[Congressional Record Volume 148, Number 50 (Monday, April 29, 2002)]
[Extensions of Remarks]
[Pages E657-E659]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




CORPORATE AND AUDITING ACCOUNTABILITY, RESPONSIBILITY, AND TRANSPARENCY 
                              ACT OF 2002

                                 ______
                                 

                               speech of

                         HON. MICHAEL G. OXLEY

                                of ohio

                    in the house of representatives

                       Wednesday, April 24, 2002

       The House in Committee of the Whole House on the State of 
     the Union had under consideration the bill (H.R. 3763) to 
     protect investors by improving the accuracy and reliability 
     of corporate disclosures made pursuant to the securities 
     laws, and for other purposes:

  Mr. OXLEY. Mr. Chairman, I want to take this opportunity to clarify 
several matters on this legislation. First, I want to discuss a 
specific provision of the legislation. H.R. 3763 provides enhancements 
necessary to support the Securities and Exchange Commission in its role 
to protect investors of public companies, including the unique 
relationships of auditors to the absentee shareholder. It is not 
intended to extend to auditors of privately-held companies or other, 
smaller regulated entities. These entities are uniquely different from 
global public companies in many ways. For example, many of these 
smaller companies do not have large executive staffs. Instead, they 
rely on their CPA/auditor to provide objective, trusted advice and 
counsel on a broad range of tax and business issues. Extending the 
reach of these restrictions to such firms could create unintended 
harmful consequences to an important segment of the U.S. economy.
  It is for this reason that the bill contains section 2(j), clarifying 
the application of the bill. This section is intended to ensure that 
public regulatory organizations are properly focused on the auditors of 
public companies with respect to their audits of such companies. It is 
not meant to apply to the thousands of American accountants that 
continue to provide trusted advice to their small business clients.
  Second, Mr. Chairman, I want to take this opportunity to correct a 
specific error that appeared in the Committee's report on the 
legislation. On page 31 of the Committee Report (H. Rept. 107-414), the 
sponsor of amendment No. 1b(5) is incorrectly identified as Ms. Hooley 
of Indiana. The correct sponsor should be Ms. Hooley of Oregon. I 
regret any confusion caused by this error and apologize to the 
gentlelady from Oregon (Ms. Hooley).
  Finally, Mr. Chairman, I am including for the Record the cost 
estimate prepared by the Congressional Budget Office on H.R. 3763. It 
was not available at the time the Committee's report was filed on the 
bill, and I am including it here to ensure a complete legislative 
history for the bill.

                                                    U.S. Congress,


                                  Congressional Budget Office,

                                   Washington, DC, April 26, 2002.
     Hon. Michael G. Oxley,
     Chairman, Committee on Financial Services, House of 
         Representatives, Washington, DC.
       Dear Mr. Chairman: The Congressional Budget Office has 
     prepared the enclosed cost estimate for H.R. 3763, the 
     Corporate and Auditing Accountability, Responsibility, and 
     Transparency Act of 2002.
       If you wish further details on this estimate, we will be 
     pleased to provide them. The CBO staff contacts are Ken 
     Johnson (for federal costs), Paige Piper/Bach (for the 
     private-sector impact), and Susan Sieg Tompkins (for the 
     state and local impact).
           Sincerely,
                                                 Barry B. Anderson
                                   (For Dan L. Crippen, Director).
       Enclosure.

       Congressional Budget Office Cost Estimate, April 26, 2002

[H.R. 3763: Corporate and Auditing Accountability, Responsibility, and 
Transparency Act of 2002, as passed by the House of Representatives on 
                            April 24, 2002]


