[Congressional Record Volume 148, Number 93 (Thursday, July 11, 2002)]
[Senate]
[Pages S6636-S6643]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
PUBLIC COMPANY ACCOUNTING REFORM AND INVESTOR PROTECTION ACT OF 2002--
Continued
Mr. REID. Madam President, I ask unanimous consent that there be a
vote immediately on or in relation to the Levin amendment, the second-
degree amendment. Following disposition of that amendment, we vote
immediately on the Edwards amendment; and following that, we vote on
cloture, which motion was filed yesterday.
The PRESIDING OFFICER. Is there objection?
Mr. GRAMM. Reserving the right to object, I noticed the McCain
amendment was not listed. Was that an inadvertent error or was it the
intention to exclude that amendment which was offered after the two
listed?
Mr. REID. The last two amendments offered were the Levin and Edwards
amendments.
Mr. GRAMM. Madam President, I have to object.
The PRESIDING OFFICER. Objection is heard. The Senator from Texas.
Mr. GRAMM. Madam President, I ask unanimous consent that the vote on
cloture occur immediately; that we proceed with the process of dealing
with germane amendments; and that we set the time of 8 o'clock for all
debate on the bill to end.
The PRESIDING OFFICER. Is there objection?
Mr. LEVIN. I object.
The PRESIDING OFFICER. Objection is heard.
Amendment No. 4269
Mr. ENZI. Madam President, I do have to answer some of the questions.
I am sorely disappointed that the Senator from Arizona left the floor.
He asked some important questions. He has asked three questions about
accounting. I don't get to answer questions about accounting very
often. I was very excited about that.
Now, I do warn people who may be watching in their offices, or
somewhere else, that accounting questions often put people to sleep. So
it might not always be that exciting for them.
But I do have to say, from what we saw, there is no passion like the
passion of a repentant sinner. This is not the first time somebody has
said we are going to tell FASB what to do.
On May 4, 1994, the Senate said: We do not care what you said in your
multiple pages of FASB rules, we are going to tell you what to do. And
the vote was 88 to 9 the last time we interfered with FASB. I have to
tell you, the Senator from Arizona was in the 88. He was one of the
people who said: I know how to do this. I know how to do this better
than FASB. So listen to me: I am going to vote my conscience on this
and dictate how FASB is going to handle accounting on stock options.
If he and several other people had not voted to tell FASB what to do
at that time, we wouldn't be having this discussion at all.
Now we have another amendment. It is very important to pay attention
to the wording.
What I am trying to do is--as I mentioned, there is no passion like
the passion of a repentant Senator--I am trying to keep people from
sinning again. There are some very important reasons. We cannot take a
complex situation such as stock options, which I think all of us can
spell but for which not all of us can account, and put it into a simple
little paragraph on how it should be handled. This amendment, which is
just one sentence which makes up the whole paragraph, says:
Any corporation that grants a stock option to an officer
employee to purchase a publicly traded security in the United
States shall record the granting of the option as an expense
in that corporation's income statement for the year in which
the option is granted.
One of the problems we are having right now is investors are a little
bit shaken because there are restatements of income being done. Not all
restatements are because something was hidden. Some of those
restatements are because of changes in rules. This will be one of the
biggest changes in rules we have made in decades, and the way this is
written, while it is intended to move to an expense system, does not
really say that. It says that you have to expense it in that
corporation's income statement for the year in which the option is
granted.
There are a lot of options that are already granted. Some of them are
outstanding maybe 25 years. It is more common that it be 2 or 3 years.
The new stock options are done on a much shorter period of time. Even
if it is just 2 or 3 years, what this amendment is saying is, redo your
income statements and restate them for the last 3 years for all of your
options that are outstanding. We did not make you do that before; now
we want you to show a huge change or maybe just a small change, but at
any rate a change, and every time a company announces a change--and I
have had some call and say: I am going to have to do a restatement and
that restatement is going to be upward; you know what it is going to do
to my stock; I am showing an increase in profit, and it is going to
destroy me. All I can say is, it is the law; you have to restate.
[[Page S6637]]
This will cause the biggest restatement in the history of the United
States, the way it is done. One cannot dictate in very simple language
something that will take multiple pages to be able to explain and to
allow reconciliation. If we listened to the explanation earlier, it
sounds as if companies are writing this stuff off and nothing ever
happens with it. That is not true. Every time there is an exercise,
every time somebody trades their option for real stock, there is an
accounting for it. At the end of each year there is a reconciliation
for it to make sure the taxes are paid on the stock options that are
exercised.
We heard something earlier about $625 million that we are losing
because of Enron. It is because they went bankrupt. It is not because
they are not reconciling, because they are not paying taxes. They do
not have anything with which to pay the taxes.
One of the problems with this bill is that we have gotten into a
feeding frenzy. I think of Enron as this huge, dead carcass. In
Wyoming, we have kind of a pecking order of feeding. There are the
grizzly bears, there are the wolves, and there are the coyotes. Each of
them come up and take their bite out of the carcass, but not until the
previous one has finished, and that is kind of the way that we are
handling this bill.
We have this huge carcass of Enron, and we are trying to figure out
how to get rid of it and make sure we do not have any more carcasses.
We have a bill that has the primary right to feed on it. Then we have
the wolves, which are the germane amendments, that have the right to
feed on it. Then we have the coyotes, which do not have any right until
everything else is finished. Those are the nongermane amendments.
