Hill Leaders Agree on Corporate Curbs
Attack on Fraud Includes Auditing Control and Jail Terms; Markets Soar

By Jim VandeHei and David S. Hilzenrath
Washington Post Staff Writers
Thursday, July 25, 2002; Page A01

House and Senate leaders, hoping to restore confidence in the scandal-tainted corporate world, agreed yesterday to broad new regulation of businesses and their auditors, and to stiffer penalties for those who commit financial fraud.

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 have lost trillions of dollars on the stock exchanges since the Enron Corp. scandal broke in October.

The package creates a new board to oversee the auditors of companies traded on the stock markets; limits accounting firms' ability to profit from doubling as consultants to the companies they audit; and gives shareholders more time to sue companies that mislead them. The legislation also dramatically increases 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 yesterday 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 S. Sarbanes (D-Md.), chief architect of the legislation. "We intend to see that they once again merit that reputation."

Congress's actions are a political defeat for 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 Corp. last year and the investigation of its auditor, Arthur Andersen LLP, to focus Congress's 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 toward next week's vote.

Lawmakers hoped yesterday'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. Some lawmakers, however, cautioned that the legislation alone cannot solve all the financial markets' woes.

"One bill is not going to restore confidence in the stock market," said House Majority Whip Tom DeLay (R-Tex.).

As nearly 1,000 chief executive officers 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 will 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 have 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 from ever again auditing publicly traded companies.

Lawmakers said the board, equipped with new enforcement authority, will be a powerful new weapon in deterring companies from making misleading financial statements and to punish 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 Securities and Exchange Commission has the power to discipline auditors of publicly traded companies, but, handicapped by limited resources, has been slow to act.

The bill requires 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 requires 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 legislation that we crafted in the conference, I think, goes a long way in solving some of the egregious problems that have arisen as a result of corporate misconduct and accounting scandals," said Rep. Michael G. Oxley (R-Ohio), who led the House conferees.

The House-Senate deal will make it more difficult for accounting firms to provide "consulting" services to companies they audit. Arthur Andersen, one of the world's largest and most venerable accounting firms, vouched for the flawed accounting at Enron Corp. while reaping millions of dollars in consulting fees from the company.

Under the proposed new 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.

Oxley and many other Republicans wanted to give the oversight board greater flexibility to waive the restrictions, but Democrats resisted.

Republicans also failed to limit the number of years that shareholders are given to sue corporations that allegedly dupe them. Shareholders now have up to three years to file suit; the new law gives them five.

"We will accept surrender from Republicans," said Rep. John J. LaFalce (D-N.Y.), a conference committee member.

The legislation is a victory for Sarbanes, who steered legislation that once seemed in trouble to a unanimous Senate vote last week, and then prevailed over House conferees on the central elements of his bill. The bill passed by the GOP-led House was less stringent and left key decisions to the SEC.

Republicans, who as recently as yesterday were provided private polling data showing that business scandals are eroding some of their support, have pushed hard for quick votes on legislation cracking down on corporations, especially as Democrats are trying to make the issue a central theme for this fall's House and Senate elections.

In final negotiations, Republicans, who a few months ago opposed many of the reforms they are now backing, won longer jail sentences and stiffer fines for corporate criminals. Oxley also won support for a special fund to return ill-gotten corporate gains to investors.