[Congressional Record (Bound Edition), Volume 148 (2002), Part 9]
[Senate]
[Pages 12112-12133]
[From the U.S. Government Publishing Office, www.gpo.gov]




  PUBLIC COMPANY ACCOUNTING REFORM AND INVESTOR PROTECTION ACT OF 2002

  The PRESIDENT pro tempore. Under the previous order, the Senate will 
now proceed to the consideration of S. 2673, which the clerk will 
report.
  The assistant legislative clerk read as follows:

       A bill (S. 2673) to improve quality and transparency in 
     financial reporting and independent audits and accounting 
     services for public companies, to create a Public Company 
     Accounting Oversight Board, to enhance the standard setting 
     process for accounting practices, to strengthen the 
     independence of firms that audit public companies, to 
     increase corporate responsibility and the usefulness of 
     corporate financial disclosure, to protect the objectivity 
     and independence of securities analysts, to improve 
     Securities and Exchange Commission resources and oversight, 
     and for other purposes.

  The PRESIDENT pro tempore. The Senator from Maryland, Mr. Sarbanes, 
the manager of the bill, is recognized.
  Mr. SARBANES. I thank the Chair.
  Mr. President, today the Senate turns its attention to S. 2673, the 
Public Company Accounting Reform and Investor Protection Act of 2002, 
which was reported from the Senate Committee on Banking, Housing, and 
Urban Affairs on June 18 on a strong 17-to-4 vote.
  A unanimous consent agreement was entered into with respect to this 
legislation prior to the Fourth of July recess, which provided that at 
2 p.m. today, Monday, July 8, the Senate would proceed, for debate 
only, to the consideration of this legislation.
  I hope to take a fair amount of time to set out the process through 
which the committee worked and to discuss the provisions of this 
legislation.
  As I understand it, upon convening tomorrow and going back to this 
legislation, amendments will be in order. There are a couple of 
technical amendments that I am hopeful we can approve today by 
unanimous consent. I will be discussing that with the distinguished 
ranking Republican member of the committee in the course of the 
afternoon.
  Mr. President, I rise in very strong support of this legislation. 
This legislation is intended to address systemic and structural 
weaknesses that I think have been revealed in recent months and that 
show failures of audit effectiveness and a breakdown in corporate 
financial and broker-dealer responsibility. In fact, it is very clear 
that much of this has been happening over the last few years.
  Hopefully, we have experienced the brunt of it. Who can guarantee 
that, however, when every day you come to read in the morning paper yet 
another story, as witnessed this morning with respect to one of the 
most respected pharmaceutical companies in the country.
  I believe this bill is urgently needed. I hope my colleagues will 
agree with that and will support its swift passage.
  The House, earlier this year, passed legislation on this subject, but 
I think it is fair to say that the legislation we are bringing to the 
floor of the Senate is more comprehensive, more thorough, and, I 
believe, more effective. But, of course, once we complete our work 
here, we will have the challenge of going to conference with our 
colleagues on the other side of the Capitol to work out the differences 
between the two versions of the legislation.
  Let me discuss for a few minutes the backdrop against which this bill 
was crafted. Our financial markets have long been regarded as the 
fairest, the most transparent, and the most efficient in the world. In 
fact, I think it is fair to say--and many of us have said it time and 
time again--that the American capital markets are one of the great 
economic assets of this country and a very important source of our 
economic strength.
  It is becoming increasingly clear that something has gone wrong, 
seriously wrong, with respect to our capital markets. We confront an 
increasing crisis of confidence that is eroding the public's trust in 
those markets. I frankly believe that, if it continues, this erosion of 
trust poses a real threat to our economic health.
  Let me begin with one of the most obvious symptoms of this problem: 
the extraordinary increase in restatements of corporate earnings. The 
Wall Street Journal, citing a study last year by the research arm of 
Financial Executives International, the organization of the chief 
financial officers of corporations, reported that there were 157 
financial restatements by companies in 2000, 207 in 1999, and 100 in 
1998. The 3-year total of 464 was higher than the previous 10 years 
combined, during which the average number of restatements was 46

[[Page 12113]]

each year. This is a dramatic increase in the number of restatements.
  Last month's revelation by WorldCom is only one example of a problem 
that is becoming increasingly disturbing. In a recent article titled 
``Tweaking Numbers To Meet Goals Comes Back To Haunt Executives,'' the 
New York Times described a series of recent corporate failures or near-
failures that were characterized by accounting improprieties: Adelphia 
Communications, ``$3 billion in loans to its founding family'' had been 
concealed; Computer Associates was investigated ``on suspicion of 
inflating sales and profits by booking revenue on contracts many years 
before it was paid''--you raise your revenues, there is no offsetting 
cost, you boost your profits. Global Crossing is being investigated 
``on suspicion of inflating sales and profits by making sham 
transactions with other telecom companies''; Enron, ``hiding losses and 
loans with partnerships that were supposedly independent but were 
actually guaranteed by the company''--Enron filed for bankruptcy last 
December--Rite Aid had ``four former top executives indicted . . . in 
what regulators called a securities and accounting fraud that led to a 
$1.6 billion restatement of earnings''; Tyco International is under 
investigation ``on suspicion of hiding payments and loans to its top 
executives . . . and its ``shares have plunged 75 percent this year as 
investigators question whether it inflated its earnings and cashflow''; 
WorldCom, under investigation for ``hiding $4 billion in expenses by 
wrongly classifying short-term costs as long-term investments.''
  Commentators have made much of the fact that while Enron had very 
complicated dealings, off-balance-sheet special entities and a host of 
other things, WorldCom simply took expenses that should have been 
treated as short-term costs and set them up as capital investments to 
be amortized over a period of time. Of course, that was a very 
substantial reduction in WorldCom's costs. As a consequence, its 
profits were boosted by $4 billion. The SEC asked them to come clean, 
and now we think there is probably another billion of faulty accounting 
with respect to their statement.
  Can you imagine--the company went from showing a substantial profit 
to actually having a loss. People are out in the marketplace making 
decisions about whether to purchase this stock. Pension plans are 
making decisions on behalf of their members. And they are making the 
decision in the belief that this company is making a good profit. 
Instead, it is losing money.
  I read one story where competitors of WorldCom were apparently 
debating within their own corporate ranks: How do they do it? How are 
these people producing this profit record? We can't do it. We are 
competing against them. We think we are doing everything we ought to be 
doing, and we just can't produce the same kind of performance. How are 
they doing it? What is the secret they have discovered?
  The secret they had discovered was to hide their expenses by wrongly 
classifying short-term costs as long-term investments.
  The Xerox Corporation, one of the pillars of our economic system, 
paid a $10 million fine to the SEC in April, the largest in an 
enforcement case. They reclassified $6.4 billion in revenue and 
restated financial results for the last 5 years. I could go on and on 
with other companies: Cendant, MicroStrategy, Waste Management.
  What has led to this increase in restatements? The practice of 
``backing into'' the forecast earnings has certainly contributed. The 
New York Times described this practice as follows:

       Some companies do whatever they have to do to make sure 
     they do not miss a consensus earnings estimate. They start 
     with the profit that investors are expecting and manipulate 
     their sales and expenses to make sure the numbers come out 
     right. During the last decade's boom, as executive pay was 
     increasingly based on how the company's stock performed, 
     backing in became more widespread and more aggressive. Just 
     how much so is only now becoming clear.

  The distinguished Columbia Law School Professor John Coffee, noted, 
in summarizing the trend:

       During the 1990s, the quality of financial reporting and 
     analysis appears to have declined. While an earnings 
     restatement is not necessarily proof of fraud, this increase 
     strongly implies that auditors have deferred excessively to 
     their clients.

  Jack Ehnes, the chief executive of the California State Teachers 
Retirement System, which oversees $100 billion in investments, put it 
this way:

       This looks like the year of the restatement. It's certainly 
     disturbing for investors who expect financial statements to 
     be accurate.

  Clearly, what is transpiring is having a very severe impact on hard-
working American families. Corporate wrongdoing is being felt not just 
at the boardroom table, but it is now being felt at the kitchen table 
as well.
  First of all, there have been tremendous job losses. The Washington 
Post reported that WorldCom was laying off 17,000 employees. The 
companies that are going into bankruptcy are shedding employees left 
and right. Enron laid off 7,000 people after it filed for bankruptcy. 
Global Crossing laid off 9,300 employees in the last year. Employment 
at Xerox is down 13,000 from 2 years ago. So there is a direct impact 
on many working families, simply through the layoffs, as the companies 
for which they work encounter difficult financial times.
  In other words, the company is crashing down, and the workers, 
amongst others, are paying the price.
  Second, the adverse impact on employees clearly extends to the impact 
of these corporate failures on employee pension funds, an impact that 
has led many workers to question the security of their retirement. A 
quick look at the numbers demonstrates how badly public pension funds 
have been hit.
  It is reported that 21 States have combined losses of just under $2 
billion from their WorldCom investments. The California public 
retirement system reported a loss of $565 million. And the numbers go 
on from there. I won't cite them all, but all across the country there 
are tremendous losses being incurred. It is said that the loss of value 
of both WorldCom and Enron has cost public State pension funds $2.7 
billion.
  Of course, in addition to their impact on workers and pension funds, 
these revelations have had a negative effect on shareholders generally. 
Average investors are watching their portfolios plummet and their 
retirement prospects decline. Worldcom's market capitalization has gone 
from $180 billion at its peak 3 years ago--this is just WorldCom--to 
$177 million last week. Tyco lost $90 billion in market capitalization 
between January 2001 and June 2002, and on and on.
  The bond markets have also been affected. WorldCom, for example, has 
$28 billion in outstanding bonds that are due between now and 2025. 
Investors, including banks and insurance companies, stand to lose much 
of this sum. So you are being hit not only if you have a direct 
connection with WorldCom, but also if you have an equity interest in a 
bank or insurance company that owns WorldCom bonds. The current market 
value of these bonds is 15 cents on the dollar.
  The same week that WorldCom's auditing irregularities became public, 
Morgan Stanley observed that the spread between corporate bonds and 
comparable Treasury bonds had widened by 15 basis points. As the Wall 
Street Journal wrote on June 27:

       That is a dramatic move that will boost the borrowing costs 
     for all kinds of companies.

  Now, the problems that I have described did not develop overnight. In 
many ways, they reflect failures on the part of every actor in our 
system of disclosure and oversight. Auditors who are supposed to be 
independent of the company whose books they are reviewing are too often 
compromised by the fact that they provide consulting services to their 
public company audit clients. Securities analysts are not in a 
position, according to observers, to warn investors or direct them to 
other investments.
  As the New York Times reported in an article earlier this year 
entitled ``A Bubble No One Wanted to Pop'':

       Eager to help their firms generate business selling 
     securities to investors and reap their own rewards and 
     bonuses, Wall Street analysts have made a habit of missing 
     corporate misdeeds altogether.


[[Page 12114]]


  I will come back to these issues later. But for the moment I simply 
want to note that the problems leading to such dramatic lapses are 
widespread and seem to be built into the system of accounting and 
financial reporting. That is what this legislation seeks to address. 
Our committee did not engage in an exercise in finger-pointing and 
placing blame but we held a series of hearings--I will discuss them in 
a minute--directed toward the future; in other words, we focused on the 
changes we can make that will help to clear up this situation. It is 
serious.
  The Wall Street Journal, in a recent comment, said:

       The scope and scale of the corporate transgressions of the 
     late 1990s now coming to light exceed anything the U.S. has 
     witnessed since the years preceding the Great Depression.

  One can run through the figures and find some support for that. 
Between its peak in 1929 and 1931, the Dow fell 79 percent. Over the 
same period since its peak in March 2000, the Nasdaq has fallen 73 
percent. But rather than work through these figures, let me simply 
close this part of my statement with a comment from Benjamin Graham's 
classic textbook on ``security analysis'':

       Prior to the SEC legislation . . . it was by no means 
     unusual to encounter semi-fraudulent distortions of corporate 
     accounts . . . almost always for the purpose of making the 
     results look better than they were, and it was generally 
     associated with some scheme of stock-market manipulation in 
     which the management was participating.

  He was writing about the year 1929. Regrettably, that description 
fits some of today's events. Now, I am certainly not suggesting that 
this is the practice of a majority of our business people. In fact, 
most of them, I think, try very hard to play by the rules, and to be 
honest and straightforward in their dealings, and they recognize how 
important trust is.
  But it is clear, from the number of departures we have witnessed from 
that standard, that what is involved is more than just a few bad 
apples. Those bad apples ought to be punished, and punished very 
severely. I certainly agree with the President when he makes that 
statement. But it seems to me we have to move beyond that in order to 
address the incredible loss of investor confidence that is now taking 
place.
  I have been reading the newspaper articles carefully, and sometimes 
the most apt comments come not from the experts but from ordinary 
citizens. My colleague from Texas knows that very well because we have 
a noted citizen of his State, Dicky Flatt, who is constantly cited.
  Karl Graf, a financial planner and accountant in Wayne, NJ, is quoted 
in the Bergen Record as saying:

       The integrity of the game is in question for now, and 
     that's a much bigger thing than if the stock market does 
     poorly for two years. You have to have faith in the numbers 
     the companies are reporting, and if you don't or can't, it 
     makes it seem more like gambling all the time. It makes me 
     more cynical, and I'm very discouraged. It's going to take a 
     lot to make people feel confident.

  Bob Friend, an aerospace engineer from Redondo Beach, CA, a stock 
investor for 20 years, was quoted in the L.A. Times as saying:

       There's a complete lack of trust in corporate leadership. I 
     think the lack of ethical behavior has destroyed investor 
     confidence.

  Morris Hollander, a specialist in financial disclosure accounting 
with a Miami firm, was quoted in the Miami Herald as saying:

       We always had the strongest financial markets in the world, 
     and that was because of credible accounting standards. When 
     you see that confidence eroding, it is not good. It is a real 
     serious credibility crisis.
  A recent poll demonstrates that these views are not unique or 
unusual. When asked this question: ``when it comes to financial 
information the major stock brokerage firms and corporations provide to 
you, do you or do you not have confidence that the information is 
straightforward and an honest analysis,'' only 29 percent of Americans 
said they had confidence the information was straightforward and an 
honest analysis. A majority, 57 percent, did not have confidence in the 
basic information that undergirds our equities market.
  The Washington Post, on June 26, reported:

       According to economists and market analysts, these still-
     unfolding corporate and accounting scandals have begun to 
     weigh heavily on the stock market, the dollar, and the U.S. 
     economy. And the effects are likely to linger at least 
     through the end of the year.

  The same article quoted the chief economist for one of Wall Street's 
major firms as saying:

       The economy and markets right now are in the midst of a 
     full-blown corporate governance shock. . . . To presume 
     somehow that it's over or that the worst is behind us is 
     naive.

  Furthermore, it is not only American investors who are losing 
confidence in our markets. A recent New York Times article entitled 
``U.S. Businesses Dim as Models for Foreigners'' quoted Wolfram Gerdes, 
the chief investment officer for global equities at Dresdner Investment 
Trust in Frankfurt, as saying:

       There is unanimous agreement that the United States is not 
     the best place to invest anymore.

  According to the Federal Reserve Board, foreign direct investment in 
corporate equities has fallen by 45 percent from 2001 to 2002. And 
according to a new OECD report, foreign inflows from cross-border 
mergers and acquisitions, which in 2001 were greater than direct 
foreign investment into the United States, have fallen sharply in 2002.
  The Wall Street Journal said:

       The loss of faith by American and overseas investors in 
     U.S. corporate books is churning global financial markets: 
     Share prices are plunging in America and the dollar is losing 
     value, setting off stock-market plunges in Asia, Europe and 
     Latin America. If the flow of foreign capital to the United 
     States is disrupted as a result, the world economy could be 
     jeopardized, because the U.S. relies on overseas money to 
     finance its huge current-account deficit, and Asia and Europe 
     rely on America to buy imports.

  As I draw this preliminary overview of the context in which we are 
working to a close, I want to speak for a moment about the potential 
loss of world economic leadership for the United States. The Wall 
Street Journal had an article entitled ``U.S. Loses Sparkle as Icon of 
Marketplace.'' It says:

       The wave of scandals in corporate America is roiling world 
     stock markets. But the controversy may have an even greater 
     impact in the marketplace of ideas, where the U.S. economic 
     model is coming under attack.