What we are trying to say is let us get this carcass finished off
before we have a whole bunch more carcasses, before the stock market
has more problems. They are a little bit worried about us working on
this stuff at all, and if they see an amendment like this with the
oversimplification being thrust on this legislative body to make a
massive accounting decision, they ought to panic. We do not want that
to happen.
There are a lot of reasons this amendment should not be passed should
it ever come to a vote, and I hope everybody would do that. Now, I have
an option I had drafted up. I have over 25 cosponsors from both sides
of the aisle now. It deals with stock options. What it does is put it
back on FASB to come up with a proper solution and gives them some
guidelines to look at. That would be the way to handle a massive
problem like this with a lot of detail for which none of us, including
me, have the expertise.
I am kind of fascinated that Warren Buffett is the main authority on
stock options these days. As I look at it, there are several camps of
people that are opposed to stock options, not opposed to the accounting
of stock options. They are flat out opposed to stock options. Warren
Buffett is one of those. And that is because when stock options are
exercised, it dilutes his stock. I think he probably has more stock
than anybody else in the whole world, and I guess if I had more stock
than anybody else in the whole world I would have gotten there by being
sure that every single piece of that was accounted for. Unfortunately,
that is not the case. But that would give one some compunction to make
sure that none of it can be diluted, which is what stock options have
the possibility of doing.
It is also based on the premise that the company is going to grow and
expand, and that is why all of the people who are employees are willing
to take stock options instead of hard cash. I think all of them would
love to have hard cash as Berkshire is doing.
I suspect that the hard cash does not come to quite as much as the
increase in value of the stock. So given an option between hard cash
and potential in a company that you yourself can work in, you yourself
believe in, you yourself know can grow, you want to participate in all
of that economic growth. So stock options would be something that might
lure you from another company, that might lure you into a startup
company, that might lure your expertise to where you can make this
company grow.
One of the questions that was asked was: If stock options are not a
form of compensation, what are they? At the time they are granted, they
are not anything. There is no assurance of them being worth anything.
They are a potential liability, and there are some models for
determining how to calculate that. They are very complicated. I am not
even sure an accountant can handle all of those things. I think they
have computer models now that are designed by engineers that go through
this thing to calculate what that worth would be so they could put down
some number on their balance sheet. Or they can use the other option,
which is to disclose it in a footnote. If I wanted to devote more time
to this, I would bring over a chart that shows the disclosure that is
in the footnote.
So if people read the annual report of the corporation, they know
what the potential dilution and value of those stock options are.
Then the next two questions are: If compensation is not an expense,
then what is it? And if expenses should not go in this calculation,
where should they go? Those are two questions built on a false premise.
That is why it makes it difficult to answer the last two questions. If
you answer the first one, the next two are not answerable.
Like I said, if I were one of those people such as Warren Buffett who
wanted to do away with stock options, that is the attack I would take.
I would appreciate it if they were a little more honest: We just want
to do away with stock options.
There is another group of people who say all the stock options go to
the top employees and consequently they do not want stock options
either, but the honest part of that is that they do not want stock
options either.
I heard all the references to the newspapers that say expense these
things. Of course, I know that all the newspapers have all the
technical expertise to make that kind of an evaluation. I say that
facetiously, of course.
Senator Sarbanes and I have been working on this accounting bill for
months, and as we went through the hearings that he did with so much
care, very carefully picking the people with the most expertise to be
able to explain to us what went wrong in the Enron situation and what
could be done in the future to prevent that sort of thing from
happening again, it was very educational and he did a magnificent job.
While we were going through that process, I was keeping notes and he
was keeping notes. I think everybody else in the Banking Committee was
keeping notes. From those notes, several of us drafted up a bill. I
noticed that an editorial in the Washington Post down near the end said
something needed to be done, which all of us agree on, and then down at
the end it says Senator Enzi's bill is a sham.
My first reaction was to get ahold of them and say: Can I talk to the
accountant that looked at my bill? Well, the newspaper has journalists,
not accountants. It might be a small flaw in expertise even on stock
option expensing. I have not seen anything in there since I continued
to work with Senator Sarbanes, and some of the principles I had in mind
were some of the same principles that he had, and those were easy to
resolve. Some of the other ones that I had wound up in the bill and are
in this bill that we have before us now. I have not seen any editorial
that recognizes their expertise of that evaluation either.
There were comments about Chairman Greenspan, and I did read the
speech he gave. As soon as I read the speech he gave, I wanted a little
bit more information. So I asked if I could get together with him, and
he was nice enough to come to my office. Through the discussion, which,
again, was educational, I keep learning things every day. This is such
a marvelous institution for education. One of the things he concluded
with was to say: Yes, they should be expensed, but Congress should not
decide how that is done. He was not in favor of us passing something
that said how to handle stock options. I think he could see the wisdom
or the folly, whichever way you want to consider it.
Now, one may have guessed that I am in opposition to the McCain
amendment on expensing stock options. I
[[Page S6638]]
think there are some other ways of doing it better. I think there are
ways that it could actually be voted on by this group if it were done
better. I do not think the one that is presented is the one that is
votable, and I assume he will work with us and make some changes.
As we all know, Enron's executives and employees were issued numerous
stock options. It is now clear that months before Enron filed for
bankruptcy, executives were aware of the true condition of the company.
They exercised millions of dollars of options. Enron employees kept in
the dark on company finances are left with worthless Enron stock, and
retirement savings, while some bad Enron executives absconded with
stock openings. The financial fraud causing the collapse of Enron had
nothing to do with the company's accounting procedures for stock
options.
