[Congressional Record Volume 148, Number 34 (Thursday, March 21, 2002)]
[Senate]
[Pages S2281-S2282]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. NELSON of Florida (for himself and Mrs. Carnahan):
  S. 2056. A bill to ensure the independence of accounting firms that 
provide auditing services to publicly traded companies and of 
executives, audit committees, and financial compensation committees of 
such companies, and for other purposes; to the Committee on Banking, 
Housing, and Urban Affairs.
  Mr. NELSON of Florida. Mr. President, I rise today to introduce the 
Integrity in Auditing Act. I am introducing this bill with my colleague 
from the Commerce Committee, Senator Jean Carnahan of Missouri. This 
legislation presents a comprehensive approach to securities reform as a 
key element in protecting America's shareholders and consumers in our 
capitalist system. We look forward to the Commerce Committee's 
Subcommittee on Consumer Affairs, Foreign Commerce and Tourism hearings 
in April on these issues.
  I am focusing my review of the Enron collapse on institutional 
investors, like State pension funds representing the guaranteed 
retirement plans of our police officers, firefighters, teachers, and 
other State and local workers. The Florida Pension Fund took a bath 
from investing in Enron, and it cost my State plenty. I want to protect 
the taxpayers and prevent large losses in our public pension systems in 
the future.
  The legislation I am introducing today addresses the safety nets 
intended to protect investors like State pension funds against abuses. 
The Integrity in Auditing Act prohibits auditors from providing any 
nonaudit services to their audit clients. The bill allows auditors to 
perform tax-consulting services with the approval of a company's Audit 
Committee. Additionally, the bill prohibits outside accountants from 
working in a management job for a client company for 1 year. These key 
provisions, essential to any reform effort, are similar to those found 
in other bills including a bill introduced by my colleagues, Senators 
Corzine and Dodd.

[[Page S2282]]

  The legislation adds additional safeguards for the investing public, 
including State pension funds. The bill requires that companies rotate 
their outside auditors every 7 years. The company can continue its 
relationship with the auditing firm through nonaudit client services.
  The Enron collapse poses a challenge to us in designing a system of 
corporate governance that secures better financial disclosure for the 
future. In my view the best response to Arthur Andersen's precarious 
state is to make sure our efforts to reform the profession enables the 
auditing profession to continue their needed work in our capital 
markets with the potential loss of one big player. The legislation I 
introduce today strives to meet that objective.
  In addition to protecting the integrity of the auditing process, this 
legislation recognizes that independent directors should effectively 
monitor management behavior and represent the interests of the 
shareholder. The Council of Institutional Investors and others have 
called for auditor and board independence. Accordingly, the Integrity 
in Auditing Act requires enhanced disclosure of director links to 
companies.
  The bill requires that a company disclose, with every filing, any 
board of director relationship, familial, professional, financial, to 
the company. This legislation also requires that all Audit and 
Compensation Committee members must be independent directors.
  We should be clear that the Securities and Exchange Commission impose 
a swift and serious approach to improving our corporate governance 
systems. This bill includes a sense of the Senate that the SEC should 
take a tough enforcement approach, including criminal prosecutions, if 
warranted.
  One of the biggest casualties of Enron's bankruptcy filing is the 
growing lack of confidence and trust by consumers, employees, and 
investors in the financial statements of companies. Willful blindness 
of companies leads to fuzzy disclosures. Cozy relationships among 
company executives, its auditors and board of directors, money 
managers, Wall Street analysts, lawyers, and others, cry out for 
reform. Our public institutional investors like state pension funds 
deserve no less.
  Mr. President, I recently read Teddy Roosevelt's 1902 annual message 
to Congress. Our 26th President was known as a Trust Buster. He told 
the truth about our free enterprise system. He said ``We can do nothing 
of good in the way of regulating corporations until we fix clearly in 
our minds that we are not attacking corporations; we are merely 
determined that they shall be so handled as to serve the public good. 
We draw the line against misconduct, not against wealth.''
  We can all learn from history as we proceed to find thoughtful and 
appropriate ways to reform our securities laws on behalf of the public.
  Mrs. CARNAHAN. Mr. President, today my friend, Senator Nelson of 
Florida, and I are introducing important legislation to restore 
accountability to the accounting industry. The Integrity in Auditing 
Act will help renew Americans' confidence in our financial markets. 
Investors rely on the financial information that is provided by 
companies and certified by independent auditors. This legislation is 
designed to make sure that these auditors are truly independent.
  Over the course of the last few months, I have been looking into the 
devastating events related to the collapse of the Enron Corporation. As 
a member of both the Governmental Affairs Committee and the Commerce 
Committee, I have participated in numerous hearings on this matter. We 
have heard testimony from many experts about the different things that 
went wrong at Enron. The shareholders were failed by many parties who 
were supposed to be looking out for their interests: the company 
executives, the board of directors, the Government watchdogs, and 
certainly, the accountants who certified that Enron's financial 
statements were accurate.
  But, this is not just about Enron. This is about the disturbing 
number of restatements that firms have filed in recent years. It is no 
longer uncommon for a company to say that profits they previously 
touted were actually fictitious. This is absolutely unacceptable. And 
to the extent that inaccurate accounting can be eliminated by removing 
any conflicts of interest that are preventing better audits, Congress 
must act quickly to do so.
  Let me be clear, that I have the deepest respect for the many 
accountants in this country who are extremely hard working and honest. 
This legislation is not meant to impugn individual accountants or the 
accounting industry. Rather, it will improve this industry. The 
Integrity in Auditing Act will ensure that accountants can do their 
jobs with the highest professionalism, free from any pressures to 
overlook suspicious bookkeeping by their clients.
  The reforms we propose today are urgent and in the interest of all 
Americans. Auditors who simply rubber stamp questionable financial 
reports for their clients do a tremendous disservice to all investors. 
If they prevent true and accurate information from coming to light, 
auditors endanger the hard earned savings of working Americans. Many 
parents are investing money every year to pay for the college expenses 
of their children. Many workers are saving for their golden years in 
401(k) plans or other retirement accounts. Young couples, saving to buy 
their first homes, often put money into mutual funds or money market 
accounts. All of these investors are entitled to accurate information 
so that they can make wise decisions about their savings.

