[Congressional Record (Bound Edition), Volume 148 (2002), Part 1]
[Senate]
[Pages 47-48]
[From the U.S. Government Publishing Office, www.gpo.gov]




             THE INVESTOR CONFIDENCE PROTECTION ACT OF 2002

  Mr. DODD. Mr. President, I anticipate the arrival of my colleague 
from New Jersey, Senator Corzine, at any moment because we would like 
to at least put our colleagues on notice today of our intention to 
introduce legislation to strengthen the independence and objectively of 
corporate audits in this country.
  I have the fortunate job of being the chairman of the Securities 
Subcommittee of the Banking Committee of the Senate. I have held that 
position for a number of years, both as chairman and as the ranking 
Democrat during Republican majorities in this Chamber, and have worked 
very closely with a number of my colleagues on a variety of issues 
affecting the securities industry, the confidence in our markets.
  Obviously, the events we have heard about over the last number of 
days involving the Enron Corporation and Arthur Andersen's accounting 
firm and other questions have raised some issues that Senator Corzine 
and I think need addressing. They have been discussed in the past. We 
have never codified some of these issues, but they have been the 
subject of extensive debate and discussion as how best to proceed.
  We do not have the specific bill yet to put before the Senate today. 
We will in the coming few days, possibly as early as next week or the 
week after. We will lay out what we think is a framework for how, at 
least from the perspective of investor confidence, the accounting 
industry particularly needs to deal with the issue of consultive 
services and auditing services that they provide.
  Our financial markets are the most vibrant in the world. That is 
stated over and over again. It cannot be stated often enough because it 
is true. There is a very simple reason for that continued success and 
that is because investors have confidence when they take their hard-
earned money and in America they invest it in the public companies of 
this Nation. The world comes to the United States to invest because 
they know they will receive, very simply, a fair and honest deal. It is 
that simple.
  There may be other factors and certainly we know that around the 
world there may be potentially a better return on one's investment in 
Asian markets and European markets or elsewhere, but the world comes to 
the United States because they know, while there may not be the 
opportunity to maybe make as much on their investment as may be offered 
elsewhere, that in this country if one comes here, our system is fair. 
Our system is fair and just, and that is one of the great attractions 
to domestic investors as well as foreign investors.
  We can point to the depth of liquidity in this country, the degree of 
efficiencies in our markets, but ultimately the investing public, both 
internationally and domestically, invests in our markets and our 
companies because they believe the public information about these 
companies is true and it is accurate.
  The accounting profession has played an incredibly important role in 
attaining and ensuring this investor confidence, and they deserve great 
credit, in my view, for the tremendous job they have done historically. 
The seal of approval that our accounting firms provide is a franchise 
of which we should be immensely proud in this country, and I think most 
of us are.
  However, that franchise is in danger of losing the investing public's 
trust. Once lost, that trust would be difficult, if not impossible, to 
recover, at least in the short term.
  In recent years, there have been a series of very high-profile 
accounting failures. The Enron failure may be the most prominent case, 
but it is certainly not an isolated incident. Indeed, it is only the 
latest, perhaps the most publicized, incident in a troubling series of 
incidents calling into question the integrity of corporate audits. More 
financial restatements on corporate earnings have been filed in the 
past 3 years than in the previous 10 years combined. These restatements 
have in most instances dramatically downgraded the financial health of 
the companies in question.
  The collapse of Enron, specifically the seemingly massive failure of 
auditors to recognize and act on the myriad of financial reporting 
irregularities, focuses our attention on a central question: Are 
reforms needed to preserve and strengthen the integrity of the audit 
process? I have come to the conclusion that they are.
  The accounting profession is undergoing tremendous change. Accounting 
firms no longer simply provide audit services. In response to our 
dynamic economy, they have adapted to become full-service financial 
consulting companies. I strongly support the diversification that is 
occurring in the accounting industry. In many cases, this development 
of expanding their services has allowed them to provide far better 
audits than they did in the past. However, these changes must not come, 
in my view, at the expense of these accounting firms' Federal mandate 
to provide objective and independent financial reporting. Conflict of 
interest, even the perception of conflict, undermines the confidence of 
the investing public.
  I do not believe the Enron collapse was caused solely by the lack of 
auditor independence. That would be a terribly naive conclusion to 
draw. Many facts are yet to be uncovered. However, it is well known 
that the company's auditor received greater compensation for the 
nonaudit services it provided to Enron than for the audit services it 
provided. No one could fail to be troubled by the simple fact that 
there was compensation of $27 million for consulting services and $25 
million for auditing services. No one can say it does not raise 
questions about the objectivity of the audit process.
  No one, I believe, can seriously argue that when all the questions 
have been raised, we should not do everything possible to strengthen 
the independence and objectivity of financial audits. That is what we 
rely on.
  There is an inherent conflict. The auditor's compensation is paid for 
by the very company being audited. We cannot change that. The only way 
I suppose would be to establish some Government agency or huge division 
within the Securities and Exchange Commission that would conduct the 
Government audits of public companies. I don't know that anyone 
suggests that. I am not suggesting we ought to change the present 
system of having these accounting firms conduct these audits.
  The problem is, if that same company is not only providing the audit 
but also providing a variety of other services, there is the 
perception, at the least, of a problem. I use the analogy of hiring a 
construction firm to build your house while the contractor is also the 
building inspector. One may end up with a great house, but there are 
some inherent concerns for the homeowner about whether or not the 
construction would be done as well, as soundly, and met all the 
requirements.
  I do not believe the fact that the Enron Corporation hired Arthur 
Andersen to be its consultant and auditor necessarily caused this 
entire problem, but the fact is when a firm is doing both those 
functions for the same company, the investor confidence so critical to 
the success of our markets comes in question.
  For those reasons, Senator Corzine of New Jersey and I plan to 
introduce legislation in the coming days to implement four critical 
reforms to the auditing process.
  First, it restricts auditors from offering nonaudit service to audit 
clients. Accounting firms could continue to provide audit and nonaudit 
services to clients, but they could not offer both services to the same 
client. I don't think that is an outrageous suggestion. I am not 
suggesting they ought not provide consulting services. It strengthens 
the audit process. If one client is providing those two services to the 
same client, there is at least a perception of a serious problem. I 
suggest that Enron's problem is not an isolated case; it is more 
widespread.