I appreciate my colleagues' effort to try to fix the problems posed
by Enron, and perhaps WorldCom and Xerox and Global Crossing as we get
into those. Congress must react to what happened with Enron, but it
must be careful not to overreact. I have a principle with legislation
having watched it for a long time: If it is worth reacting to, it is
worth overreacting to. It goes back to the feeding frenzy on the huge
carcass that is here--an overreaction, adding things to one up or
outbid.
While legislation may be appropriate to ensure employees are
protected and prevent future Enrons from occurring, we should not do
anything to hamper rank-and-file employees from receiving stock in
their company. A couple of years ago we passed a bill that went through
both Houses by unanimous consent. That bill was so that the rank-and-
file employees could get it without more difficult accounting. We said
we want the rank-and-file folks to have it. We passed a bill by
unanimous consent. That means everybody who was here at the time said
yes, that is good, without any amendments. That is tough to do around
here. It was a definite recognition we wanted all employees to have
stock options. When properly used, stock options can be a marvelous
opportunity for all of the employees.
In addition, as I mentioned, small businesses and startup companies
must continue to have an incentive to issue options, which is often
their only means to attract qualified employees. I feel so strongly
about protecting stock options for rank-and-file employees in small
businesses that on April 18 of this year I testified before the Finance
Committee against the legislation in this McCain amendment, although it
had more detail to it so it made a little bit more sense. This was
revised so it could perhaps meet the test of not being blue-slipped by
the House because it has the potential for being a revenue issue.
I am against this amendment because it seriously hurts employees,
small businesses, startup companies, and in general the high-tech
industry and many listed corporations which employ thousands of
employees. This legislation will not solve the problem of Enron, that
dead carcass I referred to, or WorldCom, which is still out there
kicking a little bit, Xerox, and perhaps failing dot-com companies, but
instead it will create additional problems for the rank-and-file
employees of the small and large corporations because they will no
longer get the benefit of stock options. Why? Because companies will no
longer have an incentive but, rather, a disincentive to grant them.
We have all heard that Federal Reserve Chairman Alan Greenspan and
Warren Buffett support the purpose behind the McCain legislation
because they believe stock options should be treated as compensation.
Admittedly, they may at some point become compensation, but there is
disagreement at what point that is. Even Chairman Greenspan admitted to
me, as I mentioned earlier, that Congress should not legislate
expensing but that the Federal Accounting Standards Board, or the FASB,
should make such a determination.
This is not an easy determination, although in our discussions we
make it sound like an easy determination. Concepts are much easier than
the detail. That is what makes our legislating so difficult. We can all
agree on huge concepts, but when you figure out the details of how you
get to that, it becomes very difficult.
Secretary O'Neill disagrees that expensing of stock options is a
solution and believes better disclosure provisions would cure the
current problem with regard to stock options. The McCain-Levin bill is
creating the same debate over expensing stock options on company
financial statements that occurred a few years ago. At that time, the
solution was to give companies the option of listing the number of
stock options issued by a company in a footnote to the financial sheets
or directly on its income or financial statements as an expense. Either
way, investors and employees have the ability to see how much stock is
outstanding before they invest in the company or before they exercise
their stock options. These footnotes provide a lot more information to
shareholders or investors than you might imagine, or than the
supporters of the McCain amendment would like you to believe.
Some would like you to believe the average person out there doesn't
have the ability to read a footnote, let alone understand it. I think
at any meeting of employees they would have people contesting that.
They look at some of those annual reports, probably more so than some
of the major investors. Some of it is difficult to understand.
Financial literacy is difficult but very important when you are
investing.
It was mentioned that Berkshire buys companies and switches to cash
bonuses. It does not cause any problem. The problem is, except cash
bonus, you lose your job. Now if they had the option between cash
bonuses and a stock option, in a growing company, which would they
take? It is hard to tell.
Rather than estimate the value of stock options and expense them on
the balance sheets, the companies estimate them in a footnote using
something called the Black-Scholes model. That is because they don't
know what the future value of the stock will be when the option is
actually exercised and sold. That is very important because I have seen
a number of different proposals on this, and one of them, unless you
expensed it and guess exactly what it was at the time you expensed it,
you are not allowed to claim any additional expense. But they don't
realize these things are reconciled so that there is a running value of
actually expensed items.
Again, that gets into a lot of the accounting detail that would put
people to sleep. I have some fascinating charts I would love to drag
out, but I have already lost most of my audience so I won't do that.
They use that model because they don't know what the future value of
the stock will be when the stock option is actually exercised and sold.
So they attempt to make an educated guess. Their footnote predicts what
the expense might be and the diluted earnings per share for the
outstanding stock.
Currently, most companies list the outstanding stock options as a
note to their financial statements. Unlike Boeing, Microsoft, Winn
Dixie, and a few other companies, most companies do not want to list
the options as an expense on their financial statement because it
creates a perception of a drop in value of the company, even though the
stock options have not yet been exercised. In other words, there has
been no expense yet and may not be an expense if the options are never
exercised. Yet under the McCain amendment, companies must list these
stock options as an actual expense to their company when granted. This
would mean taking the estimated value in a footnote and making it an
expense to the company.
A problem with expensing early on, how do you value stock options
which have been granted but not exercised or sold? Almost everyone
believes the current practice of using the Black-Scholes method to
value stock options as currently used on footnotes is fatally flawed.
Under the McCain amendment, companies are going to now have to use this
flawed model to make a guess at what the value of the options are to
determine an expense to the company.