                                SUMMARY

       H.R. 3763 would establish a new board to oversee the 
     accounting industry and would give the Securities and 
     Exchange Commission (SEC) the authority to review the board's 
     decisions. This new board would be known as the Public 
     Regulatory Organization (PRO). Also, the act would require 
     the SEC to review the financial statements of public 
     companies no less than once every three years. H.R. 3763 
     would mandate that the agency receive and publicize certain 
     filings related to insider trading in electronic format. The 
     SEC and the General Accounting Office (GAO) also would be 
     required to complete a number of studies and rulemakings 
     within several months of enactment.
       In addition, H.R. 3736 would allow the SEC to assess new 
     civil penalties for violations of the act's provisions. The 
     act also would require that any civil penalities collected by 
     the SEC from Enron Corporation, or from Arthur Andersen 
     L.L.C. concerning its audits of Enron, be paid directly to 
     former Enron employees and others designated by the agency.
       Based on information from the SEC, CBO estimates that 
     implementing H.R. 3763 would cost about $150 million over the 
     2002-2007 period, assuming the appropriation of the necessary 
     amounts. Under current law, the SEC's discretionary costs are 
     offset by fees the agency collects from securities markets. 
     Enactment of H.R. 3763 would not change the amount of fees 
     expected to be collected in the future. CBO also estimates 
     that H.R. 3763 would increase revenues and direct spending. 
     Therefore, pay-as-you-go procedures would apply. We estimate 
     that the net change in such effects would be insignificant 
     each year.
       H.R. 3763 contains no intergovernmental mandates as defined 
     in the Unfunded Mandates Reform Act (UMRA) and would not 
     affect the budgets of state, local, or tribal governments.
       H.R. 3763 would impose several private-sector mandates, as 
     defined by UMRA, on certain accountants, companies that issue 
     registered securities, officers and directors of those 
     companies, and certain owners of the securities. CBO cannot 
     determine whether the total direct cost of those mandates 
     would exceed the annual threshold established by UMRA for 
     private-sector mandates ($115 million in 2002, adjusted 
     annually for inflation), as we do not have sufficient 
     information to estimate the cost of prohibiting insider 
     trading during blackout periods when investment activity is 
     restricted.


                ESTIMATED COST TO THE FEDERAL GOVERNMENT

       The estimated budgetary impact of H.R. 3763 is shown in the 
     following table. The costs of this legislation would fall 
     within budget function 370 (commerce and housing credit).

------------------------------------------------------------------------
                                         By fiscal year, in millions of
                                                    dollars
                                      ----------------------------------
                                        2003   2004   2005   2006   2007
------------------------------------------------------------------------
            CHANGES IN SPENDING SUBJECT TO APPROPRIATION \1\
 
Estimated Authorization Level \2\....     36     31     31     31     31
Estimated Outlays \2\................     28     31     30     30    30
------------------------------------------------------------------------
\1\ H.R. 3763 also would have negligible net effects on revenues and
  direct spending.
\2\ Subject to appropriation acts, the gross spending of the SEC is
  offset by fees the agency collects from securities markets. CBO
  estimates that the SEC collections will average about $1.6 billion a
  year over the next five years.

                           BASIS OF ESTIMATE

       For the purposes of this estimate, CBO assumes that H.R. 
     3763 will be enacted by the end of 2002. Assuming 
     appropriation of the necessary funds, CBO estimates that 
     implementing H.R. 3763 would cost $150 million during the 
     2003-2007 period. The SEC's gross spending is offset by fees 
     the agency collects from securities markets on transactions 
     registrations, and mergers of securities. The act also would 
     affect both revenues and direct spending, but the net impact 
     would be negligible for each year.

                   Spending Subject to Appropriation

       H.R. 3763 would require the SEC to review financial 
     statements from every public company at least once every 
     three years. Currently, the SEC employs about 300 people who 
     review about 14,000 annual financial statements submitted by 
     publicly traded companies at a rate of once every five to 
     seven years. Based on information from the SEC, CBO expects 
     that shortening the time between reviews to three years would 
     require doubling the workforce that conducts such reviews. At 
     current pay rates, CBO estimates that salaries and expenses 
     for the new personnel would cost about $30 million a year, 
     assuming appropriation of the necessary funds.
       In addition, implementing two provisions of H.R. 3763 would 
     require the SEC to upgrade its computer systems. First, the 
     act would require the agency to establish a new rating system 
     to review the financial statements of riskier companies more 
     frequently. Also, the agency would have to receive and 
     publicize electronically certain filings related to insider 
     trading. Based on information from the agency, CBO expects 
     that the computer upgrades needed to fulfill these 
     requirements would cost about $1 million in 2003 and less 
     than $500,000 every year thereafter, subject to the 
     availability of appropriated funds.