  One area of particular importance and now debate is adoption of 
accounting principles. The European Union--and I do not think many 
people yet in this country have focused on this matter--has indicated 
that the rules adopted by the International Accounting Standards Board 
will become mandatory for all companies throughout the European Union 
in 2005.
  Traditionally, the U.S. has been preeminent in the accounting field. 
We have by far the largest economy. We have a reputation for high 
standards for transparency. So generally the American argument on 
behalf of its standards carried great influence. Now we have the 
European Union, comparable in economic size to the United States, 
moving to adopt a uniform set of accounting standards, to be 
promulgated by the International Accounting Standards Board, for all of 
the European Union countries. So there is a potential for real 
challenge to American preeminence in this area, given what is happening 
over here.
  In fact, the New York Times reported on June 27:

       There is a groundswell among executives in Europe against 
     the American system of corporate accounting--the so-called 
     generally accepted accounting principles--that was supposed 
     to be the gold standard in disclosure.
       Before Enron, Global Crossing and WorldCom, America had 
     been winning the argument on accounting standards. But now, a 
     growing number of Europeans are convinced that the American 
     system is both too complex and too easy to manipulate.

  Regrettably, in my view, unless we come to grips with this current 
crisis in accounting and corporate governance, we run the risk of 
seriously undermining our long-term world economic leadership. Why do 
countries look to us? They look to our capital markets. They say: your 
capital markets are the most transparent; they have the greatest 
integrity; we can

[[Page 12115]]

rely upon them; we can make rational business decisions using the 
information that is provided through your system. If that is no longer 
the case, we can expect growing difficulties as we continue to argue 
for our preeminence.
  The Wall Street Journal gave this summary of the problem, after which 
I will move onto the bill itself:

       The institutions that were created to check such abuses 
     failed. The remnants of a professional ethos in accounting, 
     law and securities analysis gave way to the maximum revenue 
     per partner. The auditor's signature on a corporate report 
     didn't testify that the report was an accurate snapshot, said 
     [Treasury Secretary Paul] O'Neill. He says it too often meant 
     only that a company had ``cooked the books to generally 
     accepted standards.''

  I want to be very clear about this. I believe the vast majority of 
our business leaders and of those in the accounting industry are 
decent, hard-working, and honorable men and women. They are, in a 
sense, tarnished by the burden of these scandals. But trust in markets 
and in the quality of investor protection, once shaken, is not easily 
restored, and I believe that this body must act decisively to reaffirm 
the standards of honesty and industry that have made the American 
economy the most powerful in the world. That is what this legislation 
does, and that is why I urge its adoption by my colleagues.
  Let me now turn to the hearings and to the bill. I know others are 
waiting to speak, and I will try to summarize my remarks. We have been 
working on this for a long time, so obviously I could go on at some 
length.
  First, we sought to do a very thorough and careful job in developing 
this legislation. The committee held a total of 10 substantive hearings 
and heard from a broad range of experts, as well as interested parties. 
I am not going to name all our witnesses, but, for example, we heard 
from five past Chairmen of the SEC; three former SEC chief accountants; 
former Federal Reserve Board Chairman, Paul Volcker; former Comptroller 
General and chairman of the Public Oversight Board, Charles Bowsher; 
the present Comptroller General, David Walker; a number of 
distinguished academics who have been studying these issues throughout 
their careers; leaders of commissions that studied the accounting 
industry and corporate governance; representatives of the accounting 
industry; representatives of the public interest community; 
representatives of the corporate community, and SEC Chairman Pitt.
  It was a very thorough effort to gather the best thinking on these 
issues and to give all interested parties a chance to be heard. My 
colleagues on the committee, and the ranking member, Senator Gramm, 
participated in this effort seriously and with commitment. Senators 
Dodd and Corzine early on introduced a bill dealing with oversight of 
accounting and auditor independence. Many of that bill's provisions are 
reflected in this legislation. Senator Enzi, of course, took a 
particular interest. He is the only certified public accountant in the 
Senate. Many other Members made important contributions as we moved 
along the way.
  I will now turn to each title. Title I of the bill creates a strong 
independent board to oversee the auditors of public companies. Title II 
strengthens auditor independence from corporate management by limiting 
the scope of consulting services that auditors can offer their public 
company audit clients. This bill applies only to public companies that 
are required to report to the SEC. It says plainly that State 
regulatory authorities should make independent determinations of the 
proper standards and should not presume that the bill's standards apply 
to small- and medium-sized accounting firms that do not audit public 
companies.
  Titles III and IV of the bill enhance the responsibility of public 
company directors and senior managers for the quality of the financial 
reporting and disclosure made by their companies. Title V seeks to 
limit and expose to public view possible conflicts of interest 
affecting securities analysts. Title VI increases the SEC's annual 
authorization from $481 million to $776 million and extends the SEC's 
enforcement authority. Title VII of the bill mandates studies of 
accounting firm concentration and the role of credit rating agencies.
  It is my intention to go through the bill title by title in a summary 
fashion, but I will pause for a moment and ask my colleague whether he 
has any time pressures.
  Mr. GRAMM. I don't have a time preference as such. My suggestion is 
whenever the Senator gets tired of talking and would like me to speak a 
while, I can speak, and then he can come back to it. But I have no 
objection if you want to go through your whole presentation. You 
certainly have that right. If you think it will work better doing it 
that way, that is fine. If you want to break at some point and have me 
speak, that would be fine.
  Mr. SARBANES. Why don't I move ahead, and I will try to compress it a 
bit.
  Title I creates a public company accounting oversight board. This 
board is subject to SEC review and will establish auditing, quality 
control, ethics, and independence standards for public company auditors 
and will inspect accounting firms that conduct those audits. It will 
investigate potential violations of applicable rules and impose 
sanctions if those violations are established.
  Heretofore we have relied on self-policing of the audit process, 
private auditing and accounting standards setting, and, for the most 
part, private disciplinary measures. But questionable accounting 
practices and corporate failures have raised serious questions, 
obviously, about this private oversight system. Paul Volcker stated:

       Over the years there have also been repeated efforts to 
     provide oversight by industry or industry/public member 
     boards. By and large, I think we have to conclude that those 
     efforts at self-regulation have been unsatisfactory.

  That is obviously one of the reasons we are moving, in this 
legislation, to an independent public company accounting oversight 
board. We heard extensive testimony in favor of such a board.
  The board would have five full-time members. Two of the members will 
have an accounting background. All will have to have a demonstrated 
commitment to the interests of investors, as well as an understanding 
of the financial disclosures required by our securities law. The board 
members would be appointed by the SEC after consultation with the 
Federal Reserve and the Department of the Treasury and would serve 
staggered 5-year terms. They could not engage in other business while 
they were doing this work.
  Of course, the board will have a staff. We would expect staff 
salaries to be fully competitive with comparable private-sector 
positions in order to ensure a high-quality staff.
  The bill requires that accounting firms that audit public companies 
must register with the board. Failure to register or loss of 
registration would render a firm unable to continue its public company 
audit practice. Upon registering, a company would consent to comply 
with requests by the board for documents or testimony made in the 
course of the board's operations.
  The board would possess plenary authority to establish or adopt 
auditing, quality control, ethics, and independence standards for the 
auditing of public companies. But this grant of authority is not 
intended to exclude accountants or other interested parties from 
participating in the standard-setting process. So the board may adopt 
rules that are proposed by professional groups of accountants or by one 
or more advisory groups created by the board.
  These provisions reflect an effort to respond to the argument that 
you need the experts to either set the standards or help to set the 
standards. The experts in the industry can make these proposals, but 
the board will have the authority to adopt or to modify such proposals 
or to act of its own volition.
  We provide for the inspection of registered accounting firms by the 
board. Firms that audit more than 100 public companies are to be 
inspected by staff of the board each year. Firms that audit less than 
that are inspected every 3 years, although the board has the power to 
adjust these inspection schedules.

[[Page 12116]]

  The board also has investigative and disciplinary authority. Former 
SEC Chairman Arthur Levitt told the committee:

       We need a truly independent oversight body that has the 
     power not only to set the standards by which audits are 
     performed but also to conduct timely investigations that 
     cannot be deferred for any reason and to discipline 
     accountants.

  If the board finds that a registered firm, or one or more of its 
associated persons, has violated the rules or standards, it will have 
the full range of sanctions available.
  The board also has the power to sanction a registered accounting firm 
for failure reasonably to supervise a partner or employee, but we allow 
an accounting firm to defend itself from any supervisory liability by 
showing that its quality control and related internal procedures were 
reasonable and were operating fully in the situation at issue. I am 
mentioning this item, even though it may not seem that important in the 
context of a bill this complex, to point again to the effort that was 
made in the committee to balance competing concerns.
  In effect, we say the firms have this supervisory responsibility. 
They should not duck this responsibility. Otherwise, how are we going 
to assure the people working for accounting firms are meeting high 
standards? On the other hand, we realize it is extremely difficult in 
large organizations to control right down to the last person. So we 
provided that if accounting firms have quality control and related 
internal procedures in place that are reasonable and that are operating 
fully, the operation of those procedures can serve as a defense.
  The bill applies to foreign public accounting firms that audit 
financial statements of companies that come under the U.S. securities 
laws. The board is subject to SEC oversight, which is important. 
Finally, we formalize the role of the Financial Accounting Standards 
Board in setting accounting standards accounting standards are 
different than auditing standards, which the new oversight board will 
set. The bill provides for guaranteed funding of the new oversight 
board and the FASB by public companies, something I think we all agree 
is extremely important.
  Some have asked, why do we need a statutory board? Why not let the 
SEC do something of this sort by regulation? But others have raised 
questions about the adequacy of the authority the SEC has to accomplish 
all of this by regulation alone. Clearly, a firmer base would be 
established, a stronger reference point, if the board were established 
by statute, and the potential of litigation that might arise with 
respect to some of these disciplinary and fee-imposing powers if they 
were created solely by the SEC by regulation would be avoided by a 
clear statutory underpinning.
  Furthermore, I believe, frankly, that we need to establish this 
oversight board in statute in order to provide an extra guarantee of 
its independence and its plenary authority to deal with this important 
situation.
  Let me turn to title II on auditor independence. This is a very 
important issue. Each of the country's Federal securities laws requires 
comprehensive financial statements. That is what is now required under 
the securities laws for public companies. They have to have 
comprehensive financial statements that must be prepared--and I now 
quote from the statute--``by an independent public or certified 
accountant.''
  The statutory requirement of an independent audit has two sides to 
it. It is a private franchise, and it is also a public trust.
  The franchise given to the Nation's public accountants is clear. 
Their services must be secured before an issuer of securities can go to 
market, have its securities listed on the Nation's stock exchanges, or 
comply with the reporting requirements of the securities law. In other 
words, the accountants have been handed by mandate a major piece of 
business because the statute says to these public companies that they 
must have comprehensive financial statements prepared by an independent 
public or certified accountant.
  So in effect we have directed to them a significant amount of 
business. But the franchise, in a way, is conditional. It comes in 
return for the certified public accountant's assumption of a public 
duty and obligation.
  The Supreme Court stated this well in a decision almost 20 years ago:

       In certifying the public reports that collectively depict a 
     corporation's financial status, the independent auditor 
     assumes a public responsibility. . . . [That auditor] owes 
     ultimate allegiance to the corporation's creditors and 
     stockholders, as well as to the investing public. This public 
     watchdog function demands that the accountant maintain total 
     independence from the client at all times and requires 
     complete fidelity to the public trust.

  Richard Breeden, former chairman of the SEC from 1989 to 1993, under 
the previous President Bush, said in his testimony before the 
committee:

       While companies in the U.S. do not have to employ a law 
     firm, an underwriter, or other types of professionals, 
     Federal law requires a publicly-traded company to hire an 
     independent accounting firm to perform an annual audit. In 
     addition to this shared Federal monopoly, more than 100 
     million investors in the U.S. depend on audited financial 
     statements to make investment decisions. That imbues 
     accounting firms with a high level of public trust, and also 
     explains why there is a strong Federal interest in how well 
     the accounting system functions.

  What has happened in recent years is that a rapid growth in 
management consulting services offered by the major accounting firms 
has created a conflict in the independence that an auditor must bring 
to the audit function. According to the SEC, in 1988, 55 percent of the 
average revenue of the big five accounting firms came from accounting 
and auditing services; 22 percent came from management consulting 
services.
  By 1999, 10 years later, these figures had fallen to 31 percent for 
accounting and auditing services, and 50 percent for management 
consulting services.
  In fact, a number of experts argue that the growth in the non-audit 
consulting business done by the large accounting firms for their audit 
clients has so compromised the independence of audits that a complete 
prohibition on the provision of consulting services by accounting firms 
to their public audit clients is required--a complete prohibition. 
According to James E. Burton, the CEO of the California Public 
Employees' Retirement System, CalPERS, which manages pension and health 
benefits for more than 1.3 million members and has aggregate holdings 
of $150 billion:

       The inherent conflicts created when an external auditor is 
     simultaneously receiving fees from a company for non-audit 
     work cannot be remedied by anything less than a bright line 
     ban. An accounting firm should be an auditor or a consultant, 
     but not both to the same client.

  John Biggs, CEO of Teachers Insurance and Annuity Association--
College Retirement Equities Fund, TIAA-CREF, the largest private 
pension system in the world, which manages approximately $275 billion 
in pension assets for over 2 million participants in the education and 
research communities, told the Committee:

       Because auditors owe their primary duty to the 
     shareholders, questions about the primacy of that duty are 
     raised if the audit firm provides other, potentially more 
     lucrative, consulting services to the company. The board and 
     the public auditor should both see to it that, in fact as 
     well as in appearance, the auditor reports to the independent 
     board audit committee and acts on behalf of shareholders. The 
     key reason why awarding consulting contracts and other non-
     audit work to the audit firm is troubling is because it 
     results in conflicting loyalties. While the board's audit 
     committee is formally responsible for hiring and firing the 
     outside auditor, management controls virtually all the other 
     types of non-audit work the audit firm may do for the 
     company. Those contracts with management blur the reporting 
     relationship it is difficult to believe that auditors do not 
     feel pressure for the overall success of their firm with the 
     client. Even their own compensation packages may be tied to 
     consulting and non-audit services being provided by their 
     firm to the company. . . .
       By requiring public companies to use different accounting 
     firms for their audit and consulting services, and by 
     establishing an independent board with real authority to 
     oversee the accounting profession you will be taking 
     important steps toward reversing the crisis in confidence in 
     financial markets that exists today.


[[Page 12117]]


  We looked at this carefully. We had testimony on the other side. In 
the end, we took the approach that is outlined in the bill. The bill 
contains a short list, nine items, of non-audit services that an 
accounting firm doing the audit of a public company cannot provide to 
that company. These include, for example, bookkeeping or other services 
related to the accounting records or financial statements of the audit 
client, financial information systems design, appraisal or valuation 
services, actuarial services, management functions or human resources, 
broker or dealer or investment adviser services, and legal services.
  The thinking behind drawing this line around a limited list of non-
audit services, is that provision of those services to a public company 
audit client creates a fundamental conflict of interest for the 
accounting firm in carrying out its audit responsibility. If the 
accounting firm is not the auditor for the company, it can do any of 
these consulting services--it can do any consulting service it wants. 
But if it is the auditor--so there is a conflict of interest problem--
then we take certain services and say: those services you can't do. And 
the reason is, first of all, in order to be independent, the auditor 
should not audit its own work, as it would do if it did financial 
information system design or appraisal evaluation services or actuarial 
services. It should not function as part of the management or as an 
employee of the audit company, as it would if it were doing human 
resources services, and it should not act as an advocate of the audit 
client, as it would do if it were providing legal and expert services. 
Nor should it be the promoter of the audit client's stock or other 
financial interest, as it would be if it were the broker-dealer or the 
investment adviser.
  They are the public company's auditors. They have a very defined 
responsibility as the auditors. The bill doesn't bar accounting firms 
from offering consulting services. It simply says that if a firm wants 
to audit the company, there are certain services it cannot perform. And 
even in that case, the bill provides the board authority to grant case-
by-case exceptions, so if a case could be made why an auditor's 
performing a consulting service ought to be permitted, there is some 
flexibility to permit it.
  David Walker, the Comptroller General of the United States, in a 
statement on June 18 said:

       I believe that legislation that will provide a framework 
     and guidance for the SEC to use in setting independence 
     standards for public company audits is needed. History has 
     shown that the AICPA and the SEC have failed to update their 
     independence standards in a timely fashion and that past 
     updates have not adequately protected the public's interests. 
     In addition, the accounting profession has placed too much 
     emphasis on growing non-audit fees and not enough emphasis on 
     modernizing the auditing profession for the 21st century 
     environment. Congress is the proper body to promulgate a 
     framework [on this important issue].