The tax consequences will also be based on this flawed estimate. But
later, when some of the stock options are exercised and the value is
different than estimated, this amendment provides no opportunity for a
reconciliation of company records or taxes.
[[Page S6639]]
That is kind of an accounting principle that there is supposed to be an
explanation for how taxes match up with the books of the company. Yes,
we do force different kinds of calculations for taxes than we do for
the accounting that goes to the stockholders. But the accountants are
able to draw the reconciliation, they are able to show how one number
goes to another number. That is a requirement, as well.
Currently, when the estimates are placed in the footnote, they appear
as what they are, a best guess at their value, with no effects on the
company's books and no need for reconciliation of records later. Yet an
investor can see what outstanding, possible estimated expense might
occur to the company.
Another problem with the McCain amendment is it does not provide for
a method of reconciliation if the stock options are never exercised. So
what appeared as an expense may never happen, yet the value of that
stock actually goes down instead of up. No one would buy the option and
have it cost more than just going out and buying stock. So it is not
exercised. So what appears as an expense may never happen, yet the
financial statement prepared months before reflects an expense and a
decrease in company profit that never occurred. Meanwhile, the current
footnote method shows this estimate to investors as a worst case
scenario of what could occur if all the options were exercised but no
reconciliation were required.
As a result, the McCain amendment creates a disincentive for
companies to issue stock options to those rank-and-file employees.
If this amendment becomes law, many companies will cut back on giving
stock options to rank-and-file employees rather than list those options
as an expense, and create a perception of a decrease in the value of a
company when the stock options are not yet an expense and may never be
exercised. This means employees will lose a valuable means of
increasing their income.
But, these companies are not going to cease offering CEOs and senior
executives this form of compensation--that is deferred compensation.
Big companies will continue to issue stock options to attract the best
talent to top levels of their companies, because this is the only way
they can get the most talented management personnel. Despite what the
media and supporters of this amendment want you to believe, stock
options are not issued to just executives. In fact, those who claim
only a small percentage of stock options are offered to rank-and-file
companies are misguided. For example, Sun Microsystems, which has
approximately 40,000 employees, distributed only 9 percent of its stock
options to executives in 2000 and 2001. In contrast, distribution of
stock options to employees who were not executives was a whopping 91
percent for both those years.
This is not an isolated example. In 1998, over 66 percent of large
companies gave options to some portion of their non-executive
workforce. Of this group, 26 percent granted options to all their
workers and another 15 percent gave options to at least half of their
employees. A 2000 survey of Pricewaterhouse-Coopers and the National
Association of Stock Plan Professionals reported 44 percent of 345
large domestic companies with stock option plans made grants to all
employees, including hourly employees. The San Francisco Chronicle
reports that in the technology sector, this percentage is even higher.
Of the top 100 e-commerce companies, 97 percent give options to all
their employees.
The San Francisco Chronicle also points out that:
Ten years ago, about a million workers were in a few
hundred employee stock programs around the country.
In 2001, that number had grown to 10 millions Americans receiving
stock options. The National Center for Employee Ownership confirmed the
trend is toward more non-managers receiving stock options. However, the
Levin legislation will stop this trend by having a negative effect on
companies which offer stock option compensation packages to their rank-
and-file employees. The McCain/Levin Amendment will also hurt small
businesses and start-up companies which cannot afford to offer the
salaries larger companies give, so they offer stock options as an
incentive to attract highly-skilled employees. And it works. They do
not have the hard cash for bonuses, but they have stock options. In
turn, employees that risk working for start-up companies have the
ability to make much more money than through traditional methods of
payment by salaries or wages.
The National Commission on Entrepreneurship points out that, without
stock options, startup companies which are now household names, like
Intel, Federal Express, Apple, Dell and Starbuck, would not exist. In
addition, the McCain-Levin bill will cause the whole tax structure to
dramatically change. Currently, when stock options are granted or
issued there is no tax consequence for either the employer or employee.
But when stock options are exercised, the employees are taxed as if it
is ordinary income. The income amount is based on the difference
between the market price and the exercise price.
Of course, if it goes down and there are not stock options exercised,
then there is no income tax because there is no gain.
I do have some charts, again, too, that show that the Federal
Government does receive the taxes that are due, unless there is a
bankruptcy.
At the same time, the employer can take a deduction based on the
amount equal to what is considered income to the employees. For
example, if the amount is $25,000 worth of income to employees, the
company may take a deduction based on the same amount, $25,000, times
its marginal tax rate. If the marginal tax rate is 35 percent, the
company would have a tax savings of $8,700. This deduction provides a
useful incentive for a company to offer options to its rank-and-file
employees. Unfortunately, the McCain-Levin bill will force companies to
list the numbers of stock options issued as an expense on its financial
statement before they can take the current tax deduction. And they way
that this particular amendment is written, it will have to be a
restatement for all the years for which there are stock options out. As
I mentioned, this added expense to the financial statement alone is a
disincentive for companies to issue stock options. In addition, under
the McCain-Levin amendment, the tax treatment of the deduction totally
changes, becoming much more complicated because it involves valuing
stock that has never been exercised. The tax complexity created by this
amendment is another disincentive for companies to issue stock options
to rank-and-file employees.
Add to all of this, the fact that stock options are not all exercised
at the same time. But that is the optional part of it. When you are
given a stock option, you have the control over when you personally
want to take the stock option or not take the stock option.