[[Page E658]]

       H.R. 3763 also would require the SEC to review any 
     sanctions or rulemakings proposed by the PRO. Based on 
     information from the SEC, CBO expects that the agency would 
     need to hire additional workers to oversee the PRO. Assuming 
     that these new personnel would be compensated at current pay 
     rates, CBO estimates that implementing these provisions would 
     cost less than $1 million a year, subject to the availability 
     of appropriated funds.
       H.R. 3763 would require SEC and GAO to complete a number of 
     studies and rulemakings within several months of the act's 
     enactment. Based on information from the CBO estimates that 
     implementing these provisions would cost $4 million over the 
     2002-2004 period, assuming the appropriation of the necessary 
     amounts.

                      Revenues and Direct Spending

       H.R. 3763 would establish new civil penalties for people 
     who mislead auditors in a way that distorts financial 
     statements, officers who trade their companies' stock during 
     periods when employees are not allowed to trade that sock, 
     and other persons who violate the act's provisions. Such 
     civil penalties are recorded in the budget as governmental 
     receipts (revenues). Based on information from the SEC, CBO 
     estimates that these provisions would increase revenues by 
     less than $500,000 a year.
       Under the act, any civil penalties collected by the SEC 
     under current law from Enron Corporation, or from Arthur 
     Andersen L.L.C. related to its Enron audits, would be paid 
     directly to Enron employees and others. Because of the low 
     probability that the SEC would both assess and be able to 
     collect civil penalties from these two companies, we expect 
     that any change in direct spending that would result from 
     this provision would be negligible.
       Under the act, all financial statements required to be 
     filed with the SEC under the securities laws would have to be 
     certified by an accountant that was deemed qualified to do so 
     by the PRO. CBO expects this provision would give the SEC, 
     acting through the PRO, substantial authority to regulate and 
     control entry into the accounting industry. In addition, the 
     SEC could control the appointment of officers to the PRO 
     board, would approve its annual budget, and could grant the 
     PRO board members the authority to subpoena witnesses. 
     Because the PRO would have regulatory power over the 
     accounting industry, thus exercising the sovereign power of 
     the federal government, CBO would consider it a governmental 
     entity. As a result, we believe that its collections and 
     spending should be included in the federal budget.
       H.R. 3763 would require that the board by self-funded, 
     although the act does not specify the nature or the intended 
     payers of any fees or charges it might assess. Based on 
     information from the SEC, we expect the PRO would cost at 
     least a few million dollars a year to operate. Without such 
     details, we cannot determine whether these fees should be 
     classified in the budget as governmental receipts or 
     offsetting receipts. CBO estimates, however, that the net 
     effect of the board's collections and spending under H.R. 
     3763 would not be significant in any year.


                      PAY-AS-YOU-GO CONSIDERATIONS

       The Balanced Budget and Emergency Deficit Control Act sets 
     up pay-as-you-go procedures for legislation affecting direct 
     spending or receipts. CBO estimates that H.R. 3763's net pay-
     as-you-go effects would be insignificant for each year.


        ESTIMATED IMPACT ON STATE, LOCAL, AND TRIBAL GOVERNMENTS

       H.R. 376 contains no intergovernmental mandates as defined 
     in UMRA and would not affect the budgets of state, local, or 
     tribal governments.


