House and Senate leaders, hoping to restore confidence in the scandal-tainted corporate world, agreed Wednesday to broad new regulation of businesses and their auditors, and to stiffer penalties for those who break corporate laws.
Marking the toughest new restrictions on accounting practices since the Great Depression, the legislation is intended to make it harder for corporate executives and auditors to deceive investors, who've lost trillions of dollars in the stock market since the Enron Corp. scandal broke in October.
The package would create a board to oversee the auditors of companies traded on the stock markets; limit accounting firms' ability to profit from doubling as consultants to the companies they audit; and give shareholders more time to sue companies that mislead them. The legislation also would dramatically increase maximum fines and jail sentences for those who violate new and existing corporate laws.
The legislation emerged from six days of talks between House and Senate conferees, who largely adopted the Senate's broader proposals for cracking down on corporate fraud. Legislative leaders predicted the House and Senate will approve the measure by the end of next week, and President Bush signaled he will sign it into law.
"Traditionally our markets have been the fairest, most efficient and the most transparent in the world," said Sen. Paul Sarbanes, D-Md., chief architect of the legislation. "We intend to see that they once again merit that reputation."
Congress' actions are a strong rebuke to the accounting industry, which for years avoided government regulation by showering policymakers with political contributions and hiring former lawmakers and aides as lobbyists. The legislation's bipartisan support suggests that lawmakers from both parties, responding to public anger over the recent corporate scandals, are rethinking the government's decades-long trend toward deregulating business. The bill also suggests a new political resolve to treat white-collar crime as seriously as bank robbery.
It took the sudden collapse of Enron and the investigation of its auditor, Arthur Andersen LLP, to focus Congress' attention on long-standing conflicts of interest in the nation's financial system, and it took a string of other scandals to propel the legislation to passage.
Lawmakers hoped Wednesday's dramatic rise in stock prices was a sign that the legislation will calm investors and persuade them that government is serious about cracking down on corporate fraud.
As nearly 1,000 chief executives are required to certify their companies' most recent financial statements beginning in mid-August, many financial analysts expect more firms to step forward and admit they inflated or misrepresented earnings. At the same time, the Bush administration and several congressional committee chairmen say they'll intensify investigations of corporate wrongdoing.
The new corporate accountability measures are so popular in Congress that an overwhelming majority of the 535 lawmakers are expected to vote for the conference committee report, a remarkable show of bipartisanship that belies concerns that some lawmakers, Republicans in particular, have privately expressed about various details.
House and Senate leaders agreed to create an oversight board to police the auditing of corporations. The board, to be supervised by the Securities and Exchange Commission, would set auditing rules and perform routine inspections of accounting firms. It would have the power to levy stiff fines and to ban auditors who break rules.
Lawmakers said the board will be a powerful deterrent against misleading financial statements and accountants who acquiesce in fraud.
Under the current system, the American Institute of Certified Public Accountants writes and enforces auditing standards. In essence, auditors police themselves and, some legislators say, do a poor job of it.
The SEC has the power to discipline auditors of publicly traded companies, but, with limited resources, has been slow to act.
The bill would require the SEC to step up its routine review of financial reports filed by big corporations. In the past, the SEC has examined only a small percentage of company filings. It also would require chief executives to certify corporate financial reports and attest to the soundness of internal controls. But executives could be held liable only for knowingly misleading investors.
The House-Senate deal will make it more difficult for accounting firms to provide "consulting" services to companies they audit. Arthur Andersen, one of world's largest and most venerable accounting firms, vouched for the flawed accounting at Enron while reaping millions of dollars in consulting fees from the company.
Under the proposed law, the Arthur Andersens of the world will need the permission of a committee of independent directors at a company to provide consulting services. At least in the near future, companies will be reluctant to allow their auditors to do any consulting, supporters say.
The new law also gives shareholders five years to file suit against corporations that allegedly dupe them.