Then there are some other interesting amendments out there that could
deal with stock options and whether lawyers could ever exercise them,
or whether they would have to reinvest them--a lot of complications.
But even assuming they are exercised at the same time, the McCain
amendment imposes much more complexity to the current system.
Again, I have some charts that could show how all that complexity
comes about, but it looks as if we are ready to move on to another
decision here so I will pass on that.
If I have confused anybody, I know that I have not confused them
nearly as much as if I showed them how this actually worked. This is
not easy stuff. I guess that is what keeps accountants in business. It
really isn't all the taxes that people pay, although a lot of the
revenue comes from figuring the taxes.
I do hear from accountants who say: You really need to simplify the
system. Yes, I do hear from accountants that way--not just about this
system but the tax system as well. There is plenty of work out there
for them to do and not enough accountants, and there are less and less
every day. However, I think I have made one thing crystal clear--99
Senators with no accounting degree, and 1 Senator with an accounting
degree, have no business trying to rewrite the accounting methods of
publicly listed companies. In other words, if you or your staff don't
understand any of this, then you shouldn't vote for the McCain-Levin
amendment. Instead, the Federal Accounting Standards Board, or even the
Securities and Exchange Commission, have much more expertise to make
these determinations. We can direct them to look at
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current accounting methods, rather than passing specific legislation on
replacing the current system. We can direct them to look at possibly
developing a better pricing model to value stock options than the Black
Scholes method. We can ask it to look at possibly improving disclosure
provisions to better inform investors, including using plain English
and charts and graphs. We should direct them to create rules that
continue to promote ownership of company stock by employees, rather
than providing disincentives to companies in granting stock options.
Let's let the entities with expertise study and recommend what will
prevent future Enrons. Otherwise, we may create a remedy that is worse
than the disease.
As mentioned before, I worked with Senator Lieberman and Senator
Allen and Senator Boxer and numerous other Senators to come up with an
amendment that would give some direction to FASB. It would show them
that we do want them to take a look at this, that it is a priority, and
that we would like to have a solution as soon as possible, but not one
that will destroy the entire market, not one that will require
retroactive restatements for all of the companies to bring them up to a
specific present point.
There will be companies that will choose to do that, but in the
present atmosphere that could be very detrimental to the entire stock
market. So I hope we will not try to go with something oversimplified
as the McCain amendment is, and that we will take a look at making sure
that options are treated properly, as we are trying to do in this bill,
with all accounting. We are trying to set up a mechanism--a mechanism,
not specific language on accounting--a mechanism for determining proper
accounting, and I think the bill before us does a good job of doing
that. It sets up oversight for discipline and ethics. It will be the
first time that we have had centralized any profession. But it will
solve some problems, and it needs to be done quickly for the sake of
the stock market. I am sure we will get to address this at a later
time.
I heard the threat of the Senator from Arizona. I hope in the
meantime that his threat will include a little rewrite that gives a
little bit more latitude and puts the situation in the hands of the
people who actually have some expertise on this.
I yield the floor.
Mr. LIEBERMAN. Mr. President, I want to talk briefly today about how
America got caught in the current quicksand of corporate scandal and
how we can help dig our economy out of it.
Our economy is in trouble today not because we have a shortage of
parts, labor, or ingenuity, but because the American people have a
shortage of confidence in the basic mechanics of the marketplace. Every
new corporate scandal jostles our markets with the force of a jab or an
uppercut. If the punches keep coming and we don't react, our economy
will get even wobblier. It may even get knocked down.
Investors are shaken. They don't know what's real anymore. Trust has
eroded. The stock exchanges are suffering. These are serious problems
that demand a serious response, which is why I strongly support Senator
Sarbanes' legislation to reform accounting oversight and strengthen
corporate accountability.
I welcome President Bush's voice to this discussion, and appreciated
the principled remarks he made in New York on Tuesday. But the
President's substantive proposals were late and they were limited. I
regret that he still hasn't committed, and committed forcefully, to the
meaningful, systemic reforms in the legislation before the Senate
today. This is a responsive bill. It is a responsible bill. A vote for
it is a strong vote of confidence in the American economy. And the
President's failure to speak out in favor of it, in my view, sends the
wrong message to our markets.
In the wake of Enron's collapse, I had hopes that self-regulation
could heal many of the wounds inflicted on our markets and on our
economy. I have called for the markets to toughen listing standards,
and for companies to make ethics a front-burner issue, not a footnote.
Many companies have made progress. The stock exchanges and other
business groups have worked to root out conflicts of interest and to
demand more independent corporate oversight.
But the new revelations, which seem to come daily, have demonstrated
that these problems go far beyond a bad company or two or three. We now
have to ask not whether there are more scandals lurking in the fine
print, but how many more are there? And we have to ask, what is it
about the shape of the system that needs to be corrected to prevent
similar debacles from happening again?
The system isn't broken, but it is strained. And we all now
understand that self-regulation, as critical as it is, will not do
enough to fix the damage.
The stakes are high. Over the last two decades we have witnessed an
explosion in middle-class participation in the capital markets. A
majority of Americans now have a direct stake in stock or mutual funds,
usually, through their 401-k plans. Those American investors have
discovered, through the painful shock of every new recent revelation,
that the basic, traditional ethical values of small businesses, where
you respect every dollar, pay back your investors, treat your employees
well, and serve your customers honestly, are not always shared in the
boardrooms of some large corporations.
Today and tomorrow, the American people deserve every confidence that
their government is setting the highest standards of honesty,
transparency, and accountability and enforcing those standards without
hesitation.