  There are a lot of other auditing services, other than the nine I 
mentioned, that an auditor may want to provide and whose provision we 
did not preclude. In other words, the statutory system that we are 
establishing lists certain consulting services that, if you are the 
auditor, you cannot perform for the public company that is your audit 
client, unless you can get one of these case-by-case exemptions from 
the board. And those consulting services were the ones which, upon 
examination, seemed clearly to raise the most difficult conflict of 
interest questions that could result in undermining the auditor's 
fulfillment of his auditing responsibility.
  The public company auditor can provide other non-audit services; that 
is, any but those on the proscribed list, if it clears them with the 
audit committee of the public company's board of directors. We seek to 
strengthen the audit committee in very substantial ways, including, as 
I will mention later, that they should be the ones to hire and fire the 
auditors--that the auditors really work through the audit committee for 
the board of directors and that the auditors do not work for the 
management. I think it is very clear, to some extent, and in some 
instances, it is management working with the auditors that have done 
these clever schemes for which we are now paying the price.
  We had the issue of auditor rotation before us. Many witnesses 
thought the audit firm itself should have to rotate every 5 years, 
periodically. We did not go that far. We recommend here that the lead 
partner and the review partner on audits must rotate every 5 years--not 
the audit firm itself. But we do provide that audit firm rotation 
should be further studied and direct the General Accounting Office to 
undertake such a study with respect to the mandatory rotation of the 
audit firm.
  I will move more quickly and skip over some sections, but I can 
always, of course, come back to them if there are any questions.
  We were concerned about the movement of personnel from audit firms to 
the public company audit clients. There we put a 1-year cooling off 
period with respect to the top positions in the company, so that you 
can't hold out to the audit team the immediate prospect of an important 
position in the company. Again, we are trying to protect the 
independence of the audit.
  The next two titles, III and IV, deal with corporate responsibility 
and enhanced financial disclosure. As I said, we provide for a strong 
public company audit committee that would be directly responsible for 
the appointment, compensation, and oversight of the work of the public 
company auditors, which makes it clear that the primary duty of the 
auditors is to the public company's board of directors and the 
investing public, and not to the managers. We provide that the audit 
committee members must be independent from company management.
  We require that the audit committee develop procedures for addressing 
complaints concerning auditing issues and also that they put in place 
procedures for employee whistleblowers to submit their concerns 
regarding accounting.
  Where does an employee go when he sees a problem and is fearful of 
taking it up with management because his perception is that management 
is involved with the problem? We specifically provide that they should 
be protected in going to the audit committee.
  We have a provision prohibiting the coercion of auditors. Some have 
asserted that officers and directors have sought to coerce their 
auditors or to fraudulently influence them to provide misleading 
information. Obviously, the auditors ought to be protected from that as 
well.
  We have a provision that the CEO and the CFO who make large profits 
by selling company stock or receiving company bonuses while management 
is misleading the public about the financial health of the company 
would have to forfeit their profits and bonuses realized after the 
publication of a misleading report.
  We also address the question of remedies against officers and 
directors who violate securities laws, something in which the SEC is 
very interested.
  We have a provision on insider trades during pension fund blackout 
periods. We prohibit the insider trades. So you can't have officers and 
directors free to sell their shares while the majority of the employees 
of the company are required to hold theirs--as, of course, has happened 
in some instances.
  On enhanced financial disclosures, we require that public companies 
must disclose all off-balance-sheet transactions and conflicts. We 
require that pro forma disclosures be done in a way that is not 
misleading and be reconciled with a presentation based on generally 
accepted accounting principles. More companies are doing these pro 
forma disclosures. They really are not accurately reflecting the 
financial conditions of the company.
  We require very prompt disclosure of insider trades--actually, to be 
reported by the second day following any transactions.
  We require the reporting of loans to insiders. There have been some 
enormous loans made. At a minimum, those need to be disclosed. Some 
argue they ought to be prohibited. We didn't go that far. Some 
testified there are some good reasons on occasion that a company ought 
to make a loan to one of its officers. But, at a minimum, they ought to 
be disclosed.

[[Page 12118]]

  This is a small item, but it may have a good benefit. We require 
public companies to disclose to the investors whether they have adopted 
a code of ethics for senior financial officers and whether their audit 
committee has among it a member who is a financial expert. We don't 
require them to have a code of ethics, although we think they should. 
We just require that they disclose whether they have one or not.
  Title V deals with analyst conflicts of interest. We have had this 
incredible situation that was brought to the public attention by the 
efforts of the Attorney General of the State of New York, Eliot 
Spitzer, in which research reports and stock trades of companies that 
were potential banking clients of a major broker-dealer were often 
distorted to assist the firm in obtaining investment banking business. 
There was one document that actually acknowledged the conflict and, as 
a result, stated:

       We are off base on how we rate stocks and how much we bend 
     over backwards to accommodate banking.

  These analysts would recommend a buy rating on the stock essentially 
to help out the investment banking firm which was trying to get the 
company's investment banking business. So they get the analysts to say 
good things about the company, which will then lead the company to be 
far more favorably inclined and take on that firm in order to do their 
investment banking business.
  In some instances, they were actually recommending buys and then they 
were saying to one another what a turkey the company was, but the poor 
investor was being taken at the time.
  We set out a number of provisions in this regard. I will not go 
through all of them.
  We prevent investment banking staff from supervising research 
analysts or clearing their reports.
  We prohibit analysts from distributing research reports about a 
company they are underwriting.
  We have a provision to protect analysts from retaliation for making 
unfavorable stock recommendations.
  We heard moving testimony from someone who said: If you make an 
unfavorable recommendation, who knows what is going to happen to you?
  We also provide--the bill here focuses on disclosure instead of 
prohibition--that an analyst would have to disclose if he owned the 
company stock. If you are doing an analysis and if you are doing a 
report and a recommendation, you ought to disclose whether you own the 
company stocks or bonds, whether you have received compensation from 
the company, whether your firm has a client relationship with the 
company, and whether you are receiving compensation based on investment 
banking revenues from the company. These are not prohibitions, they are 
just disclosures.
  The thought behind this is, if you are an investor and an analyst is 
making a recommendation and he puts up front in his analysis that he 
owns the company stock, or that he is receiving compensation from the 
company, or that his firm has a client relationship with the company, 
or that he is receiving compensation based on investment banking 
revenues received from the company, someone is going to look at this 
and say: wait a second. I have to take his recommendation in the 
context of his involvement.
  Finally, of major importance is the increase we have provided for the 
budget of the SEC to, No. 1, provide pay parity for SEC employees; No. 
2, enhance information technology and security enhancement; and, No. 3, 
fund more professionals to help carry out the important investigative 
and disciplinary efforts of the SEC.
  We provide for two studies. One concerns the consolidation of public 
accounting firms. Senator Akaka was very interested in this. There has 
been a constant consolidation trend. We have asked the Comptroller 
General to do the study. And the other is by Senator Bunning directing 
the SEC to conduct a study of the role of credit rating agencies in the 
operation of the securities markets.
  In closing, there has been broad support for this legislation. Just a 
few days ago, the Business Roundtable came out in favor of it. The 
Financial Executives International early on in the process was 
supportive, as well as the Council of Institutional Investors.
  We have tried hard to listen to the concerns people raised.
  The procedure here was that before the Memorial Day recess--in fact, 
in early May, we put out a committee print. As we approached markup 
shortly before the Memorial Day recess, a number of amendments were 
proposed. It was urged that we put the markup over. We agreed to do 
that. We took all the amendments that had been put forward, and other 
suggestions that were being received with respect to the committee 
print, and went back and reworked it.
  I have to say to you that, in all candor, many of those suggestions 
were meritorious and in fact are now reflected in the legislation that 
is before the Senate.
  So we tried very hard to listen to people at every step of the way. 
We then reworked the print. We came back with another committee print. 
We went to markup on June 18. We made a limited number of amendments in 
markup and brought the bill out to the floor of the Senate by a 17-to-4 
vote.
  I simply close by saying how strongly I believe that financial 
irresponsibility and deception of the sort that we have seen in all of 
the instances that keep appearing on the front pages of our newspapers 
are a real threat to our economic recovery. We cannot afford to wait 
for the next corporate deception, followed by the next round of 
layoffs, followed by the next collapse of a company's pension fund.
  We need to take action to restore public trust in our financial 
markets, and that really begins with restoring public confidence in the 
accuracy of financial information. That is what this legislation seeks 
to accomplish. I urge my colleagues to support this critical 
legislation.
  Mr. President, I yield the floor.
  The PRESIDING OFFICER (Mr. Bingaman). The Senator from Texas is 
recognized.
  Mr. GRAMM. Mr. President, I begin by thanking Senator Sarbanes for 
working with me as we have considered this bill. I congratulate him on 
this day that we are considering the bill in the Senate.
  We had a series of hearings that I wish every Member of the Senate 
could have attended. I am not surprised that at the end of those 
hearings good people with the same facts, as Jefferson said so long 
ago, were prone to disagree.
  I find myself in a position where Senator Sarbanes and I agree on 
many of the key issues of this bill; we differ on others. It is not the 
first time in managing a bill that we have been on opposite sides.
  I reminded Senator Sarbanes this morning that it might very well be 
this will be the last bill we will ever manage together. Since I am 
leaving the Senate, and we have something like 40 legislative days 
left, I do not know whether, after this bill is dealt with, the Banking 
Committee will warrant any of those 40 days.
  But I would like to say for the record that no one can object to the 
hearings we had, the approach the chairman has taken. Whether you agree 
with him or whether you do not, I think his approach has been reasoned 
and reasonable.
  It is clear this issue has attracted a great deal of attention. It is 
clear that there is a mind in the Congress, if not in the country--
Congress is not always reflective of the thinking of the country--but 
there is a sort of collective mind that we need to do something, even 
if it is wrong.
  I lament, as we have gotten into this debate, that the media has 
decided that the tougher bill is the bill with more mandates; that if 
you decided to set up a stronger committee, a stronger board with 
broader powers so they might decide to go beyond the legislative 
mandates, that that is a weaker proposal than having Congress actually 
write auditing standards or conflict of interest standards.
  I would submit to my colleagues--and I guess I would have to say at 
this point, I do not know that we will follow this adage--but I suggest 
this is a

[[Page 12119]]

very important bill. I urge my colleagues, as you look at this bill, to 
realize we are not just talking about accounting. If this bill were 
just about accounting, it could do some good, it could do some harm, 
but it could not do too much of either.
  But this bill is far more than just a bill about accounting. This is 
a bill that has profound effects on the American economy; therefore, I 
think it is very important that we try to look at the problem and that 
we try to come up with a solution that will be good not just for today, 
not just that will bring forth a positive editorial in a newspaper 
tomorrow, but I submit we want to try to find one that meets the front 
porch of the nursing home test. That is the test where, when we are all 
sitting around in rocking chairs in a nursing home, and we look back at 
what has happened under this bill, that we will be proud of what we did 
and how we did it.
  I want to touch on several things. I want to go through and make 
several points, some related to what the distinguished chairman said, 
some just because I want to say them. I want to talk about what I 
believe the problem is. And I want to make it clear that I do not know 
how to fix it. I do not know that this bill fixes it. I do not believe 
it does. I do not believe my substitute I offered fixes it either. But 
I think somebody needs to talk a little bit about it. Then I want to 
talk about the bill that we have before us, and where I agree with it 
and where I differ, and what those differences are.
  I think the good news is--from the point of view of if consensus is a 
good thing--there is a consensus, and has been from the very beginning, 
that we need to pass a law. What this President cannot do is provide an 
independent funding source and a legal foundation for this independent 
board.
  I personally believe the President's 10-point program was a good 
program. What the Chairman of the SEC cannot do is provide an 
independent funding source and provide a legislative foundation for the 
board. The Chairman and I agree on that.
  There have been people who have reached a conclusion that if you 
differed from Senator Sarbanes, you did not really want a bill. I 
believe those of us who have differed do want a bill. And the one thing 
that we agree on, which I think is at the heart of this whole debate, 
is a strong, independent board to make determinations about conflict of 
interest and about ethics.
  Now, let me touch on the things that I wanted to touch on.
  I personally thank Senator Sarbanes for the approach he took in 
focusing on the problem and on the future. Everybody knows this has now 
become a political issue. We know that people are either trying to go 
back and pin this problem on past Presidents or SEC Directors or they 
are trying to pin the problem on the current President and the current 
SEC Chairman. I think it is a testament to Senator Sarbanes' leadership 
that he has had nothing to do with that.
  The plain truth is we have had a succession of great SEC Chairmen. 
Arthur Levitt and I disagreed on many things, but I do not think 
anybody could argue that he was not an effective SEC Chairman. It is 
true that he had the ability, under existing law, to go back and change 
GAAP accounting to set up a board, to do anything he wanted to do, and 
he did not do it. But it is always so easy to see these things when you 
are looking with that wonderful hindsight.
  Anybody has to give Arthur Levitt credit that he was the first to 
raise an issue about auditor independence. Whether you agreed when he 
raised it or not that it was a problem, that it was proven, it is clear 
that he saw a problem which may or may not be the source of our problem 
today, but many people believe it is. You have to give him credit. And 
I don't believe anybody else in his position would have done a much 
better job than he did.
  Let me also say that I think Harvey Pitt has done an outstanding job 
in the short period of time he has been at the SEC. Much is made of the 
fact that he did legal work for accounting firms. I continue to be 
struck by this approach that somehow knowledge is corruption, that 
somehow the perfect regulator is a guy who just came in off a turnip 
truck and who knows absolutely nothing.
  It reminds me of Senator McCain was once telling a story about 
talking to a journalist who was covering the Vietnam War and asking the 
journalist if he had ever read this seminal work about the history of 
Vietnam. And the journalist said: No, he had never read it because he 
wanted to approach the subject with a totally unbiased mind.
  There is a big difference, I submit, between an open mind and an 
empty mind. We make a grave mistake when we discount knowledge. 
Everybody today, when they are criticizing Harvey Pitt, talks about the 
fact that he represented accounting firms and security firms. I guess 
if he were being more aggressive than is the public mood, people would 
remember that he was probably the most rigorous chief counsel at the 
SEC in its history and, in that process, brought cases against numerous 
major companies. They would be saying that that experience had tainted 
him for his current work.
  The point is, the man has broad experience as chief counsel to the 
SEC, where he prosecuted major firms, and he has vast experience as 
probably the Nation's premier security lawyer where he defended 
associations and businesses. And quite frankly, when in doubt, I will 
go with knowledge. When in doubt, I will take experience. I do not 
believe that experience taints you.
  Let me also say that there is this current mood that anything having 
anything to do with accountants is somehow bad. Having just praised 
Harvey Pitt, let me point out an area where I disagree with him. When 
he set up his board to oversee accounting ethics and to look at issues 
such as the independence issue, on ethics issues, he does not allow 
people with an accounting background to vote.
  Now I would have to say that I strongly disagree with that for two 
reasons: No. 1, since when is a person's background a source of 
corruption? I will address that a little more in a minute. Secondly, 
when you are looking at what is and what is not ethical practice, I am 
not saying it is absolutely essential, but it is helpful to have 
somebody who knows something about what practice is.
  I submit that in all of these approaches, from the SEC approach to 
the approach of this bill, we are probably going too far in putting 
people in positions where they are going to have massive unchecked 
authority and they have no real expertise in the subject area.
  Anybody who thinks this board is just going to slap around a few 
accountants does not understand this bill. This board is going to have 
massive power, unchecked power, by design. I would have to say the 
board that Senator Enzi and I set up in our bill has massive unchecked 
power as well. I mean, that is the nature of what we are trying to do 
here. I am not criticizing Senator Sarbanes. I am just reminding people 
that there are two edges of this sword. We are setting up a board with 
massive power that is going to make decisions that affect all 
accountants and everybody they work for, which directly or indirectly 
is every breathing person in the country. They are going to have 
massive unchecked powers.
  We need to give some more thought to who is going to be on this board 
and is it going to be something that is attractive enough to make 
people want to serve.
  In the proposal Senator Enzi and I put together, I thought we could 
enhance its prestige by making it a little more independent of the SEC. 
Under the committee bill, which is before us, the SEC would appoint the 
members of the board. I thought that given the broad nature of its 
power, which goes far beyond just accounting and far beyond just 
securities, it would be helpful to have the SEC appoint two members--
Senator Enzi and I suggested that one have an accounting background and 
one not--have the Federal Reserve Board appoint two; have the CFTC 
appoint two; and then have the President appoint the chairman. I think 
that board would have a higher profile. With a Presidential appointee