  This legislation is an important step toward ensuring that investors 
can trust the financial information provided by companies. Let me 
briefly summarize how this legislation establishes the independence of 
auditors. First, it prohibits audit firms from providing non-audit 
services to their clients. An exception is made if the client's Audit 
Committee believes it is in the best interest of the shareholders to 
also receive tax services consulting from the audit firm. But it will 
prevent companies from engaging in extremely lucrative management 
consulting or technology consulting contracts with the auditors who 
ought to be providing unbiased assessments of the companies' financial 
health.
  Second, this legislation requires that every seven years a company 
rotate the firm that performs its independent audit. Arthur Levitt, the 
former chairman of the Securities and Exchange Commission made it very 
clear why such rotation is important. In his testimony before the 
Senate Banking Committee he proposed that audit firms ought to be 
rotated in order ``to ensure that fresh and skeptical eyes are always 
looking at the numbers.''
  This legislation will also close the revolving door that could 
compromise independent auditors. It prohibits outside accountants from 
working, in a management capacity, for a client company for a period of 
1 year. This simple restriction will ensure that shareholders, and not 
company management, remain an auditor's primary concern.
  In the interest of providing full information to investors, our 
legislation also requires that any connections between the company and 
a member of the board of directors be fully disclosed, whether those 
connections are familial, financial, or professional. It also prohibits 
any directors who have such potential conflicts of interest from 
serving on the board's audit or compensation committees.
  Lastly, this legislation would express the sense of the Senate that 
the Securities and Exchange Commission ought to take a tough approach 
to the enforcement of securities laws.
  America has the most vibrant and dynamic economy in the world. The 
foundation of our economy is our capital markets, which are robust and 
resilient. But the success of these markets depends on the free flow of 
accurate, reliable information. Our markets are the envy of the world 
because of the confidence investors have in the private and public 
institutions that produce, verify, and analyze this information.
  The legislation we are introducing today will improve our markets. It 
will restore public confidence in auditors. And it frees accountants 
from any inappropriate conflicts of interest. I encourage my colleagues 
to support this bill.
                                 ______