That is why I strongly support Senator Sarbanes' bill. It is a potent
prescription for the serious ethical ills that ail our economy. The aim
here is not just to penalize individuals when fraud happens; it is to
prevent future economic catastrophes, to the degree that we can, and
re-instill confidence in the marketplace. I regret that after the
collapse of Enron and the pretty pathetic parade that has followed of
Global Crossings, Tycos, ImClones, and WorldComs, the President still
hasn't awakened to the full scope of the problem or the need for a
strong solution like that proposed by Senator Sarbanes.
Gene Sperling, former Economic Adviser to President Clinton, put it
well. After September 11, we all understood what was necessary to get
people back in airports and on airplanes. Cracking down on hijackers
with tough new criminal penalties wouldn't be enough. We knew that we
needed to improve baggage and passenger screening, fortify cabin doors,
and make a whole host of other changes that addressed the systemic
problems that let the attacks happen in the first place.
The same is true here. If we want Americans to regain confidence in
our economy and get back in the market, as they have gotten back in the
skies, we need to not only get tough on offenders, but to get tough on
the structural problems that enable the offenses. That means closing
loopholes and rooting out the endemic conflicts of interest that put
even decent people in difficult if not untenable situations.
Senator Sarbanes' bill would set up a strong, independent board to
oversee accountants--a critical step that will give Americans reason to
believe their numbers again. The President hasn't come out clearly in
favor of that. The bill would restrict firms from doing both consulting
and auditing for the same company in most cases, addressing what is a
corrosive conflict in the system today. The President hasn't supported
that as a law yet. The bill would also go further than the new NASD or
NYSE rules to address the inherent conflicts of interest that currently
prevent Wall Street analysts, who make the judgments so many Americans
rely upon in making their investment decisions, from thoroughly and
independently scrutinizing the companies they cover. In the hearings of
the Senate Governmental Affairs Committee I chair, we discovered that
those conflicts are real, deep, and widespread. Unfortunately, the
President hasn't been strong enough or sharp enough on this issue. And
the bill would require disclosure within 7 days anytime a corporate
executive takes a loan from the company he is working for.
We in Washington cannot and should not pretend to be able to fix all
these problems single-handedly, but we have an essential role to play.
We must lead.
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And at the same time, we must take care not to let this turn into an
anti-business crusade. I believe in American business. My father was a
small business owner in Stamford, CT. Through hard work he bought a
house, sent his kids to college, prepared for retirement, and bettered
his community.
You cannot be pro-jobs and anti-business. You can't be pro-growth and
anti-business. You can't be pro-opportunity and anti-business. Business
has created our unprecedented prosperity, and business will continue to
extend more and more opportunities to more and more Americans and
people around the world. But not if we let this erosion of confidence,
this rust of distrust, keep eating away at our markets.
American values are better than Enron's values. They're better than
Global Crossing's values. They're better than WorldCom's values. And so
is the American economy better and stronger than these companies'
ethical and economic breaches of trust. This bill will point the way to
both better ethics and better economics. It should become law.
Mr. FEINGOLD. Mr. President, I support S. 2673, the Public Company
Accounting Reform and Investor Protection Act of 2002, and I commend
Senator Sarbanes for his efforts to produce this measure. That it is
needed is a sad commentary on the state of corporate finance, but it is
also a reminder that free markets do not work well without a set of
rules and regulations in which the marketplace can be confident. It is
also a reminder that if government is to farm out the task of
regulating corporate finance, then those entities that are designated
to patrol corporate activities must also have the confidence of the
marketplace.
The Enron and WorldCom disasters were notable but not isolated.
Observers have noted the increase in corporate financial restatements
in recent years. In testimony on this point, Robert Litan of the
Brookings Institution reports that the number of American corporations
whose earnings have been restated had been modestly rising throughout
the 1990s, but then took a big jump in 1998 and hit a peak of over 200
in 1999. Many reasons have been offered for this development. Some
point to the tying of executive compensation to stock performance.
Others have noted the potential conflict of interest that arises when a
firm provides both auditing and consulting services to the same firm.
Both explanations have some merit.
And I will add to both of those reasons the enactment of a so-called
securities reform measure in December of 1995, a law that made it more
difficult for stockholders to hold corporations and accounting firms
accountable for bad behavior. One newspaper has characterized that law
as expanding ``a climate that invites the kinds of securities and
accounting abuses that investors and employees suffered in Enron's
colossal collapse.'' In reviewing the history of that bill, the
Washington Post reported that ``accountants at what were then the Big
Six firms lobbied aggressively for the measure, spending millions of
dollars.'' The Post story also adds a foreboding note that ``leaders of
Arthur Andersen were so pleased with their efforts they encased the
text of the new law in a paperweight and handed it out as a souvenir.''
The reforms we consider today are extremely modest, and I look
forward to supporting amendments that will further strengthen this
bill, including Senator Leahy's amendment that will strengthen
enforcement and sanctions for securities fraud. That amendment passed
unanimously out of the Judiciary Committee earlier this year. It
creates new criminal laws for altering or shredding documents and
provides tough new penalties specifically for securities fraud. It
prevents wrongdoers from avoiding those monetary damages by filing for
bankruptcy. It provides specific whistleblower protections for
employees who provide information to Federal regulators or criminal
investigator about corporate wrongdoing. And it increases the statutes
of limitation in securities fraud cases, responding to clear evidence
that the shorter time limits put in place by the 1995 securities reform
law have allowed wrongdoers to escape liability. These are necessary
steps, and I applaud the chairman of the Judiciary Committee for
bringing this amendment forward on this bill.