[[Page 12120]]

as chairman, it would raise the prestige of the board, and we would get 
better people to serve on the board.
  I urge my colleagues, think long and hard when you think about this 
board exerting tremendous, unbridled, unchecked power, about how many 
people you want on the board who know something about the subject 
matter. Today, in an environment where accountants are the evil people 
of the world, the enemies of the people, having no accountants on this 
board or relatively few and not letting them vote when ethics matters 
are being dealt with, I assert that kind of approach means you are not 
going to have first-rate people who are going to want to serve.
  Let me finally get it out of my system by saying: I don't know a 
whole bunch of accountants. I taught at a public university. About a 
third of my students in economics were accounting majors. I would have 
to say that I have a pretty high opinion of accountants. If I had to 
trust the safety and sanctity of my children and my wife today, after 
all these revelations about bad accounting, to a politician, a 
preacher, a lawyer, or an accountant drawn at random in America today, 
without any pause I would choose an accountant.
  I am not saying that there are not bad people in accounting. I am not 
saying there has not been abuse. But I think we have to separate people 
from professions.
  One of my concerns is, we have already had a decline in the number of 
people majoring in accounting. I am wondering, I don't care what kind 
of law you write, I don't care what kind of board you set up, if we 
don't attract smart young people into accounting, people who understand 
it is not talent, it is not personality, it is not cool, it is 
character that ultimately counts, then none of these systems are going 
to work very well.
  Now, I don't buy the idea that legislating something instead of 
setting up a reasoned system to make decisions is a tougher approach; 
and if it is, I don't want it. But what we have today is an approach 
that is largely taken in the media that the more mandates you have, 
that the more things chiseled inflexibly into law, that the more it is 
one-size-fits-all, whether it has any rhyme, reason, or responsibility, 
that that is tougher, and therefore it is better, that in today's 
environment is obviously appealing.
  I hope this doesn't happen, but it would not shock me if we have a 
series of amendments offered tomorrow when we start dealing with the 
bill, where people try to out-tough each other--maybe one to kill all 
the accountants and start all over and train new ones. Well, nobody 
would offer such an amendment, but I think we could very easily get 
into this oneupsmanship that we can end up regretting. I hope that will 
not happen. I want to discourage that.
  Let me give you an example of where Senator Sarbanes and I differ in 
our opinions. Who is right, I don't know. I think maybe being in this 
business for a while convinces you that nobody has a lock on wisdom and 
nobody knows in each and every case what is right and responsible, but 
I want you to understand the difference of our approach. Let me just go 
right to the heart of the matter.
  The substitute that I offered in committee with Senator Enzi has an 
independent board. I think it is better, but you can argue that the two 
boards are pretty similar. Ours is a little more independent of the 
SEC; though, in the end, to meet the constitutional test, the SEC has 
to have authority over it. We went a little further in terms of 
independence and appointing members, and I have already talked about 
that. But the whole heart of the difference--let's pick one issue--
comes down to auditor independence. If you ask me today, should the 
same company that does an external audit for a firm be able to do 
internal audits--and I argue today I don't have the knowledge to say 
this--I would argue today that I really don't know enough about 
accounting practice and how the process works, not just at General 
Motors but at the smallest corporation in America, to make that 
decision. The bill before us sets out the law. It is written in the law 
that if you do an external audit, you cannot do any one of these nine 
different things. I don't know, it may well be that after a reasoned 
analysis a competent board would decide they ought to do those things. 
My guess is that if I had to decide today, and you forced me to make a 
decision that was going to be binding on the country, which is a little 
frightening to me, I might well agree with most, and in some cases all, 
of these things. But I don't believe we ought to be writing that into 
law. I don't think anything is gained by writing it into law, and I 
think a lot is lost by writing it into law.
  Having read editorials, I know this makes the bill tougher, but I 
don't think it makes it better. What I believe we should do is set up 
the best and strongest board we can, make it independent, give it 
independent funding, and put competent people on it. The way Senator 
Enzi and I did it, and there is nothing magic about it other than that 
we did it, we decided to have the SEC, the Fed, and the CFTC appoint 
two members, one with an accounting background and one without, and 
then have the President appoint the chairman, and he could decide.
  I personally think that having more accountants rather than fewer is 
a plus, not a minus. I don't think they all ought to have an accounting 
background. I don't necessarily say a majority have to have an 
accounting background, but I believe that day in and day out, 20 years 
from now when we have all left the Senate and we are not paying 
attention to these things, it would help to have people who know what 
they are doing. I don't buy the idea that people who don't know what 
they are doing are more moral, other things being the same, than people 
who do know what they are doing. In any case, I believe that rather 
than writing out these nine things by law that you cannot do while you 
are doing an external audit, we ought to set up the strongest board we 
can, and we ought to give them external funding and plenty of power, 
and we ought to say to them: you need to look at these nine things and 
do a reasoned analysis. You need to talk to lots of people, such as 
smart theorists who are accounting professors at our best universities, 
and you probably ought to talk to the bookkeeper in Muleshoe who is 
actually doing bookkeeping work, look at the practical, the 
theoretical, and make a determination.
  Should you be able to do an external audit and do any one of these 
nine things? You make a decision and set it out in regulation. Why is 
that better than writing it into law? It seems to me it is better for 
two reasons: One, if you are wrong, or if accounting practices change, 
or if your perception of the problem changes, you can go back and 
change it by regulation. The problem with writing it into law is that 
Congress then has to come back and change the law. As we know from 
Glass-Steagall, it took us 60 years to fix something that had it been 
written in regulation by the 1940s, it would have changed. But we 
didn't change it until 1999.
  The second reason, which I think is equally important, if not more 
important, is the way the bill is now written might very well make 
sense for General Motors. That is, it might make perfectly good sense 
to have a process whereby General Motors might have three or four 
different CPA firms--maybe more--but they are operating all over the 
country and all over the world. That is perfectly feasible. But the 
last time I looked--and I don't know, but some of these may have gone 
out of business and, God willing, maybe some new companies have come 
into business--the last time my trusty staff looked, there were 16,254 
publicly held companies in America. I don't care how smart you are, I 
don't care how good your intentions are, you cannot write a mandate, if 
you get too far in the detail, that fits General Motors and also fits 
the 16,254th largest company in America. It just doesn't work.
  One of the advantages of setting up an independent board, giving them 
a mandate to look at these areas, but not chiseling it into stone in 
legislation, is because they can then say, well, here is the principle 
and if you are General Motors, here is how it applies, but if

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you are XYZ Paint Company in Montana, or Wyoming, or wherever, you 
might only have one accounting firm operating in the town that you are 
domiciled in. I am not saying you cannot hire accountants to come from 
the Capital City, or wherever, to your town to do work for you, and 
maybe you ought not to be operating in a little town in a small State; 
but people choose that, and people who represent small States seem to 
like these companies being there. I am just saying that giving the 
board the ability to set a principle and apply it in one way to General 
Motors and in another way to a small company in a small town makes 
eminently good sense in practice.
  Now, I know it is not a mandate in the same sense as writing it into 
law, but I think the result would end up being better.
  One of the amendments that I will offer--and I thank Senator Sarbanes 
for trying--and one thing I have to say is that nobody on our committee 
can say that Senator Sarbanes did not listen. Nobody can say he failed 
to try to hear them out on their concerns and that, in many cases, he 
didn't change the bill to try to respond to their concerns.
  One of the changes that I support is giving the board, with the 
concurrence of the SEC, the ability to grant waivers to these rules 
and, in fact, to the law. The problem with waivers on an individual 
company basis is a practical problem, and that is, if 16,254 companies 
are trying to get waivers under their special conditions--they all come 
to Washington and hire lawyers and lobbyists; they all petition the 
board and the SEC--if that board has 16,254 petitions in 1 year, and it 
could have many times that if people are petitioning for different 
kinds of waivers, we are going to shut it down for any other purpose 
except waivers.
  What will happen, not because anybody wants it to happen but because 
of the very nature of Government, the people who will get the waivers 
will not in general be the most deserving people. They will be the 
people who hired the best lawyers, who had the best contacts, who knew 
how to go about it, and who had the money to spend getting the waiver.
  My guess is the smallest companies that need the waiver the most will 
not get them. Surely at some point we are going to fix the bill so that 
the accounting board, with the concurrence of the SEC, can say: OK, 
look, in applying this, if you fall into these categories, you have 
these circumstances, you have a waiver to do things in this way. 
Clearly, something like that has to make sense.
  One of the things we have to come to recognize, and I think we all 
recognize it, is that having a beautiful law in a law book does not 
make good law. It has to be practical, and it has to take into account 
the 1,001--in this case, the 16,254 different circumstances that can 
apply.
  What is the problem? I guess there are as many theories about the 
problem as there are people. I have my own theory about the problem, 
and I will share it with my colleagues and anybody else who is 
interested.
  Why is all of this happening now? I believe it is happening because 
of the problems in GAAP accounting. There are other extenuating 
circumstances, and I want to touch on them, but here is the problem in 
GAAP accounting. Senator Sarbanes used a perfect example of it, and I 
will just take his example. He talked about how WorldCom saw its market 
capitalization fall from $100 billion to $100 million. How is that 
possible? I remember when Enron went bankrupt. People said: Where are 
the assets? When a company goes from $100 billion to $100 million, what 
happened to the assets?
  Here is the problem. Increasingly, the asset is a combination of 
know-how, credibility, and a belief by the public that you are carrying 
out your business in an efficient and ethical way. Increasingly, the 
modern corporation does not have 12 steel mills. They do not own 
massive physical assets. Many companies have tried, basically, to get 
out of the asset business into the information business. The value of 
WorldCom was a discounted present value of what the public believed its 
revenue stream was relative to its cost. It never had $100 billion 
worth of physical assets, anything like it. That is what the value of 
the ideal was as the public perceived it in a period where our wise 
friend, Alan Greenspan, talked about irrational exuberance. That is 
what they thought that company was worth, but it never had assets that 
were anything near $100 billion. What it had was know-how, knowledge of 
a market, and it had credibility.
  Enron was like a bank in the 19th century before FDIC insurance. 
Their reputation was the source of their value, and when they made 
stupid business decisions that called that reputation into question, 
they collapsed.
  I have a great sympathy for accounting because I used to be an 
economist, and in economics, we have something called ceteris parabis. 
It means ``other things being the same.'' So when we do not know what 
those other things are, we just utter this Latin phrase and pretend 
they do not exist--literally pretend they do not exist.
  That is valuable in physics where you talked about force equals mass 
times acceleration, or for every action there is equal but opposite 
reaction. That is an assumption. That is a simplification because it 
leaves out friction, and it leaves out gravity. There is nothing wrong 
with it, but the problem is, accounting cannot do those things.
  I had a famous and great accounting professor named David McCord 
Wright. Nobody remembers him anymore. I can visualize him today easily 
defining WorldCom. He would have talked about the discounted stream of 
earnings, and he would have talked about the value of their equity or 
market capitalization and would have plotted out a projection of 
revenues and a projection of costs and integrating that area to add it 
up, and that is where the $100 million was.
  I doubt if WorldCom's physical assets ever totaled $50 million, 
probably not $20 million. You are an accountant and you have the job 
with the directions that are available through GAAP, generally accepted 
accounting principles. You have the job of trying to model, for 
accounting purposes, what WorldCom looks like. You do not have the 
ability to utter a Latin phrase and wish away things you do not 
understand. Our problem today is that our GAAP accounting has not kept 
pace with the world in which we live.
  In this world where knowledge is power, in this world where know-how 
is wealth, it is very hard to model with GAAP accounting. In the decade 
of the 1990s, when this new model was used on a massive basis in the 
American economy, accountants had to figure up how much all this stuff 
was worth.
  GAAP accounting has not kept pace with our changing economy. Our 
accounting is based on the old steel mill of the 1940s where you had 
how much you paid for the furnaces, and you had them a certain period 
of time, and you have depreciated them.
  How do you depreciate an idea? How do you book having brilliant young 
people who are committed to the future in your company because they own 
your stock? How do you put that down in value terms?
  So when we are pointing the finger at these people who call 
themselves accountants, when we are blaming them for every problem in 
the world, accountants did not put WorldCom into bankruptcy. 
Accountants did not put Enron into bankruptcy. Enron put Enron into 
bankruptcy by making bad business decisions. The accounting was a 
problem because it was slow to show it, but it was there. WorldCom's 
problems were there. The problem was not accounting. The problem was 
accounting did not show the problem soon enough.
  So if anyone is listening to this debate and thinks some investment 
is going to be more valuable because we have better accounting, in the 
long run that is true; in the short run, I am not sure that is true. In 
fact, I argue these companies would have gone broke anyway. Clearly, 
they would have gone broke, and they would have gone broke quicker had 
the accounting system been better. It should have been better. It needs 
to be better.

[[Page 12122]]

