[Congressional Record Volume 148, Number 2 (Thursday, January 24, 2002)]
[Senate]
[Pages S101-S102]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mrs. BOXER:
  S. 1896. A bill to prohibit accounting firms from providing 
management consulting services for the companies they audit and any 
other non-audit related services that could result in a potential 
conflict of interest or otherwise impair the independence of the 
auditor, and for other purposes; to the Committee on Banking, Housing, 
and Urban Affairs.
  Mrs. BOXER. Mr. President, today, I am introducing the Auditor 
Independence Act of 2002. The Act directs the Securities and Exchange 
Commission, SEC, to issue regulations prohibiting accounting firms from 
providing management consulting services for the companies they audit 
and barring accounting firms from providing any

[[Page S102]]

other non-audit related services that could result in a potential 
conflict of interest.
  Using the rule that former SEC Chairman Arthur Levitt proposed in 
2000 as a model, my legislation removes the actual conflict of interest 
as well as the perception of a conflict of interest that results when 
an auditing firm provides a client with consulting and auditing 
services.
  The scandal resulting from the relationship between Enron and Arthur 
Andersen is only one example of the overdue need for this reform. In 
November 2001, Enron disclosed that it had overstated profits by more 
than $580 million since 1997. That means that Enron lied to investors 
about its earnings and the Arthur Andersen auditors failed to expose 
that lie in 1997, 1998, 1999, and 2000. During each of those years, 
Arthur Andersen worked as both auditor and consultant to Enron.
  In 2000 alone, Enron paid Arthur Andersen $27 million for its audit 
work and paid the firm $28 million in management consulting fees. In 
auditing Enron, Arthur Andersen clearly made a series of errors. It is 
reasonable to assume that Arthur Andersen's dependence on the 
consulting fees that it charged Enron may have affected the quality of 
their audit work.
  But the problem is not limited to Arthur Andersen. In a study 
analyzing the effects of accounting firms' consulting business on the 
independence of their auditors, Stanford professor Karen Nelson an her 
colleagues provide evidence showing that the provision of non-audit 
services impairs an auditor's independence.
  The study used new data that has become available just since February 
2001, when the SEC began requiring corporations to disclose all audit 
and non-audit fees paid by a corporation to its auditor. The study 
looked at the ratio of non-audit versus audit revenues paid by a 
corporation to its auditing firm. It found that over half of the firms 
paid more for consulting services than audit services, and that over 95 
percent of firms purchase at least some non-audit services from their 
auditor.
  The study also found that corporations with the least independent 
auditors, those who paid the most in consulting fees versus audit fees, 
are more likely to just meet or beat earnings benchmarks, such as 
analysts' expectations and prior year earnings expectations, and to 
report large discretionary earnings. This suggests more ``earnings 
management'', manipulation of debt and earnings data, went on among 
companies in the sample that paid the highest proportion of management 
consulting fees to their auditors. We must remove this conflict of 
interest from the accounting business.
  Public confidence in the integrity of an accounting firm's audit will 
depend now more than ever before on whether auditors are independent 
from the companies that they audit. Auditors clearly cannot be 
independent from the companies they audit if they rely on those 
companies for lucrative consulting fees.
  I look forward to working with my colleagues in the Senate to pass 
this bill quickly as a part of our larger legislative response to the 
Enron scandal.
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