Committee, which on Tuesday will consider a Democratic plan that restricts consulting work by accounting firms and a rival Republican measure that is backed by the industry.

Critics of the accounting industry, which has suffered from a series of scandals after Enron Corp.’s bankruptcy last year, are backing legislation by Sen. Paul S. Sarbanes (D-Md.), chairman of the Senate panel.

Sarbanes’ bill calls for creation of a Public Company Accounting Oversight Board that would report to the Securities and Exchange Commission and oversee auditors of public companies.

The measure would restrict consulting work by accounting firms to eliminate a perceived conflict of interest. Sarbanes and others fear that lucrative consulting fees make accountants reluctant to challenge clients over questionable financial maneuvers.

The Sarbanes proposal also would penalize chief executives and chief financial officers if a company reissues financial statements because it failed to comply with securities laws. These corporate officers would be forced to forfeit profit and bonuses earned in the year before any restatement.

Additionally, the Sarbanes measure calls for rotating lead partners on audits every five years to help preserve the independence of the relationship. It also makes companies wait at least a year from the completion of their audit before hiring one of their outside accountants for a company job.

Sarbanes’ bill “could result in serious, harmful consequences for capital markets and American business,” said the American Institute of Certified Public Accountants, the industry lobbying group. “The draft legislation would add unnecessary and nonproductive costs to businesses and impose a duplicative regulatory burden.”

The group claimed last week that Sarbanes’ legislation “would result in a de facto government takeover of the accounting profession” and urged members to contact their senators to oppose it.

Sarbanes and the other Democrats have a one-vote majority on the 21-member committee.

The accountants group noted that Senate Banking members Mike Enzi (R-Wyo.) and Phil Gramm (R-Texas) have offered an alternative plan, which, “as currently drafted, is less intrusive on the profession and the business community, while still providing significant and effective oversight to prevent future business failures.”

The Enzi-Gramm measure creates a Professional Standards Board with fewer powers than the Sarbanes bill envisions. It does not restrict consulting work, force the rotation of lead partners on audits or restrict companies from hiring their outside accountants.

Calls for accounting reform were triggered by the disclosure of Enron’s accounting irregularities and its Dec. 2 bankruptcy filing. Critics say Enron’s auditor, Arthur Andersen, failed to blow the whistle on questionable financial maneuvers, demonstrating how accountants had become too cozy with clients.

Pressure for reform intensified as accounting irregularities surfaced in other energy businesses and industries, including telecommunications, software and cable television.

“The issue is whether you want real reform or weak reform,” said former U.S. Comptroller Gen. Charles Bowsher, who served on a panel led by former Federal Reserve Chairman Paul A. Volcker that attempted to rescue Andersen and transform it into an audit-only accounting firm.

“This is a classic case of how the accounting profession in recent years has wanted the least reform that they could get away with,” said Bowsher, who also was chairman of the accounting profession’s disbanded Public Oversight Board.

After some initial worries that a groundswell of support for reform might overtake Congress, the chief lobbyist for the accountants group now predicts that lawmakers will take a more cautious approach.

“These things don’t lend themselves to simple solutions,” said John E. Hunnicutt, who heads the Washington office of the accountants group and helped defeat an earlier attempt by former SEC Chairman Arthur Levitt to restrict consulting work by auditing firms. “Once the excitement and the glares fade, people really start to think about it.”

The trade group has hired former Republican congressman Vin Weber, now of management consulting firm Clark & Weinstock, and Weiser Group Inc. to help it lobby Capitol Hill and launch a public relations campaign to stave off reforms it considers overly burdensome.

In March, the group sent out thousands of “action alerts” to members, urging them to voice their opposition to proposals to limit consulting services.

Bowsher said he was concerned that Sarbanes’ proposal could be derailed by Gramm, the ranking Republican on the committee and husband of Wendy Gramm, who sat on the Enron board while the company inflated profit through off-the-books partnerships.

Bowsher’s concern was shared by Lynn Turner, former chief accountant at the Securities and Exchange Commission, who heads the Center for Quality Financial Reporting at Colorado State University.

Turner noted that Enron’s collapse caused huge losses to investors and workers.

“It is unfortunate that Sen. Gramm, with his close ties to Enron and the administration, has chosen to vehemently oppose Sarbanes’ efforts to reform the markets and provide investors a reasonable degree of protection,” Turner said.

Gramm aides did not return calls seeking comment. W. Neil Eggleston, an attorney for Wendy Gramm, said she had not discussed the legislation with the senator.

“That is his business, not hers,” Eggleston said.

Bowsher believes that if Sarbanes is unable to get his legislation out of the panel soon, the prospects for its success diminish because Congress will become more distracted by the Nov. 5 elections.

And anything that comes out of the Senate will have to be reconciled in conference with legislation proposed by Rep. Michael G. Oxley (R-Ohio) that passed earlier this year. Turner and other critics of the accounting industry said Oxley’s bill is weaker than Sarbanes’.

In addition to Volcker and Bowsher, the Sarbanes bill has the support of several accounting industry veterans aligned with Volcker’s failed efforts to save Andersen, including C. Michael Cook, former chief executive of Deloitte & Touche, and Russell E. Palmer, former managing partner of Touche Ross before its merger with Deloitte.

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Times staff writer Edmund Sanders in Washington contributed to this report.