                 ESTIMATED IMPACT ON THE PRIVATE SECTOR

       H.R. 3763 would impose several private-sector mandates, as 
     defined by UMRA, on certain accountants, companies that 
     issued registered securities, officers and directors of those 
     companies, and certain owners of the securities. CBO cannot 
     determine whether the total direct cost of those mandates 
     would exceed the annual threshold established by UMRA for 
     private-sector mandates ($115 million in 2002, adjusted 
     annually for inflation), as we do not have sufficient 
     information to estimate the cost of prohibiting insider 
     trading during the blackout periods when investment activity 
     is restricted.
       Under the bill, independent public or certified accountants 
     would be: Subject to a system of review by a public 
     regulatory organization to be established under the act; 
     prohibited from offering both audit and certain nonaudit 
     consulting services (financial information system design or 
     implementation services or internal audit services); and 
     required to prepare final audit work papers and maintain them 
     and other information related to certified financial 
     statements for at least seven years.
       According to the American Institute of Certified Public 
     Accountants and other industry representatives, the industry 
     currently: Sponsors a private entity that reviews independent 
     accountants; has voluntarily stopped offering both audit and 
     such nonaudit consulting services; and retains financial 
     statement working papers and records for seven years.
       Therefore, CBO estimates that the direct cost to comply 
     with those new mandates would be small, if any.
       H.R. 3763 would require that the public regulatory 
     organization be self-funded. Based on information from the 
     SEC, the annual cost of operating the public regulatory 
     organization would be at least a few million dollars. 
     Although the act does not specify the nature of the intended 
     payers of any fees or charges to fund the organization, it is 
     likely that such fees would be levied on the accounting 
     industry and other private entities involved in investment 
     activities. Currently, the accounting industry is self-
     regulated and voluntarily provides the funding.

              Accelerated Financial Information Disclosure

       Under sections 4 and 6 of the act, the SEC would prescribe 
     rules that would require companies that issue securities to 
     file and make public certain financial information on a rapid 
     and essentially contemporaneous basis and to provide 
     additional financial information in periodic financial 
     reports to the SEC. The cost of providing real-time 
     disclosure of financial information and additional financial 
     reporting would depend on rules to be prescribed by the SEC. 
     Since the regulations have not been established, CBO cannot 
     estimate the cost to comply with those mandates.
       Section 4 would require officers and directors of companies 
     that issue securities and certain owners of such securities 
     to disclose electronically to the SEC any insider trading 
     before the end to the next business day. According to the 
     SEC, insider trading disclosure is currently required to be 
     reported to the SEC by the tenth day of the month following 
     the month in which the trade occurred. Under the act, the SEC 
     is required to facilitate electronic filing and disclosure 
     through revising forms needed for reporting. Thus, CBO 
     estimates that the cost of providing such information on an 
     expedited basis would be small.
       Section 4 also would require a company that issues 
     securities to provide on their corporate Web site insider 
     trading information before the end of next business day after 
     the day the disclosure is received by the SEC. According to 
     the SEC, an average of 15 to 20 insider trades per company 
     each year would need to be posted on the company's Web site. 
     With the requirement that the SEC facilitate electronic 
     filing and disclosure, CBO, therefore, estimates that the 
     cost of posting insider trading information on a company's 
     Web site would be small.

                Periodic Restrictions on Insider Trading

       Section 5 would prohibit certain owners and officers of a 
     company from selling equity securities issued by that company 
     during a period (called ``blackout'' periods) when 
     participants in the retirement plan are restricted in their 
     ability to direct investments. Such periods may occur for 
     administrative reasons, for example, when a plan changes 
     recordkeepers. This restriction would increase the financial 
     exposure of affected owners and officers and, thus, could 
     impose a cost of them. CBO does not have sufficient 
     information to estimate the amount of that cost.

                       Code of Ethics Disclosures

       Section 8 would require the SEC to prescribe rules that 
     would require companies that issue securities to immediately 
     disclose electronically any changes in, or waiver of, their 
     code of ethics to the SEC. Based on information from the SEC, 
     a change in a company's code of ethics occurs very 
     infrequently; therefore, CBO estimates the direct cost to 
     comply with this requirement would be minimal.
       Estimate prepared by: Federal Costs: Ken Johnson; Impact on 
     the Private Sector: Paige Piper/Bach; and Impact on State, 
     Local, and Tribal Governments: Susan Sieg Tompkins.
       Estimate approved by: Peter H. Fontaine, Deputy Assistant 
     Director for Budget Analysis.


[[Page E659]]



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