We should also consider other steps, if not on this bill then as part
of another vehicle, to close down abusive tax shelters that encourage
the kind of creative bookkeeping used by Enron, and to address the
double standard of allowing certain forms of executive compensation to
be deducted from taxes, while remaining hidden from investors.
All of these steps face opposition by interests who are more
concerned with their own profits and survival than with the public
interest. Unfortunately, these interests have held great sway over the
Congress over the last decade, using soft money contributions and
lobbying might to smother reform proposals before they could receive a
fair hearing and action by the Congress. It is very unfortunate that
the measures we are considering today were not enacted years ago. If
they had been in place, thousands of employees might not have lost
their jobs and millions of investors might not have lost their life
savings.
Let us not forget that the central players in the scandals of the
past year are not rogue companies operating at the fringe of American
economic life. No, they are some of the biggest companies in the
country, and they have been central players in a corrupt campaign
finance system that this Congress finally started to address by passing
the McCain-Feingold/Shays-Meehan bill a few months ago.
We have all heard of how Enron curried favor in Government. It gave a
total of nearly $3.7 million in soft money to the political parties
from the 1992 election cycle through June 3 of this year according to
Democracy 21. Arthur Anderson made about $645,000 in soft money
contributions during that period. Global Crossing gave just over $3
million to the parties in soft money from the 1998 election cycle to
the present. And WorldCom, whose failure has brought us to the point
where we will actually pass these long needed reforms, has given over
$4 million in soft money, dating back to the 1992 cycle. Just in this
cycle, with all its problems, WorldCom has already made $400,000 in
soft money contributions, according to the Center for Responsive
Politics.
These are enormous sums. They show, frankly, that our political
parties are among those who were unjustly enriched by these companies
who cheated their shareholders and employees. I understand that some
contributions have been returned, but just as in the case of the
employees who lost their jobs or the investors who lost their life
savings, the damage has been done. The contributions had their intended
effect when they were given.
As I mentioned before, and as we all know, Congress passed and the
President signed a bill to ban soft money earlier this year. So these
enormous soft money contributions should be a thing of the past
starting in the next election cycle. Members of Congress will no longer
be allowed to call up the CEOs of Enron, or Arthur Anderson, or Global
Crossing or WorldCom, or any other corporation, and ask for enormous
contributions for the political parties and then have to come back to
this floor and vote on legislation that might affect their activities.
At least that is what we intended. But in just the last few weeks, the
Federal Election Commission has undermined the law that we passed after
so many years of effort. The new regulations on our soft money ban that
are about to be promulgated open enormous new loopholes in the law
before it even goes into effect. If we want to remove the stain of soft
money from the legislation we pass in this Congress, we cannot allow
that to happen.
The sponsors of campaign finance reform intend to invoke the
Congressional Review Act to overturn these regulations. That will send
the FEC back to the drawing board to do the job of implementing the law
right. Doing this is part and parcel of addressing the corporate
scandals that have led to our work on the floor today on this important
bill. Unless we defend the soft money ban, the influence of
unscrupulous corporations on the Congress will continue, and we will
find ourselves again in the situation of trying to explain to America
why we didn't act to prevent further corporate and accounting scandals
or other scandals before they happened.
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According to Consumers Union, just over half of all U.S. households
are investing in the stock market, many through their retirement
savings. If the public is to have confidence in the financial markets,
they must have a complete and honest accounting of the financial health
of the firms in which they invest. This bill is a good starting place,
and I look forward to supporting it. And I look forward to maintaining
public confidence in the Bipartisan Campaign Reform Act of 2002 by
overturning the FEC's loophole-ridden regulations before they take
effect.
Mr. KYL. Mr. President, as Congress debates S. 2673, the Public
Company Accounting Reform and Investor Protection Act of 2002, it is
important to keep in mind certain facts: The United States of America
is the most successful country in the world. No other country outworks,
outproduces, or economically outperforms the United States. Americans
have much to be proud of and it is due to the vigor of our businesses,
the entrepreneurial spirit of our citizens, and the willingness of both
to take risks. For hundreds of years, people from every corner of the
globe have chosen to come to our country and pursue what has become
known to the world as the American Dream.
The American Dream can and should be available to all Americans who,
with diligence, determination, and a sound moral compass, choose to
pursue it. Unquestionably, our government has an important role to play
in ensuring its viability. By the passage and enforcement of laws to
protect Americans seeking to achieve success, lawmakers reaffirm that
America's prosperity rests on the rule of law, on the existence of
safeguards, checks, and balances to ensure that all compete fairly in
the marketplace. These protections must be transparent and easy to
understand. This is not only so that businesses and individuals can
readily determine what distinguishes appropriate from inappropriate
action, but so that all may have faith in the governmental bodies
tasked with enforcing the rules.
The implosion of Enron, Global Crossing, WorldCom, and other public
companies has caused widespread concern about the soundness of American
businesses. Public confidence in corporate practices has been
undermined, and serious questions have been raised about the accuracy
of corporate audits and the integrity of auditors. Many Americans have
become worried that neither internal corporate safeguards nor the
government's financial oversight mechanisms are functioning properly.
I share these concerns and I am glad that the Senate is seeking to
address them. All Americans have a stake in a healthy business climate,
and we know that health depends on having an ethical business climate.