  The point I am trying to make is the following: When you are trying 
to model a company using GAAP accounting, it is hard. It is something 
nobody has ever done before.
  We are learning how to do this, and we will--using concepts like 
goodwill to try to be a proxy for things like intellectual capital and 
know-how. That is the source of our problems.
  I think the fact this came at the end of a financial bubble in the 
1990s exacerbated the problem. The problem, in my opinion, is 
accounting was easier--maybe it was not easier initially. We figured 
out how to do it on the old model. We will figure out how to do it on 
the new model.
  There is some smart accountant, probably at Texas A&M right now, 
studying accounting, who will probably get an MBA, who will figure out 
how to get all this goodwill off our books--which is a silly concept in 
my opinion, but it is the only one we have--and come up with models of 
intellectual capital that will have meaning, just as that steel furnace 
in the 1940s and the write-down of it that made sense, but that is not 
the world in which we live. That has to be dealt with.
  Something the chairman's bill does, something that I very much am in 
favor of, is it gives independent funding to FASB. The two things that 
have to be done and only Congress can do them effectively, in my 
opinion, are: No. 1, we have to have an independent, self-funded 
accounting standards board, FASB, and we have to have accountants 
setting accounting standards. No. 2, we need to set up this board to 
oversee ethics in accounting.
  I do not think it matters whether it has a majority of accountants or 
not, but it needs to have a reasonable number of people who have a 
background in accounting so they know what they are doing and so they 
have an intellectual stake in it being done right. It is a dangerous 
thing when there are people with massive power who do not have any kind 
of intellectual stake in the application of that power, and it concerns 
me.
  So to conclude, let me say this: Senator Sarbanes and I, when we were 
at this point on the financial services modernization bill, were on 
opposite sides. I was for the bill. I saw it as the epitome of all 
wisdom. He was opposed to the bill and saw it in less glowing terms. By 
the time we got out of conference, it was our bill. We were together on 
it and 90 Members of the Senate voted for it. It passed the Senate 
initially on a very close vote, a very narrow margin.
  I do not think that will be the case here. I think this bill will 
pass by a very large margin. I also think it is possible that by the 
time we have reconciled this bill with the House, that we can have a 
bill that will be very broadly supported. At that point, I hope I will 
be in a position of supporting it.
  There are many good things in the Sarbanes bill. There certainly has 
not been a bill, since I have been in the Senate, that was better 
intended than this bill. I do think it can be improved. I think it 
legislates too much. I think it does one-size-fits-all mandates. It 
takes them a little bit too far. That, to some guy outside government, 
does not sound very important, but it is very important when one starts 
talking about application. If we do this thing right, and if we build a 
consensus and it works well, that will be the final monument of the 
bill.
  I hope we can offer germane amendments. As of right now, I think 
there will probably be two amendments I will offer. One will have to do 
with this issue about granting waivers on a blanket basis so that 
rather than making every individual company that has specific kinds of 
problems come in and ask for an individual waiver, that the SEC and the 
board, when they agree, could simply issue a set of principles, and if 
you qualify you would get the waiver. If you do not, you do not. Pretty 
straightforward amendment.
  The second amendment I believe I will offer will have to do with 
appeals. Under British common law, we have always taken a very strong 
position in affecting the right of a person to earn a living. We have 
set very high standards when it comes to taking somebody's livelihood. 
I believe there are people who are practicing accounting, or 
veterinarians or economists or any profession, there is somebody in it 
who ought not to be in it. I think when this board, which is a private 
entity--and again this is not a problem with the Sarbanes bill. This is 
a problem of our substitute as well. It is a strange kind of entity. We 
want it to be private, but we want it to have governmental powers. We 
have tried to structure it in ways to try to accommodate this.
  The bottom line is, when this board is taking away somebody's 
livelihood and that person believes they have been wronged, they ought 
to have a right to go to the Federal district courthouse. They ought to 
have a right to say: I do not think that was right, and I want my day 
in court.
  They ought to have to pay for it, and at that point I think all the 
material involved has to be made public, but that is a right I think 
people have to have. Those two amendments are very narrowly drawn, and 
they go to the very heart of the bill. I know some of our colleagues 
are thinking about offering a whole bunch of other amendments. I submit 
that trying to work out a compromise with the House is going to be 
difficult. I think we will succeed at it, but I think if we get a whole 
bunch of other issues involved, we are making the mountain higher. I 
believe we are ready to legislate in this area, and I think if we can 
limit what we are doing to this area that we can pass this bill, we can 
go to conference, and we can come back and have a bill signed into law 
before we leave. I think if we get into a lot of other areas, I am not 
saying the world comes to an end if you put an amendment on here--
having us write accounting standards with regard to stock options, for 
example, that is a tax issue. I would probably want to make the death 
tax permanent as a second-degree amendment, but I am not saying the 
world comes to an end if we do that.
  I am saying if we get off into those kind of issues, where you have 
strong feelings on both sides of the aisle--and that would not be any 
kind of partisan vote--I think it is harder for our chairman and for 
the members of this committee to get their job done. I hope we will 
have a limited number of amendments. I hope they will be germane to the 
bill.
  Finally, at some point we are going to take up Yucca Mountain. I am 
not up high enough in the pecking order to have gotten the word as to 
exactly when that is going to be. Other things being the same, I would 
rather finish this bill first and then go to Yucca Mountain than to 
stop in the middle of it. But it is a highly privileged motion. Any 
Member can make it. It is not debatable. I assume at some point 
sometime tomorrow that motion will be made. As I figure the time limit 
under that privileged motion, it would take about a day.
  I don't see any reason this bill should not be finished this week, 
and maybe much sooner if we can stay on the bill, if we don't drift on 
into these other areas. When people who are for the bill in its current 
form want to stay pretty close to the bill and people who are against 
it in its current form want to stay pretty close to the bill, we ought 
to stay pretty close to the bill.
  I thank my colleagues for their indulgence. I look forward to working 
on this issue. I yield the floor.
  The PRESIDING OFFICER (Mr. Dorgan). The Senator from Wyoming.
  Mr. ENZI. Mr. President, these are interesting times. I hope 
colleagues have been listening. The two presentations that preceded me 
were outstanding explanations of both the bill and the financial 
problems facing the world today. I don't think you can get a clearer 
explanation of the problems than those given by Senators Gramm and 
Sarbanes. They are very detailed and very much to the point and lay the 
groundwork for what we are about to do.
  Usually in this Chamber, we have a solution and we are looking for a 
problem. Today, we have a problem and we are looking for a solution. We 
have a problem before the Senate. The way this process works, is that 
we try to place the solution in the best possible

[[Page 12123]]

form. Under our form of government, the Senate will work on its bill; 
the House works on another bill on the same topic. When those two bills 
have been completed, there will be a conference committee and we will 
work out the differences. Through every one of those processes, there 
will be changes to the legislation. We get 100 different opinions from 
100 different backgrounds on any piece of legislation. That is what 
makes our form of government work. At the other end of the building, 
there are 435 people from different backgrounds. They all lend their 
opinion issues that come before the House.
  It is sometimes a slow process, but it is the best process in the 
world. It will work on this problem for which we are looking for a 
solution.
  If the economy were different today, we would not have this problem. 
When there are changes in the economy, we realize accounting problems--
or at least that is when the accounting problems become apparent. That 
is where we are today.
  I am the lone accountant in the Senate. There is a good reason for 
that. Accountants are out there doing very detailed work. When you 
listen to what is in this bill, you are going to hear details that you 
do not hear with other legislation. It is the nature of the occupation, 
of the profession of accounting. In the last 6 months, there has been 
an increased interest in the accounting profession. Kids in colleges 
have been asking the Deans about this phenomenon called accounting that 
nobody has talked about for a long time. It is a tremendous opportunity 
for accountants to finally explain what they do.
  Some of the kids are looking into accounting for the wrong reasons. 
They want to be one of the green eyeshade people bringing down huge 
corporations. That is not what it is about. It is an opportunity to 
make sure everyone understands business in America. Accountants are the 
people with the very basis who both know it and can explain it. That is 
their job.
  Somewhere along the line, it is possible for people to get distracted 
from that main goal. We are trying to bring them back to that main 
goal--providing a basis where everyone can understand the value of the 
companies in which they are investing.
  Today we are addressing accounting legislation that has been reported 
out of the Banking Committee. It has been through initial scrutiny. It 
has been through the process that leads us to the floor. I have talked 
about the floor process, but so far this has only been through the 
hearings process. We had 13 hearings in the Banking Committee. They 
were on very diverse topics and a very diverse bunch of people who 
understood each of those topics testified. I commend Senator Sarbanes 
for the way he conducted the process of the hearings, and then the 
process of negotiations that led up to the committee vote. That 
happened over the last several months. On this issue, I can think of no 
other Chairman in either the House or Senate who did a more thorough 
job in conducting hearings. The Banking Committee stayed on the 
substance and did not allow enormous outside pressures on this issue to 
interfere with trying to get to the bottom of the real problem. The 
hearings were not finger-pointing. The hearings were an attempt to get 
valuable information to arrive at the best possible solution.
  In addition, the witnesses at the hearings presented objective views. 
Had it been my choice to call the witnesses, I would have chosen nearly 
every person who testified. That shows the care and concern that went 
into choosing the individuals who provided this basic information. The 
witnesses offered several different views, and they came from diverse 
backgrounds.
  I also thank the Chairman for the way he and his staff conducted 
themselves through the endless negotiations we had during that same 
timeframe.
  Right now, it seems as if everyone is writing an accounting bill--
including myself. In fact, I got calls as soon as Enron occurred from 
some of the House Members who said they would really like to work on a 
bill with me. Of course, the first question I had to ask them was, What 
did you find really happened with Enron? Usually the answer was, We 
don't know yet. Their response was, but we want to get ahead of the 
curve.
  I am glad we had the patience to wait, to hold the hearings, and then 
to negotiate through a number of different bills to come up with the 
one before the Senate today. Those negotiations by Senator Sarbanes and 
his staff were both honest and fair. Although we were not able to agree 
on everything, which is the basis of negotiation, I believe all 
negotiations took place in good faith. I thank the Chairman for that. I 
do think we have a bill that is a good basis for finishing the process 
and going to conference.
  Enron, Global Crossing, WorldCom, and the other numerous restatements 
that are occurring have caused a ripple effect on the trust of 
corporate executives and their auditors by the public. These 
executives, the persons in whom shareholders put their trust, have 
stained the entire corporate community. A few bad apples have spoiled 
the bunch. As a result, the legislation we will be debating this week 
will restructure the way executives operate by increasing 
accountability and making it easier to discipline fraudulent behavior 
while at the same time increasing penalties for illegal activity.
  This legislation will force the management of companies to be 
accountable to their shareholders by requiring that they certify the 
accuracy of their financial statements. In addition, the legislation 
will require that members of corporate audit committees are independent 
directors. We provide the audit committee the ability to engage outside 
consultants and advisers and provide them the resources they need to 
determine whether the accounting techniques being used are in the best 
interests of the shareholders.
  In addition, all employees should be subject to the same rules when 
selling company stock. In this regard, the bill prevents officers and 
directors of a company from purchasing or selling stock when other 
employees are restricted. And when these officers or directors do sell 
stock in the companies in which they work, they should report the 
transaction on the next business day.
  However, the cornerstone of this legislation will be to change the 
way in which a company's auditors interact with their clients, and also 
to force them to be more accountable. While I believe that accountants 
have extremely high ethics and standards, I do believe the current 
environment has highlighted a number of problems inherent in the 
current oversight structure of the accounting industry.
  I do believe it is an awesome task to be the accountant trying to 
explain this to everybody else. I do need to explain a little bit why 
there are not more accountants in legislatures or in the Senate or in 
the House. That is because if you pick up experience in legislating, 
most of that is done during the tax season and we need the accountants 
during the tax season. And they need the business during the tax 
season. If they don't earn at least 70 percent of their revenue during 
that time, they are out of business, which precludes them from picking 
up legislative experience. There is no requirement that you have to 
have legislative experience before you come here. There is no 
requirement that you have any kind of experience. But that is why there 
are fewer accountants here than there are a number of other 
professions--it is a matter of timing.
  While I am hesitant to move forward with the number of changes 
included in the bill, I do believe the legislation is necessary given 
the current lack of faith in accountants.
  Make no mistake about it, this legislation is federalization of the 
accounting industry. This bill places a Federal Government bureaucracy 
at the helm of accounting regulation. While the legislation doesn't 
prevent the State accountancy boards from continuing to regulate 
accountants registered in their States, it does establish an overlord 
regulator to oversee the firms which audit publicly traded companies. 
My hope is that this new oversight structure will renew the faith the 
public has in auditors and the financial statements which they help 
prepare.

[[Page 12124]]

  In addition to my own proposal, over the past several months I have 
seen a lot of different proposals. I have also spoken to and met with 
many of my colleagues about this issue. I have spoken with groups from 
different industries; I have talked to scholars, consumer advocates, 
and regulators. All the groups agree that steps need to be taken to 
enhance the oversight of accountants.
  I have examined several existing models of quasi-public regulators 
such as the New York Stock Exchange and the National Association of 
Securities Dealers. One point is clear: When these organizations were 
established, there was a desire to appoint the most informed 
individuals, those who actually deal with the industry on a day-to-day 
basis, as majority members of the boards that oversee the industry.
  For instance, the National Association of Securities Dealers, NASD, 
has a large board which must consist of anywhere between 17 and 27 
members. Nowhere in the NASD rules does it state their board members 
may not serve if they have previously been involved in the securities 
industry. As such, the majority of the NASD board members have worked 
within the industry.
  Why should the accounting industry be treated so differently? Why 
would we create a board which oversees the accounting industry and then 
require that a minority of its members have ever practiced accounting? 
The NASD plays just as important a role in the protection of investors 
as the accounting oversight board will, so why shouldn't the persons 
who sit on this board have the best possible knowledge of the 
accounting industry?
  I do want to thank Senator Sarbanes for the change he made in the 
legislation. Originally it said there could be no more than two 
accountants on this five-person board. He made the change so that two 
will be accountants. It is a very significant change so that 
accountants are represented on the board. Previously it would have been 
possible to have no accountants regulating the accounting profession.
  Every piece of legislation has its handful of unintended 
consequences, despite how well-meaning Congress can be. I fear the way 
in which the accounting industry will change when a group of non-
accountants set the standards which accountants must follow. Lawyers do 
not have non-lawyers setting ethical and professional standards which 
they must follow, yet I would argue that those standards are as 
important as accounting standards and ethics.
  I don't want my message to be misconstrued. I do believe that a board 
should be established to oversee the accounting industry. I also agree 
the board members should have all the tools necessary to effectively 
oversee the industry. I agree that the board members should be full-
time and independent from the accounting firms. I agree that they 
should be appointed by government and not by industry. But I do not 
agree that the members of the board should be excluded just because 
they may have passed a CPA exam 25 years ago.
  To the contrary, because I believe this board should be as effective 
as possible, I believe the board members should know how an audit 
engagement works and they should know the pressures that are applied to 
an auditor from a client. I believe with this knowledge the board may 
in fact apply stricter standards than a board of non-accountants.
  As I said, I believe accounting firms should be subject to strict 
scrutiny. However, I do not believe this legislation should pave the 
road for the trial bar to open frivolous lawsuits against accounting 
firms. Arthur Andersen no longer exists. Can we really afford to lose 
another one or two of the final four firms? We used to call them the 
big five. Now we call them the final four.
  It was mentioned earlier that there are 16,254 SEC-filed 
corporations. That is 16,254 to be reviewed, primarily by four 
accounting firms. If the trial lawyers pick off one after another after 
another of the firms because the Board provides information and because 
they are handed that information, how will we have those 16,254 audited 
at all?
  I am hoping there are a lot of young people listening who are going 
into accounting who may start firms and grow the firm themselves so 
they can handle an audit of a Fortune 500 company. But it doesn't 
happen overnight. And we have to make sure that there is auditing, and 
not just consulting, which some people will point out is where most of 
the money is these days.
  It makes me nervous to know that essentially only four accounting 
firms now have the resources and expertise to audit the world's largest 
companies. We rely on these firms to verify the books of diverse and 
complex companies because they are the only firms that can provide this 
service. If we subject them to the will of the trial bar, they will 
surely continue to be driven from existence, one firm at a time.
  Instead, we should punish the wrongdoers to the fullest extent 
possible and rely on good managers of companies to do their jobs 
effectively. In the end, we are going to end up making the audit 
committee members full-time employees, and then there will not be any 
independence--another problem about which we have to worry.
  Having said this, I do believe this legislation is needed at this 
time. Congress must produce a remedy to help restore investor 
confidence. We have seen that real penalties, or at least a threat of 
strong penalties, need to be hung over the heads of corporate 
executives to assure they maintain their obligations and 
responsibilities. The moral and ethical breakdown among some of those 
executives is disgraceful, and investors must know these executives 
will be punished severely when they make selfish judgments.
  A major concern, as we have gone through this legislation, trying to 
put the bill in its present form, has been the relationship to small 
business. As I mentioned 16,254 companies are the ones that are 
registered with the SEC. There are thousands of companies out there 
that are not SEC registered businesses. There are thousands of entities 
out there that hire auditors to give confidence in the financial 
statements they have that are not SEC filed.
  One of our concerns has been that we not change business so 
drastically that these small businesses will no longer be able to 
afford auditors. So we built in protections for the small businesses. 
Our intent with this bill is not to have the same principles that apply 
to the Fortune 500 companies apply to the mom-and-pop business. When 
they hire an auditor, they want that auditor to give them every bit of 
information they possibly can so the information they get improves 
their business and doesn't hide anything from investors. Mom and pop 
are the investors.
  We have taken a lot of care to be sure we are not cascading the 
provisions down into small business. We will look at additional ways, I 
am sure, to make sure that does not happen. This is not a license to 
States to do the same thing that we are doing on a Federal basis. There 
is recognition that on a Federal basis there is a bigger problem than 
on a State-by-State basis.
  I also want to point out there is also a responsibility by the 
individual investor. They have to learn to diversify and not to keep 
all of their eggs in one basket. I hope we can turn this situation into 
a chance to educate small investors as to how best to manage and invest 
their money. Nothing will bring back the billions of dollars employees 
of some of these companies have lost. But hopefully the collapse in 
confidence will ensure that individuals will never again lose their 
life savings because of a lack of diversification or knowledge of 
finance.
  What will this legislation provide? It will provide a strong 
oversight body to watch the accounting industry. It will provide a set 
of corporate governance laws that will require corporate executives to 
become accountable for their financial statements. It will provide 
assurances that corporate boards watch the management of the company 
with a more critical eye--no longer will board memberships be cushy 
jobs with no responsibility.
  It will also provide assurances to the American people that Congress 
will not allow these millionaire and billionaire executives to 
steamroll their obligations to the shareholders. It will also