[[Page 48]]

  Again, accounting firms continue to provide audit and nonaudit 
services. They cannot offer both. This restriction builds upon the 
important work in this area performed by former SEC Chairman Arthur 
Levitt and former SEC chief accountant Lynn Turner, who should be 
commended for their tireless efforts. The SEC's current auditor 
independence rule has helped but, in my view, is inadequate to ensure 
full auditor independence.
  Second, we propose a prohibition on any accounting firm providing an 
audit for a company whose comptroller or chief financial officer has 
worked for such accounting firm in the previous 2 years. This will help 
reduce the potential for conflict of interest that may arise when 
accountants become senior executives at companies they audited.
  Third, we strengthen the independence of the standard-setting body 
for the accounting profession, the Financial Accounting Standards 
Board. The FASB is acknowledged around the world as the best accounting 
standard setter. But the FASB often comes under tremendous pressure 
from a variety of sources to adopt standards that could cloud rather 
than clarify a company's health from the point of view of investors.
  A few years ago a suggestion was made that Congress would legislate 
certain accounting practices that the FASB would have to sanction. I 
did not necessarily disagree with some who were raising the issue about 
various accounting procedures or practices. The idea that Congress 
would get in the business of legislating, by margins of 51-to-49 votes 
in this body, is a frightening prospect--that we would so politicize 
the Financial Accounting Standards Board. I can only thank those who 
may have agreed as I did, or at least partially agreed with some who 
made the suggestion, that we did not allow that to happen. Certainly 
FASB needs to remain independent and not subjected to the kind of 
political pressures suggested some time ago.
  Our legislation also improves the independence and effectiveness of 
FASB by securing a steady funding source and encouraging greater 
timeliness of actions. One problem is they are very slow. They cannot 
keep up with what is going on in the real economy. FASB needs to act 
expeditiously in response to issues.
  Lastly, our legislation improves the ability of the SEC to improve 
audit quality by doubling the size of the SEC accounting staff. 
Presently, the accounting staff is 20 to 25 people, the size of a 
congressional office, for oversight over all of the accounting firms 
and the audits that occur in the country. I am not suggesting just more 
personnel will necessarily solve the problem, but by increasing the 
size of that staff, and then having more random audits of the audits 
done, the prospect has its own obvious benefit to this potential 
problem. SEC accountants would help the agency do a better job of 
ensuring that audits meet the high standards of independence and 
objectivity that have been a hallmark of the American accounting 
profession.
  In closing, I have spoken about the reforms with a number of 
knowledgeable people over the last several days, including those in the 
accounting profession. They have said privately these reforms go a long 
way to strengthening audits and the confidence of the American public. 
I look forward to working with Chairman Sarbanes, who has already 
announced good hearings on the broader issue we are dealing with, and 
with the former SEC Commissioners, and has invited the chief 
accountants of the SEC to talk to our committee in a formal hearing 
setting. That will be tremendously helpful in examining what may be the 
best way to proceed. What we want to do after we lay down a bill is 
invite these people to respond before the committees conducting 
hearings on the subject matter.
  I see my friend and colleague from New Jersey who brings a wealth of 
experience to this subject matter. In his previous life he worked for 
many years in the financial services sector. He is recognized in this 
Chamber and elsewhere for the tremendous amount of knowledge he 
acquired over the years in this area. I am pleased to be joining with 
him in this piece of legislation.
  Before I turn to my friend from New Jersey, my friend from Missouri 
is here. He is a knowledge builder as to this subject matter as well. 
As on most subjects, he has very strong feelings. I will not lure him 
into that at this particular moment because I want to hear his 
comments, if I may indulge my friend from New Jersey for a moment. 
Senator Bond and Senator McConnell and I have worked, for almost a 
year, putting together an election reform bill. Senator McConnell was 
here a few minutes ago talking about where things are and our 
willingness to come to the floor for our leadership, who asked us to do 
so. I again say publicly how much I appreciate the tremendous effort of 
my friend from Missouri. He is a great debater and tough negotiator, 
but when he gives his hand and shakes, it is a done deal.
  I ask unanimous consent to yield to my friend from Missouri.
  The PRESIDING OFFICER (Mr. Nelson of Florida). The time of the 
Senator from Connecticut has expired; he cannot yield. However, the 
Chair recognizes the Senator from Missouri.

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