While the past two decades have unleashed a tidal wave of
entrepreneurship and successful business growth, we have also
witnessed, most notably throughout the late 1990's, an ``anything
goes'' relativism that has increasingly penetrated our corporate
business and political culture.
We've always taught our children a moral principle well expressed by
Macauley: that ``The measure of a man's real character is what he would
do if he knew he would never be found out.'' We do so because, as
parents, we know that we cannot supervise our children forever. When
they face, as they inevitably will, a choice between the easy road of
cheating or the tough road of following the rules, we want them to
choose right, not wrong.
Sadly, this lesson seems to have been forgotten lately. In the haze
of morally gray areas, corporate executives have come right up against
the limits of what is acceptable behavior, and in several cases, have
gone beyond it. What's worse, these companies' boards of directors have
stood by in the face of wrongdoing, either unable to discover it or
unwilling to rouse themselves to take corrective action.
I am very troubled by the inability of the markets to see through the
phony numbers being generated by these enterprises. As a result,
average investors no longer enjoy the protections put in place to
ensure accountability and transparency. I agree with President Bush,
who said that ``to properly inform shareholders and the investing
public we must adopt better standards of disclosure and accounting
practices for all of corporate America.''
Yesterday, President Bush outlined an aggressive plan to rejuvenate
the mechanisms that ensure corporate responsibility. This plan will
expose and punish acts of corruption, make corporate accounting
standards more transparent, and protect small investors and pension
holders. The President has urged Congress to adopt tough new criminal
penalties and enforcement provisions in order to punish those who
refuse to play by the rules and who choose to undermine the integrity
of our financial markets.
The House of Representatives have already passed legislation
addressing this slippage in corporate responsibility, while also
permitting enough legal and regulatory flexibility to tackle future
problems. Rather than seeking to provide a statutory answer for every
current deficiency and every recent transgression, the House bill
recognizes that this is a job for experts and gives the Securities and
Exchange Commission the authority necessary to prevent future abuses.
By attempting to legislate detailed accounting standards, the bill
before us puts Congress in the position of micro-managing details that
we know less about than SEC experts. So, the legislation before the
Senate represents a less workable approach than the President's
proposal. Although I support its goals, particularly the need to
improve the quality of independent audits and financial reporting and
ensure meaningful accountability by executives of public companies,
this bill has other specific problems.
For example, the Public Company Accounting Oversight Board, which
would be created by the bill, would be allowed to begin proceedings
against accounting firms without affording them the same due-process
protections they would have in court. Their livelihood could be at
stake. Certainly, bad actors should be held accountable for wrongdoing.
But our system of justice has always had safeguards to protect the
innocent; checks need to be in placed to prevent the wielding of
unbridled government power.
The bill would make accountants liable for not reporting ``any
material noncompliance'' with the law that auditors ``should know''
about. What does that mean? That standard is so vague that it is
certain to invite a flood of litigation. Unfortunately, we have had
some experience with frivolous lawsuits trumped up by trial lawyers
over alleged securities violations.
Section 105 of the bill establishes liability for any ``failure to
supervise,'' another vague standard that is likely to invite
litigation.
Again, let me say that bad actors must be held accountable for
wrongdoing. But as we attempt to root out and punish the wrongdoers, we
must be mindful of the impact legislation will have on the greater
number of people who are acting in good faith. Setting up a system that
is too costly to comply with, or one that even good people find too
onerous to comply with, will ultimately harm the very people we are
trying to protect--employees, retirees, and others who have invested in
American corporations. If the liability potential is too great, it will
be hard for many businesses to obtain accounting services at a
reasonable cost.
Fortunately, we can still improve the bill in conference, before we
send it to the President and he must decide whether to sign it.
And while we're at it, the Senate would be wise to look at its own
financial practices. We, too, are accountable to the American people.
The Budget Enforcement Act of 1974 requires Congress to approve a
budget resolution on how much the government can spend each fiscal
year. Yet, this year, the Majority has refused to bring a budget to the
Senate floor. This is unprecedented and unacceptable. The majority is
abrogating its duty to the Senate and the American people. Its stubborn
refusal to do what is right, while the whole country watches, is
indefensible. Its eagerness to hammer away at what are admittedly acts
of wrongdoing in American business, while gliding over its own
dereliction of duty in the same general area--is breathtakingly
hypocritical.
So while we work to pass these important reforms, we must remember
that, like the CEOs of public companies, we, too, have an ethical duty
to protect and use wisely other people's
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money. I would remind my colleagues that it is thoroughly disingenuous
to rise today to demand clean accounting practices by the private
sector, while failing to ensure even basic general accounting standards
for the federal government.
In closing, consider the thoughts of George Will on capitalism and
ethics. Mr. Will wrote that a properly functioning free-market system
is ``a complex creation of laws and mores that guarantee, among much
else, transparency, meaning a sufficient stream, a torrent, really, of
reliable information about the condition and conduct of corporations.
By casting a cool eye on Enron's debris and those who made it,
government can strengthen an economic system that depends on it.''
I am confident that, despite these recent abuses of the public's
trust, our economy and our system remain fundamentally sound and
strong. The vast majority of businesspeople respect legal norms and
live by them. We will make our free enterprise system better for them,
and for all Americans, by penalizing those who did wrong and repairing
creaky enforcement mechanisms. The President has acted. The House has
acted. Now it is time for the Senate to act, to return trust,
accountability and transparency to our financial institutions.
The PRESIDING OFFICER (Ms. Cantwell). The Senator from Nevada.
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