[[Page 12125]]

ensure that research analysts aren't being told what to say by the 
investment bankers.
  To a great extent, I believe the marketplace has made remarkable 
changes to address a number of the issues which were highlighted by 
these corporate failures. First and foremost, corporate boards and 
audit committees will no longer turn their head when management wants 
to engage in questionable ethical engagements. Also, credit rating 
agencies will impose much more scrutiny on the companies they rate to 
protect financial institutions and other lenders. Lenders themselves 
will require more information about the stability of the companies in 
which they invest. Research analysts will ask more questions about the 
company, and more importantly, they will demand more answers from 
executives. But perhaps, most important of all, is the fact that 
investors, both institutional and individual, will be more critical.
  Shareholders will wake up and learn about the power of their votes on 
corporate actions. We've already seen great strides from some 
institutional investors in that they plan to use their votes in 
shareholder meeting to keep executives honest and accountable. They 
also plan to use their votes to impact executive compensation packages. 
These private sector solutions will be more effective than any 
legislation which can be passed out of Washington.
  One of our country's greatest strengths rests in the dominance of our 
capital markets. But the strength of our markets is only as strong as 
the underlying confidence in the listed companies. When these companies 
build facades instead of standing on principle, it shatters the entire 
system. Congress and the SEC must find a middle ground where we allow 
the marketplace to continue to operate in the capital markets to the 
greatest extent possible but also assures investors, both domestic and 
internationally, that the U.S. capital markets will continue to be 
worthy of their investments. We must continue to convince investors, 
that at the core of the American capital markets, there must be a high 
level of integrity and ethics by all players.
  I want to reiterate another message that has been prevalent this 
afternoon.
  As we get into this bill, there are virtually no limits on what 
amendments can be put on--at least unless there is a cloture motion.
  I hope people will recognize the need to have something done, the 
need to get it done quickly, and not try and make this a vehicle for 
everything they ever thought needed to be done with corporations.
  The purpose of this bill is not to solve the international problems 
of business for everything that we ever thought of.
  I hope my colleagues will constrain their amendments, keep them to 
the corporate governance and accounting area we are working on, and 
help us to get this bill finished as quickly as possible.
  Again, I thank Chairman Sarbanes and Senator Gramm for their 
tremendous efforts and insight which they provided in the previous 
explanation of this, and for the hours of work they have put into the 
solution that is before us today. I hope we can keep it to a limited 
solution, take care of the problems that are recognizable, and reach 
agreement so we can get this to conference and get a bill to the 
President for his signature.
  Thank you, Mr. President. I yield the floor.
  The PRESIDING OFFICER. The Senator from Maryland.
  Mr. SARBANES. Mr. President, I ask unanimous consent that it be in 
order to send an amendment to the desk and have it immediately 
considered. This amendment makes two simple changes to the bill. One is 
a technical change to conform to the budget rules, and a conforming 
change involving the definition of ``issuers.'' We have discussed this. 
It has been cleared. I would like to go ahead and take care of that 
business, if I could.
  The PRESIDING OFFICER. Is there objection?
  Mr. GRAMM. Mr. President, there isn't any objection. I think this 
clarifies the bill. I think it is something that both sides are for, 
even though we had a previous agreement not to do any amendments today. 
It is simply so technical that I don't think anybody would have any 
concerns.
  The PRESIDING OFFICER. Without objection, it is so ordered.


                           Amendment No. 4173

  The PRESIDING OFFICER. The clerk will report.
  The assistant legislative clerk read as follows:

       The Senator from Maryland [Mr. Sarbanes] proposes an 
     amendment numbered 4173.

  Mr. SARBANES. Mr. President, I ask unanimous consent that reading of 
the amendment be dispensed with.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The amendment is as follows:

         (Purpose: To make technical and conforming amendments)

       On page 65, line 11, strike ``All'' and insert ``Subject to 
     the availability in advance in an appropriations Act, and 
     notwithstanding subsection (h), all''.

       On page 76, between lines 16 and 17, insert the following:
       (d) Conforming Amendment.--Section 10A(f) of the Securities 
     Exchange Act of 1934 (15 U.S.C. 78k(f)) is amended--
       (1) by striking ``Definition'' and inserting 
     ``Definitions''; and
       (2) by adding at the end the following: ``As used in this 
     section, the term `issuer' means an issuer (as defined in 
     section 3), the securities of which are registered under 
     section 12, or that is required to file reports pursuant to 
     section 15(d), or that will be required to file such reports 
     at the end of a fiscal year of the issuer in which a 
     registration statement filed by such issuer has become 
     effective pursuant to the Securities Act of 1933 (15 U.S.C. 
     77a et. seq.), unless its securities are registered under 
     section 12 of this title on or before the end of such fiscal 
     year.''.

  The PRESIDING OFFICER. If there is no further debate, without 
objection, the amendment is agreed to.
  The amendment (No. 4173) was agreed to.
  Mr. SARBANES. Mr. President, I move to reconsider the vote, and I 
move to lay that motion on the table.
  The motion to lay on the table was agreed to.
  Mr. SARBANES. Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. REID. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. REID. Mr. President, I first want to extend my appreciation to 
the Senator from Maryland for this bill. It is really well timed and 
well done.
  I received a letter today from the Secretary of State of the State of 
Nevada, a Republican.
  By the way--the Senator from Connecticut is in the Chamber--the 
Secretary of State worked very closely with the Senator from 
Connecticut. As the Senator will recall, he is a very fine man. I wish 
he were a member of the Democratic Party. He is not. But he is an 
outstanding public servant.
  He wrote me a letter, which said:

       Dear Senator Reid: Investor confidence in the integrity of 
     U.S. securities markets has been badly shaken as a result of 
     Enron, Global Crossing, WorldCom, and other alleged 
     wrongdoing. The failure of several large corporations to 
     police themselves cries out for reform before the negative 
     impact on our markets damages our National economy.
       The Senate is to begin consideration of S. 2673, The Public 
     Company Accounting Reform and Investor Protection Act of 
     2002, on Monday, July 8. I fully support S. 2673 and oppose 
     any efforts to weaken its provisions.

  If I could have the attention of the Senator from Maryland, the 
manager of this bill, I have here a letter from the secretary of state 
of the State of Nevada, who says:

       I fully support S. 2673 and oppose any efforts to weaken 
     its provisions.

  I say to the Senator, one of the things the Secretary of State of 
Nevada is worried about is someone attempting to weaken the bill that 
you have brought forward to prevent State securities agencies from 
looking at wrongdoings in the State of Nevada.
  As the Senator from Maryland knows, the attorney general from New

[[Page 12126]]

York, who has been here, is very concerned about this. It is my 
understanding this bill does nothing to weaken that; is that true?
  Mr. SARBANES. If the Senator would yield.
  Mr. REID. I would be happy to yield.
  Mr. SARBANES. That is correct. At one point there was talk of an 
amendment floating around but----
  Mr. REID. But the point is, it is not in the bill?
  Mr. SARBANES. No, it is not in the bill.
  Mr. REID. On behalf of the secretary of state of Nevada, who I 
indicated earlier worked closely with the Senator from Connecticut in 
bringing forward a very good election reform bill--he is very 
progressive, and a fine secretary of state--throughout this letter, he 
acknowledges how important this legislation is. I wanted this to be 
spread on the Record before my friend's attention was diverted.
  Mr. SARBANES. I appreciate the Senator's comments.
  Mr. REID. My friend, secretary of state Heller, goes on to say:

       As Nevada's chief securities regulator, I believe there is 
     an immediate need to restore investor confidence in our 
     securities markets.
       I stand with my fellow state securities regulators in 
     endorsing Title V, Analyst Conflicts of Interest, in its 
     current form and strongly oppose any amendment to this title 
     that would reduce our ability to investigate wrongdoing and 
     take appropriate enforcement actions against securities 
     analysts. However, an industry amendment has been circulated 
     that would prohibit state securities regulators from imposing 
     remedies upon firms that commit fraud if it involves 
     securities analysts and perhaps even broker-dealers that 
     serve individual investors. If Nevada's investigative and 
     enforcement authority in this area are weakened, so too will 
     the confidence of Nevada investors.

  He certainly opposes this.
  Mr. President, I ask unanimous consent that the letter from our 
secretary of state be printed in the Record.
  There being no objection, the letter was ordered to be printed in the 
Record, as follows:

                             Office of the Secretary of State,

                                                     July 8, 2002.
     Hon. Harry Reid,
     U.S. Senator, Hart Senate Office Building, Washington, DC
       Dear Senator Reid: Investor confidence in the integrity of 
     U.S. securities markets has been badly shaken as a result of 
     Enron, Global Crossing, WorldCom, and other alleged 
     wrongdoing. The failure of several large corporations to 
     police themselves cries out for reform before the negative 
     impact on our markets damages our national economy.
       The Senate is to begin consideration of S. 2673, The Public 
     Company Accounting Reform and Investor Protection Act of 
     2002, on Monday, July 8. I fully support S. 2673 and oppose 
     any efforts to weaken its provisions. As Nevada's chief 
     securities regulator, I believe there is an immediate need to 
     restore investor confidence in our securities markets.
       I stand with my fellow state securities regulators in 
     endorsing Title V, Analyst Conflicts of Interest, in its 
     current form and strongly oppose any amendment to this title 
     that would reduce our ability to investigate wrongdoing and 
     take appropriate enforcement actions against securities 
     analysts. However, an industry amendment has been circulated 
     that will prohibit state securities regulators from imposing 
     remedies upon firms that commit fraud if it involves 
     securities analysts and perhaps even broker-dealers that 
     serve individual investors. If Nevada's investigative and 
     enforcement authority in this area are weakened, so too will 
     the confidence of Nevada investors.
       An amendment may be offered on the Senate floor under the 
     guise of creating national uniform standards for securities 
     analysts. Its real intent, I fear, is to eliminate remedies 
     that state securities regulators may impose on firms should 
     fraudulent activity be unearthed in an investigation. This 
     approach is clearly ill-advised in today's climate of 
     investor uncertainty.
       As Nevada's Secretary of State, my office is charged with 
     administering the Nevada Uniform Securities Act. My office is 
     in current negotiations with Merrill Lynch regarding a 
     possible settlement of analyst conflicts discovered in a 
     lengthy investigation by the New York Attorney General's 
     office. My staff is also participating in a task force 
     investigation of UBS Paine Webber/UBS Warburg. This amendment 
     would greatly hamper our ability to investigate analyst 
     conflicts and would have a detrimental effect on Nevada 
     investors.
       I urge you to support S. 2673 and to vote against any 
     amendment to weaken the enforcement powers of state 
     securities regulators. The result of an amendment such as 
     this could be that virtually every one of the thousands of 
     actions brought by state securities regulators every year 
     would be preempted, as well as all civil suits and 
     arbitrations under state law. In light of the recent Enron 
     and WorldCom debacles, it simply does not make sense to limit 
     or preempt the state's ability to bring enforcement actions 
     against analysts who lie to Nevada investors. The public is 
     looking for elected officials to help them regain their 
     confidence in corporate America.
       As Nevada's Secretary of State, I have a duty to protect 
     our state's investors. Any measure that dilutes my authority 
     as the state's chief securities regulator is counter to the 
     mission of my office and to state securities regulators 
     nationwide. Accordingly, I again urge you to vote against any 
     amendment to S. 2673 that would weaken the enforcement powers 
     of state securities regulators.
       Please call me at (775) 684-5709 if you have any questions 
     or need additional information
           Sincerly,
                                                      Dean Heller,
                                               Secretary of State.

  Mr. REID. Mr. President, our Nation is experiencing a crisis in 
confidence among the investing public. Americans hear on the news and 
read in the papers every day more and more cases of corporate 
executives bilking employees and investors, and of auditors who looked 
the other way, of boards of directors failing to provide the oversight 
expected of them, and of well-connected investors buying and selling 
stock based on insider information. Investors do not know who they can 
trust.
  We have been in a mad rush the last many years to make sure that the 
quarter you are involved in has a good financial statement. People go 
to whatever ends they can to make sure that that quarterly statement 
looks good to keep the stock price up. That is all that matters. It 
does not matter whether the company is losing money. It does not matter 
if their employees are being laid off. It does not matter, as long as 
they do everything they can to do what can be done to make sure that 
stock price stays the same or goes up.
  I have spoken previously on efforts of Senators to secure the future 
for American families. In fact, Senate Democrats are using that as a 
theme: to secure the future for all American families. Securing our 
future means not only making sure our borders are safe but also 
securing educational opportunities for all our children and access to 
affordable prescription drugs and affordable health care.
  We must also provide pension protection for American families. In 
part, that means extending pension coverage. There will be an 
opportunity, before this legislative year ends, where we can have a 
good debate.
  The vast majority of workers in Nevada have no pensions. As a 
consequence, they face their retirement years with inadequate 
resources. Senator Bingaman, chairman of a task force, has raised 
awareness of the lack of pension coverage for American workers and is 
working on legislation to address that problem.
  My colleagues have also led the way with other legislative 
initiatives to restore investor confidence and provide safeguards to 
secure Americans' investments, pensions, and retirement savings.
  Chairman Sarbanes has introduced important legislation that will 
create a strong, independent oversight board to oversee the conduct of 
auditors of public companies, and he has done this on a bipartisan 
basis. That bill was reported out of committee, as I recall, by a vote 
of 17 to 4, with overwhelming bipartisan support.
  This legislation would establish guidelines and procedures to assure 
that auditors of public companies do not engage in activities that 
could undermine the integrity of the audit. It ensures greater 
corporate responsibility by setting standards for audit committees and 
for corporate executives, but it would, we would hope, impose penalties 
when standards are violated. It would establish additional criteria for 
financial statements and require enhanced disclosures regarding 
conflicts of interest.
  This legislation also directs the Securities and Exchange Commission 
to adopt rules to improve the independence or research and disclose 
potential conflicts of interest. It also would provide a significant 
boost in funding for the SEC, the Securities and Exchange

[[Page 12127]]

