Senate votes 97-0 to toughen rules on accounting

Bill would boost penalties, form oversight panel, bar auditors from consulting

`Plans, hopes and dreams at risk'

July 16, 2002|By Julie Hirschfeld Davis | Julie Hirschfeld Davis,SUN NATIONAL STAFF

WASHINGTON - The Senate voted 97-0 yesterday to impose sweeping new rules for corporate accounting, signaling a rising sense of urgency among lawmakers in both parties to rein in company abuses and restore investor confidence.

On a day of gyrating stock prices, the senators passed a bill that would increase penalties for executives who deceive shareholders. The measure would also create an independent board to police the accounting profession. And it would bar accounting firms from providing consulting services to companies they audit, to remove conflicts of interest.

The legislation, written by Senate-majority Democrats, was approved as the topic of corporate responsibility appears to be gaining political momentum by the day.

Still, the bill will have to be reconciled with a weaker version that has been passed by the House, in negotiations that could begin this week.

It is not clear whether President Bush will back the Senate bill's more far-reaching reforms or instead push for the approach favored by the Republican-led House.

"It is no exaggeration to say that the crisis in our markets has put the plans and hopes and dreams of millions of Americans at risk," said the bill's chief sponsor, Sen. Paul S. Sarbanes, a Maryland Democrat. "To restore market integrity on which investor confidence depends, we must move expeditiously to enact this legislation into law."

Sarbanes called on Bush to endorse the bill. He said the president's support would enable Congress to send a corporate accountability measure to his desk by August, a deadline Bush urged lawmakers to meet during an appearance yesterday in Alabama.

As chairman of the Senate banking committee, Sarbanes was the chief architect of the measure. The bill, which had stalled in his committee just a few weeks ago, quickly gained steam after the latest wave of accounting scandals at major corporations.

The House version of the accounting bill, like the Senate's, would create an oversight board. But the board would not have to be completely independent of the accounting industry.

The House bill would continue to allow accountants to provide lucrative consulting services to companies they audit, and it contains no new criminal penalties for corporate fraud.

As passed by the Senate, the Sarbanes bill includes some proposals that Bush called for in his speech on Wall Street last Tuesday. These include longer prison sentences for mail and wire fraud and for corporate obstruction of justice.

But the Senate bill would go further than Bush - by creating the independent board, by limiting accounting firms' consulting work and by forcing senior executives to forfeit bonuses in years when their companies must restate earnings for failing to follow securities laws.

Tough fight ahead

Both the Senate and House bills would authorize $776 million for the Securities and Exchange Commission, a new infusion of money that critics have long argued is necessary. The key differences between the two bills will be resolved in what is sure to be a complex and hard-fought conference.

"This bill is going to be written in conference - there's no doubt about that," Sen. Phil Gramm, a Texas Republican, said last week.

In the House, Rep. Michael G. Oxley, the Ohio Republican who chairs the Financial Services Committee, has contended that the Senate was willing to attach virtually any idea to its bill because Democrats were playing politics with the issue.

Pressure for reform

Oxley argues that his measure is strong enough to prevent corporate scandals. But key Republicans say the pressure to restore confidence in U.S. companies and to rescue the economy has become so great that the House will likely have to adopt the Senate approach.

That point has essentially been conceded by the top Republican in each chamber.

House Speaker Dennis Hastert, an Illinois Republican, endorsed the Sarbanes bill late last week.

And Senate Minority Leader Trent Lott, a Mississippi Republican, said yesterday: "I think going into conference, the Senate bill is a stronger bill."

An independent oversight board for the accounting profession and a mandatory separation between auditing and consulting practices are warranted, Lott said.

"I think the House did good work, based on what was happening and what was known at the time," he said.

Stiffer penalties

But after revelations about the largest instance of corporate accounting irregularities in recent months - the concealment by WorldCom of $3.8 billion in expenses - the Senate bill became tougher by the day.

The week after the WorldCom announcement, Senate Democrats, led by Majority Leader Tom Daschle of South Dakota and Sen. Patrick J. Leahy of Vermont, the Judiciary Committee chairman, began a push for stiffer laws dealing with corporate fraud and obstruction of justice.

These new felonies would carry prison terms of up to 10 years for executives who mislead shareholders and who try to hide questionable transactions by destroying documents.

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