Commission, to help it carry out its responsibilities in a fashion that 
would help restore investors' confidence in the markets.
  This legislation goes a tremendous distance in addressing some of the 
major concerns I have heard from people in Nevada. And I am pleased 
this bill has gained, as I have indicated, bipartisan support.
  Indeed, it seems that after staying silent for so long, and after 
allowing a permissive atmosphere where businesses could do no wrong, 
the President, our President, and Republicans in Congress, quite 
frankly, are now reversing course. Some are falling all over themselves 
to jump on the bandwagon and support this legislation. They have done 
it after hearing from an outraged public. And that is good.
  Tomorrow I will be eager to hear what the President has to say in New 
York. I hope that he does not say we are going to have to enforce the 
law that we have, because the law we have has not been enforced, 
especially by the people who surround this President and his 
administration.
  For him to go to New York and say we need to enforce the law more 
strongly will not do the trick. He needs to jump on the bandwagon with 
this legislation. We need additional legislation.
  The President ran a campaign based on themes such as responsibility 
and accountability, but recent news reports suggest that both have been 
lacking in his explanations of his past dealings in the business world.
  Prior to holding public office, our President has parlayed his 
connections as a member of a wealthy and powerful family to arrange a 
number of, some would call, sweetheart deals. In editorials they have 
been referred to that way for the past several days. Despite a string 
of business failures, our President always seemed to land on his feet 
and seemed to profit.
  Now there are disturbing indicators that he has played fast and loose 
with some of the rules that he is now being asked, through his 
administration, to enforce. When asked about his business dealings, the 
President has not accepted personal responsibility, instead shifting 
blame to accountants and lawyers or implying that he was just doing 
business as usual.
  I would have to say there are questions not only about the Harken 
business dealings but about the business and accounting practices of 
Halliburton, where Vice President Cheney enriched himself, walking away 
with tens of millions of dollars.
  So the problems we have heard go far beyond Enron and the President's 
friend, as he referred to him, ``Kenny boy,'' Kenny Lay. They are not 
limited to the handful of companies getting most of the media coverage 
in recent weeks. Instead, there are fundamental and systematic problems 
that have to be corrected. That is what this legislation is all about.
  I applaud the chairman and the committee for reporting out this 
bipartisan legislation.
  I hope, I repeat, that the President will join in supporting this 
legislation. We need to make sure that those who serve as corporate 
executives and on boards accept the responsibility of their roles when 
they sign their name on a financial report. The American people need to 
be able to trust corporate leaders.
  Likewise, the President, and those in his administration who came to 
office from the corporate world, need to show more transparency in 
letting the American people know how they are making policy decisions, 
who has access to them, who is influencing them, who is meeting with 
them.
  I joined in an amicus brief with the General Accounting Office to 
have the Vice President disclose who he met with to come up with energy 
policy that this administration enumerated. We need to know with whom 
he met, when he met with them, and why he met with them. They refused 
to give us that information. That is why I joined in that litigation.
  This administration must set aside what I believe and agree with 
some--again, it is replete in the editorials of the last few days--is 
their arrogance and secrecy and instead be open and forthcoming public 
servants.
  This legislation is timely. The Banking Committee jumped right on it. 
Most of us thought the Enron thing was something that was a rare 
dealing in corporate America. We have come to find out it is not a rare 
dealing in corporate America. It has happened since then time and time 
again. We have only seen the beginning of it, I am sure.
  The Banking Committee is to be applauded for moving this legislation 
forward on a bipartisan basis. By a vote of 17 to 4, it was reported 
out of committee. I would hope we can get this bill out of the Senate 
as quickly as possible. It is good legislation. It is legislation that 
the American people need to reestablish confidence in corporate America 
and those people they rely on so that they feel better about having 
their pensions supplemented with investments made in the stock market.
  The stock market is an indication, as far as I am concerned, of how 
people feel about what is going on in business. As we know from recent 
days, people have not felt very good about it. We have had tremendous 
losses. I heard the chairman of the committee, Senator Sarbanes, speak 
about the Nasdaq losing some 74 percent of its value. That is a 
significant loss to our country.
  I know the Members of the Senate understand the importance of this 
legislation. I hope that they understand why it is important to move it 
as quickly as possible. We have a few short weeks to complete lots of 
extremely important legislation prior to the August recess. As I have 
said on four separate occasions, this legislation is as important as 
anything we could do, and it is very timely.
  The PRESIDING OFFICER. The Senator from Connecticut.
  Mr. DODD. Mr. President, let me begin my remarks by commending the 
distinguished chairman of the Banking Committee. I have said on other 
occasions and in other places that for students of the Congress who 
wish to find a good example of how to prepare a committee and 
ultimately the Chamber for a moment such as this, a good model to use 
would be the hearings conducted by the chairman of the committee on 
this very question.
  There were 10 hearings--there may have been more, certainly 10 full 
hearings--to which were invited virtually everyone from across the 
spectrum on this question. This was hardly a set of hearings where we 
heard from one side. We literally invited the best experts in the 
country; they came and shared with us their views and thoughts on what 
sort of steps we should be taking to reform the accounting profession, 
to reform the rules affecting the accounting profession.
  I begin by extending my compliments to the chairman and his staff for 
the tremendous job done to lay the groundwork. Oftentimes we will see, 
particularly in light of a crisis that occurs, there is a rush to 
judgment. We will come very quickly to the floor with a sort of a cut-
and-paste job with the legislation. I am not suggesting intentions are 
not good, but that is oftentimes how we react.
  This set of hearings did, very deliberately, with a great deal of 
patience and thought, lay out the foundation for the legislation now 
before the Senate.
  Certainly, while there will be ideas offered to improve the 
legislation, we think the committee has produced a very fine product. 
The best evidence of that is the fact that 17 of us in the committee 
found this proposal to be worthy of our support. There were four 
dissenters. I think even among dissenters, there was a sense that we 
were heading in the right direction. Some may have fundamentally 
disagreed, but if there were one in the four, I don't know which one it 
would have been. Most thought we were doing the right thing, either 
that we went a little too far or didn't go far enough possibly, but 
this is a very balanced approach.
  I urge our colleagues to be careful of two potential actions in the 
coming days. One would be to dilute this product in some way. We are 
not suggesting we have written perfection here, but we think this is a 
well-balanced proposal.
  Senator Sarbanes has worked closely with our colleague from Wyoming,

[[Page 12128]]

Senator Enzi, who is the only Member of this body who is actually a 
former member of the accounting profession. He brings a wealth of 
personal knowledge and awareness to the issue. He worked very closely 
with him and other members of the minority, as well as with those of us 
on the majority side, to finally bring this product to the Chamber. It 
already has involved some compromise.
  At this hour, when investor confidence is going to be absolutely 
critical and the steps that we take and the language we use will in no 
small measure contribute to the restoration of confidence, it can just 
as easily do the opposite, if we are not careful. This is a critical 
moment in the economic history of our country.
  The steps taken by those who are in significant positions to affect 
the outcome of the course we are on are going to be critically 
important.
  The second caution I express is that we don't try to also overburden 
this bill to say that this is the only opportunity for us to deal with 
every other issue affecting corporate business life in America. I am 
not suggesting the ideas Members will want to bring to the table are 
bad. But we can so load down a good bill that we can sink this effort 
if we are not careful. I urge my colleagues as well to be restrained in 
the temptation to bring up every other idea and incorporate it as part 
of an accounting reform proposal. Those are the two cautionary notes I 
have.
  Let me also add my voice to those who have expressed theirs earlier 
today. Tomorrow I know the President of the United States is going to 
give a very important speech on Wall Street in New York, the financial 
capital of our country. I commend him for doing so. I think it is 
extremely important that he actually go to Wall Street to share his 
views.
  My hope would be that this evening, as he makes the final 
preparations for his remarks, he would come out four square and endorse 
this proposal that we have brought out of our committee by a vote of 17 
to 4. I can't think of anything more the President could do in the next 
24 hours, aside from the rhetoric he will offer, than to endorse this 
bill and to say this was a good effort and to talk about the laborious 
hearings we have held to learn exactly what was necessary to 
incorporate in this legislation.
  Lastly, I would hope we would get this bill done fairly soon and not 
let this go on too long. We would love to be able to not only finish 
our work here but to go to conference with the House, which has another 
proposal. It is a weaker proposal, in my view, but nonetheless we will 
have to work with them to resolve our differences and to send a bill to 
the President for his signature.
  I would hope that before we leave for our August break less than 3 
weeks from today we would actually be able to give to the President a 
bill for his signature and not let it drag on over into September and 
October. It is important we act in a timely fashion.
  With those background thoughts, I would like to share some general 
comments about the bill itself. The importance of this issue cannot be 
overstated. Anyone who has read a paper or turned on the news or 
flipped on their computer is aware of the crisis in our financial 
markets and, in fact, beyond that, in our Nation. No rule or regulation 
is enough to address this fundamental problem.
  The issue causing all of this turmoil is about the simple word of 
``trust.'' The question that the world is asking is not whether our 
companies or corporations or the workers who toil in them or the 
products and services are competitive, but simply whether we are 
telling the truth. Are we telling the truth?
  The reason people of the world so often have come here and invested 
their hard-earned resources is not because there is a better deal to be 
made financially speaking. It is because there is a sense that our 
structures are sound, transparent, and they are fair. You may end up 
losing your investment; you may make money on your investment. That is 
always a risk when you make a financial investment. But the one thing 
you could always say about the United States, as opposed to almost any 
other place around the globe, is that when you come to America and 
invest your money, there is a sense of fairness and trust and soundness 
to our financial institutions and the structures that we created to 
protect them.
  That trust has been fractured by the events that have occurred over 
the last 9 months, And it continues to be fractured with daily reports. 
So it is vitally important that we respond in an appropriate and 
thoughtful manner as the Congress of the United States. We have done 
so, in my view, with the proposal the chairman has brought to our 
attention. The very integrity of our markets is being questioned, and 
the Congress must respond cautiously, prudently, and also 
expeditiously.
  Enron's collapse in December was, of course, an enormous shock to all 
of us. Seven or eight months later, we have seen that Enron was not an 
isolated incident. There have been a whole host of corporate accounting 
scandals and collapses--names such as WorldCom, Global Crossing, Tyco, 
Adelphia, the list goes on and on. I fear, as my colleagues do, that 
the latest corporate accounting scandal with WorldCom will not be the 
last. I hope it will be, but my fear is it will not be.
  The Congress should address the critical issue of accounting reforms 
as quickly as we can. America's financial engine does not need a 
tuneup, it needs an overhaul. We must disassemble it in some ways, 
examine every nut, bolt, and working part, and reassemble it to reflect 
the days in which we live.
  The fact is, if we fail to act on serious reforms, America will see a 
continuation of the dangerous and discredited corporate accounting 
practices that have, in the past 7 months alone, cost American 
shareholders and workers billions of dollars in their savings and 
pensions. This has deeply shaken investor confidence, and that serves 
as a cornerstone of our economic system.
  It is important to note that in the dozens of hearings surrounding 
Enron's collapse, no committee has engaged in a more nonpartisan 
examination, focused not just on what went wrong with Enron but, far 
more important, what Congress can do to prevent future Enrons from 
occurring in the days ahead.
  On March 8 of this year, Senator Jon Corzine and I introduced 
legislation, S. 2004, that addressed what we thought were some of the 
tough issues on improving regulatory oversight of the accounting 
profession and restoring investor confidence. I worked closely with the 
chairman, as did Senator Corzine, to incorporate some of the language 
and spirit of S. 2004 in the legislation before us today.
  I thank the chairman for including in the product before us much of 
what we wrote in S. 2004. I thank his staff, and I also thank my 
colleague from Wyoming.
  Congress must act quickly. If nothing else, we must address the most 
prominent cause of the recent corporate scandals, the practices 
inherent and common to the accounting profession, and particularly the 
ability to audit a company's books while simultaneously providing other 
services to that same corporation. We saw this with Enron and Andersen. 
Now we see it with WorldCom and the pending investigations that have 
greatly contributed to the public's loss of confidence in our financial 
marketplace.
  Since the beginning of the year, while our economy has been 
rebounding from last year's economic downturn and most economic 
indicators point to a bull market, the Nasdaq is down more than 20 
percent, the Dow is down more than 3 percent, and trading volume has 
declined. One reason may be investor skepticism that companies are not 
as financially healthy as they have said they were. More restatements 
on corporate earnings have been filed in the past 7 months than in the 
last 10 years combined. Most of these restatements dramatically 
downgrade the financial health of the companies in question.
  Not surprisingly, the public is quickly losing trust in disclosed 
corporate financial information. Although the investing public may be 
reacting to the bad behavior of a few, the possibility of

[[Page 12129]]

conflicts of interest between accounting firms and the companies they 
audit creates a perception that this aggressive accounting is 
commonplace, even when it may not be. This perception, which takes on 
its own sense of reality, has led to a very dangerous, least-common-
denominator thinking in which the estimated worth of all public 
companies may become undervalued because some are proven to be 
seriously overvalued.
  The fact is, a few key reforms included in this bill can go a very 
long way toward shoring up the public's confidence in the integrity of 
America's financial marketplace.
  Most importantly, to enhance auditor independence, the legislation 
restricts the ability of accounting firms to audit a company's books 
while simultaneously providing other services. It also addresses the 
revolving door through which executives from one firm leave to work for 
the companies they audit.
  This reform legislation includes the creation of an independent body 
to oversee the accounting profession, with substantial authority to 
ensure auditor discipline and improve audit quality. The Securities and 
Exchange Commission will also be given the resources to hire more 
accounting ``cops'' to handle increasingly complex oversight 
responsibilities and improve the agency's investigative and 
disciplinary capabilities. The Government must be able to assure the 
public that audits meet the high standards of independence and 
objectivity that have been the hallmark of America's accounting 
profession.
  The accounting profession is a great profession. There are thousands 
of highly qualified, talented, ethical people in the accounting 
profession. I feel for them at this hour. Because of the malfeasance 
and fraud committed by some, the many who work in this profession feel 
tainted by it. I regret that. The best way I know to recover the 
confidence people have in this profession is to provide some regulatory 
framework that would allow for auditor independence and for 
professionalism to be restored at a time when it has been so badly 
damaged.
  Investors are depending upon us to act on this issue and set aside 
partisan conflicts. As I said, we should not dilute this legislation 
and make it far less important, less meaningful, or overburden it by 
trying to add too much to the bill. It is not an easy path to walk 
down. I urge my colleagues to listen to those of us who worked on this 
bill, particularly the chairman, as we try to balance the particular 
needs of our members and the desire to come up with a good, competent, 
bipartisan piece of legislation. This is not an easy path to walk down, 
but it is critically important if we are going to contribute to the 
restoration of investor confidence as part of our responsibilities as 
members of this historic Chamber.
  The purpose of the original securities laws of the 1930s was to 
increase public trust in America's financial markets, the reliability 
of disclosed corporate financial information. The resulting openness 
and accuracy of corporate disclosures to the investing public paved the 
very way for America's rise as the unrivaled economic superpower that 
we had achieved. The collapses of Enron, WorldCom, and other 
corporations, and the accounting scandals have ended any question about 
whether these laws need reexamination. They do. We know that reforms 
are mostly needed to protect and strengthen the public trust in 
America's financial markets, and the time to enact them is now. I am 
confident and hopeful that we will do just that in the ensuing days.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Maryland is recognized.
  Mr. SARBANES. Mr. President, I thank the very able Senator from 
Connecticut for his kind remarks about our work together on the 
committee as we tried to move this legislation forward. I particularly 
want to underscore the very substantial and significant contribution 
that the Senator from Connecticut and his colleague from New Jersey, 
Senator Corzine, made when they came forward fairly early on in the 
process with S. 2004.
  Much of that legislation is included in this legislation, and it was 
a seminal contribution early on in our consideration and it helped us 
to move ahead. I am grateful to him for that and for his efforts and 
support throughout this process as we have tried to move this 
legislation forward.
  The Senator from Connecticut, of course, is a chairman of one of our 
subcommittees and has been enormously effective within the committee in 
his efforts on this legislation, and I appreciate that. I am very 
hopeful that we are going to get a good product at the end of the 
path--of course, we are not there yet--which the President will sign 
and which will make a substantial difference.
  It is a tragedy, in a sense. The founder of the accounting firm 
Arthur Andersen was a man of great rectitude and very high principles. 
He had the slogan ``think straight and talk straight'' to guide him.
  His successor, Leonard Spacek, also was a man of very high principle. 
For that company with those origins, in that tradition, to in effect 
have happen what has happened to it is a tragedy, there is no question 
about it.
  We are anxious to reassure accountants all across the country that we 
think this legislation will help bring the profession back to the 
standards that marked it at an earlier time and which standards more 
thoughtful and more responsible members hope will mark it once again.
  The point the Senator from Connecticut made in that regard is an 
interesting and important one.
  Mr. DODD. I thank the chairman.
  Mr. SARBANES. Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. DORGAN. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER (Mr. Dodd). Without objection, it is so 
ordered. The Senator from North Dakota.
  Mr. DORGAN. Mr. President, I begin by saying the Senator from 
Maryland has done this Senate and this country a great service, along 
with his colleagues, including the Presiding Officer, by writing 
legislation that addresses a critically important topic at a very 
important time in this country.
  As much as I appreciate the work done on this bill, I would still 
like to speak about a few ways in which we can strengthen it. I 
listened with some attention in the last hour or so as I presided in 
the Senate to the suggestion that we ought not change it much. I do not 
disagree with that assessment, but we ought to change it some, in my 
judgment. There are some areas we can strengthen, and I hope we can 
strengthen this legislation and send it on to the President and have 
the expectation the President will sign it.
  This Chamber has long been the site of debates about excesses and 
abuses, especially in America's poverty programs. We have heard over a 
couple of decades, and appropriately so, anecdotal stories about the 
Cadillac welfare queen who spends food stamp money to buy cigarettes. 
Congress has clamped down on all of that and said: Shame on you, you 
cannot do that, that is abusing the public trust. And it is. So we have 
taken aggressive action as we have seen these abuses.
  Today this discussion is not about the abuse of the poverty program 
or the abuse at the bottom, this is about fraud in the boardroom; it is 
about abuse at the top. It is important for all of us to understand 
that accountability and responsibility do not just apply to poor people 
in this country, accountability and responsibility apply to everyone, 
and that includes the people at the top of the corporate structure.
  I wish to talk about fraud in the boardroom, about deceiving 
investors, about cooking the books, about accounting firms that cannot 
account, about law firms that turn a blind eye. I wish to talk about 
the situations the country has seen in recent weeks and months that we 
have not seen for many decades in this country.
  The victims, of course, are the people in this country who have 
invested in stocks, who believed in the certification of financial 
statements by some

[[Page 12130]]

of the biggest accounting firms in the country that these were good 
corporations, that they had good income, that they were moving in the 
right direction, taking steps so that the funds in corporations were 
accounted for properly. And now we discover that was not necessarily 
the case in all too many instances.
  Of course, there are a lot of wonderful corporations in this country, 
wonderful companies with terrific top executive officers who do the 
right thing, always do the right thing. Yes, they take some risks, but 
they do it in anticipation of gain for the stockholders. We ought not 
tarnish with the same brush all American corporations, but we ought to 
determine what is happening within some of these corporations that has 
caused the collapse and the devastation of a lifetime of savings for 
many Americans.
  Let me use Enron as an example. We spent a fair amount of time with 
Enron hearings in the Commerce Committee. We had top executives of that 
company who had been cashing out prior to Enron going bankrupt. I have 
a chart that shows the way in which the top management of Enron made 
fortunes on the sale of Enron stock, from 1998 to the present, at the 
same time that they were driving their company into the ground.
  Contrast this with a call I received from a fellow in North Dakota 
one day who said: I worked for Enron for a good number of years. I had 
a retirement plan, and all my retirement plan was in Enron stock. Mr. 
Lay and others repeatedly encouraged us to do that. My retirement plan 
was in Enron stock. It was worth $330,000. Now it is worth $1,700. He 
said: That is what happened to my life savings--$330,000 to $1,700.
  What happened to the folks at the top of the ladder in Enron? Mr. 
Lay, the chairman of Enron, from 1998 to the present, sold $101 million 
worth of stock. That is what he received. Mr. Rice, $72.7 million; Mr. 
Skilling, $66.9 million; Mr. Fastow, $30 million.
  Mr. Fastow was able to have an equity role in the special purpose 
entities, the off-the-books partnerships, and in one of them he 
actually invested $25,000 of his own money. He invested $25,000, and 2 
months later paid himself $4.5 million. I do not know anybody who gets 
returns like that anywhere in America, except by cheating.
  In the year 2001 in American corporations, the average pay for top 
CEOs increased by 7 percent, despite falling profits and stock values. 
Is there a relationship at the top between people who run the companies 
and the performance of the companies themselves? It does not look like 
it, does it?
  In 1981, the average executive compensation of the top 10 highest 
paid CEOs was $3.5 million. In the year 2001, the average was $155 
million. So we can see what has happened in this country at the top in 
the boardroom.
  Let's look at the number of times that CEO pay exceeds average worker 
pay: In 1980, they made 42 times the pay of the average worker in the 
company. In 1990, they made 85 times the pay of the average worker in 
the company. But in the year 2000, it was 531 times. So forty-twofold 
to five hundred and thirty-onefold. That is what has happened to 
executive compensation at the top of the corporate ladder.
  We have seen story after story about what is happening in some of the 
boardrooms. There are a lot of wonderful companies, and I do not think 
this ought to tarnish all American corporations, but we ought to be 
very concerned about what is happening inside some publicly traded 
corporations and why the safeguards have not been able to provide early 
warning to investors and others.
  Adelphia: The drop in their stock value is 99 percent. The question 
is whether it failed to properly disclose $3.1 billion in loans and 
guarantees to the family of the founder.
  Dynegy: Whether the Project Alpha transactions served primarily to 
cut taxes and artificially increase cashflow, 67 percent of their value 
lost.
  Enron lost 99.8 percent of its value. In fact, as I have mentioned 
before, the Enron board of directors commissioned a report called the 
Powers Report which looked at only three partnerships, and they 
described what was happening inside this company was ``appalling.'' The 
board of directors of the company itself said what was happening inside 
the company was appalling. They said that in one year they reported $1 
billion of income they did not have.
  Global Crossing: Whether it sold its telecom capacity in a way that 
artificially boosted 2001 cash revenue, 99.8 percent loss in value.
  Halliburton: Whether it improperly recorded revenue from cost 
overruns on big construction jobs.
  The list, of course, goes on.
  Qwest: Whether it inflated revenue for 2000 and 2001 through capacity 
swaps and equipment sales.
  On the weekend talk shows, I heard a panel discussion about this, and 
one of the panelists who is kind of an academician said the market is 
just adjusting. That is an antiseptic way, by an economist I suppose, 
to ignore the fact that families are losing their life savings.
  Sure, the market is adjusting, but it means families are losing 
everything they have. It means investors with 401(k)s see that 401(k) 
shrink so their life savings are disappearing right before their eyes.
  The question with all of these issues is: What has changed? Why, with 
big accounting firms taking a look at what is going on--and today there 
is a hearing on WorldCom in the House of Representatives--why, with big 
accounting firms looking over their shoulder, has this sort of thing 
occurred?
  With Arthur Andersen and Enron, they had a $25 million relationship 
by which Arthur Andersen audited the Enron Corporation, and Arthur 
Andersen was also paid $27 million by the Enron Corporation for 
consulting services. That is one of the things that is at the root of 
this bill: Is that not a clear conflict of interest? Is there not 
enormous pressure on the accounting firm then to become an enabler for 
that corporation? The answer clearly is yes, and that is why this 
legislation takes action to deal with some of those issues.
  I was driving in the car over the weekend in North Dakota and saw 
that the Xerox Corporation had a substantial restatement of earnings. 
It indicated that the SEC had previously taken a look at it and fined 
Xerox $10 million, which seems to me like pretty much a slap on the 
wrist when you consider the billions of dollars involved in the 
restatement. Then we hear this big story this weekend about yet another 
restatement. So what we have is a restatement, and then a restatement 
of the restatement of earnings.
  What is the cause of all of this, and what is enabling it? With 
Enron, for example, it was an accounting firm that became an enabler; 
it was a law firm that became an enabler; it was CEOs who became 
greedy, officers of the corporation who did not pay much attention, who 
also, incidentally, were making a great deal of money selling stock, 
board members selling stock. It all became a carnival of greed.
  I indicated, after having spent a lot of time looking at Enron, that 
there was a culture of corruption inside that corporation. The CEO of 
Enron took great exception to that, but it is clear every passing day, 
with more and more evidence of what happened inside that company, that 
there was in fact a culture of corruption.
  How do we respond to that, and how do we deal with that? I think 
that, first of all, the rules have to be changed some, and that is what 
this legislation attempts to do. Second, even if there are changes in 
the rules, there must be an effective referee, a regulator. In this 
system of ours, we have to have effective regulation. And frankly, that 
has been lacking.
  Mr. Pitt, who is the head of the SEC, I know has taken great 
exception to statements that have been made by my colleagues and 
myself. But the fact is that a system like this cannot work unless 
there is effective oversight and regulation, and that has been lacking.
  Consider some of the statements that Mr. Pitt has made. This is Mr. 
Pitt speaking at the AICPA, which represents the accounting industry:

       For the past two decades, I have been privileged to 
     represent this fine organization and each of the big five 
     accounting firms that are

[[Page 12131]]

     among its members. Somewhere along the way, accountants 
     became afraid to talk to the SEC. Those days are ended.

  That was to the American Institute of Certified Public Accountants.
  Then Mr. Pitt, who is, again, the head of the SEC, said:

       The agency I am privileged to lead has not, of late, always 
     been a kinder and gentler place for accountants; and the 
     audit profession, in turn, has not always had nice things to 
     say about it.

  So Mr. Pitt was concerned about ensuring a ``kinder and gentler'' 
SEC.
  The New York Times did a story as a result of the initial speeches 
Mr. Pitt gave when coming to the SEC. It noted that Pitt ``spoke 
favorably of pro forma earnings reports in ways that no doubt heartened 
accountants who have worked so hard to find ways to make even the worst 
profit figures look pretty.''
  It also noted that ``A major embarrassment for accountants is having 
the SEC force a client to restate its numbers. Mr. Pitt and his chief 
accountant, Robert Herdman, are sending signals that fewer such demands 
will be made.''
  We can change the law, but if we do not have a tough, no-nonsense 
regulator, then it will not work.
  We all watch basketball games, and we see referees. They are the ones 
who enforce the rules in basketball. We see a game from time to time 
where it is quite clear right at the start the referees are not going 
to call them close, and then pretty much it is ``Katy bar the door,'' 
and things get out of hand. Then we see other games in which it is 
quite clear they are going to call up close, and nothing gets out of 
hand. The same is true with the attitude and mindset of Federal 
regulators. We have regulatory agencies for a purpose. That purpose is 
to enforce the rules. Fairly, yes, but also aggressively.
  If someone who comes from that industry and says, I represented all 
of you, and suggests it will be a kinder and gentler place, I wonder 
whether that is the regulator we ought to have.
  No matter who is heading the SEC, I want that person to be a fierce 
advocate on behalf of the rules that protect investors. I want someone 
that can make this system work and require everyone to own up to their 
responsibilities. So people who never enter a corporate office or know 
nothing about a corporation but who want to invest in American 
business, can buy a share of stock, having never met an officer of the 
company, having never visited the company, and can have confidence that 
what the accounting firm has said about that company, what the 
financial statements represent about that company, are absolutely fair 
and accurate.
  That is the only way in which the American people can participate in 
the raising of capital for America's business. If we do not do that and 
do that quickly, we undermine the entire system by which we raise 
capital in this country. We undermine the entire system. That is why 
this piece of legislation is important and timely.
  There are several amendments I would like to have considered, some I 
hope will be accepted, and some, perhaps, we will discuss at some 
length, and I may or may not prevail. There are some amendments that 
can strengthen and improve this legislation.
  One of the provisions in the legislation calls for CEOs to return 
profits and bonuses they wrongfully reaped in the 12 months following a 
published earnings report that require a restatement. I would propose 
that this provision apply when a company goes bankrupt, as well. This 
idea has been endorsed by former SEC Chairman Richard Breeden, Goldman 
Sach CEO Henry Paulson, and others.
  There also ought to be some provision with respect to loans to CEOs 
by corporate boards of directors. I don't know what that limit ought to 
be, but I mentioned one corporation where over $3 billion was loaned to 
one family of the founder. This is a publicly traded corporation. I 
believe we ought to discuss that.
  I may offer a provision dealing with something called inversion, a 
mechanism whereby some American corporations have decided they want to 
renounce their American citizenship and move their official 
headquarters to another country--Bermuda, for example. I want to be 
certain that CEOs of such companies cannot escape the requirement of 
this bill that they certify the accuracy of their financial statements. 
I do not think that, in addition to avoiding their fair share of U.S. 
taxes, these companies ought to be held to a lesser standard of 
reporting accuracy than U.S.-based firms. So I will offer an amendment, 
if needed, and visit with the chairman and the ranking member about 
that subject.
  Another issue, one requiring disciplinary proceedings to be open to 
the public was discussed in committee. Transparency and having those 
hearings open to the public are important. I hope we can consider an 
amendment on that.
  The other issue that was discussed in the committee at great length: 
What is the definition of the division of responsibilities between 
auditing and consulting? That definition, determined by the SEC or the 
Congress, is critical to determining whether there is a conflict.
  Having said all that, let me say to the Senator from Maryland, we are 
in the Senate the first week after the Fourth of July. I listened to 
the Senators from Texas and Wyoming and Connecticut and others speak 
about this bill. This is a good start. If this legislation passed 
without one word changed, it would make a magnificent contribution to a 
problem we face, a gripping problem in this country.
  Having said that, I do not subscribe to those on the committee who 
say not to change anything. That is not what the chairman said. There 
are some suggestions that will come from other parts of the Senate that 
can strengthen and improve this legislation, a couple of which I 
suggested. When it goes to conference with the House, we will have 
something we can be proud of.
  The most important thing is to show to the investors in this country 
who have lost, in many cases, their life savings, that we are taking 
action to respond to the conditions that caused this to happen.
  When we talk about the people at the top getting rich and the people 
at the bottom losing their life savings, the American people have every 
right to ask: By whose authority can this happen in this kind of 
economy? It cannot happen if the rules are fair. It cannot happen if 
the rules are enforced.
  The American people have a right to expect the regulators, the SEC, 
and the Congress to take action now to address these issues.
  I yield the floor.
  The PRESIDING OFFICER (Mr. Wellstone). The Senator from Missouri is 
recognized.
  Mr. BOND. Mr. President, I initially came to the floor to talk about 
this bill and another issue. The Water and Power Subcommittee of the 
Energy and Natural Resources Committee is holding a hearing on 
Wednesday, and I asked to testify about the views of Missouri on the 
Missouri River issue. Initially, the staff said I was not going to be 
able to testify, and I was going to therefore have to share my 
testimony with the entire body. However, I have now been advised by the 
chairman of the committee I will have an opportunity to testify, so I 
will save my comments for the committee hearing.
  I thank the chairman for giving me that opportunity.
  Mr. DORGAN. Will the Senator yield?
  Mr. BOND. I am happy to yield.
  Mr. DORGAN. Let me explain to the Senator what my hope was. The 
Senator asked to testify, quite properly. The Missouri River manual 
issue is a highly controversial issue. The Senator has been involved 
with it for some long while. We are having a hearings. The Corps of 
Engineers and many others are testifying. My hope had been we could 
hold a hearing with all of those groups, then have a separate meeting, 
hearing from all Members of Congress who want to testify. It appears 
that that will not be the case.
  We will hear from Senators at the front end of that hearing. I assume 
it will take some time. As the Senator from Missouri knows, having 
indicated,

[[Page 12132]]

yes, we would entertain his testimony, there are a number of other 
Senators who have already gotten in line saying, if that is the case, 
please hear my statement, as well. Of course we will.
  It was never a case where we would not hear testimony. The question 
was whether we would have a separate hearing and hear Members of the 
Senate. I understand the Senator's concern. Senators Daschle, Johnson, 
Conrad, Carnahan, and many, many other Senators have great concerns 
about this issue.
  I will lose some sleep Tuesday night with great anticipation hearing 
your testimony on Wednesday morning.
  Mr. BOND. I thank my good friend from North Dakota and assure him I 
hope to be brief and to the point. I am somewhat disappointed I will 
not share all that testimony with my colleagues, but there will be 
another opportunity.
  I thank the chairman of the subcommittee for his kind indulgence.
  Today I rise to join in expressing my concern about recent accounting 
practices in publicly held companies and their auditors. As a former 
State auditor, I have an interest in that profession being performed 
properly. Obviously, something is seriously broken. We hear about 
Enron, Global Crossing, WorldCom, and Arthur Andersen. The people of 
America are very concerned. We have seen millions of families with 
their investments diminished or even wiped out. That is not acceptable. 
The vast majority of investments were not in the volatile sectors, or 
not what we thought were the volatile sectors of the stock market. They 
were invested in the so-called blue chip companies. The families who 
made those investments on their strong belief in the integrity of our 
financial markets and accounting industry now find that because of 
corporate shams, accounting gimmicks, and inadequate auditing, they 
have lost significantly the investments they planned for education or 
retirement--for their families.
  As far as we know, overall the overwhelming majority of publicly 
traded companies are in full compliance with corporate accounting 
standards. But the fact that there has been a significant deception by 
a handful of companies raises suspicions of all companies. In addition, 
we don't know how many others will come forward in coming weeks.
  We must restore the public's confidence in the market. Without this, 
the economic recovery which should be beginning will remain elusive.
  While much of the focus in the debate here and in the news media is 
on the auditing problems of the big conglomerate companies, 
unfortunately little attention has been paid in this bill to how the 
impact will fall on small publicly traded companies and small auditing 
firms. As the ranking member on the Committee on Small Business and 
Entrepreneurship, I have some concerns, after reviewing this bill, that 
we may be pushing ahead without considering the serious effect and the 
unintended consequences the bill could have on smaller firms--both 
small auditing firms and small publicly traded companies.
  The bill is clearly targeted towards abuses in extremely large 
businesses, which we all think should be dealt with. I personally hope 
it will result in prison sentences for people who are proven to have 
committed criminal acts in their accounting activities.
  But the SEC is not even aware of how many small auditing firms there 
are auditing small, publicly traded companies. There are some 2,500 
small companies, and we believe many of them are audited by small- and 
medium-size auditing firms. For small auditors, the bill will require 
many new elements including registration, annual filing requirements, 
as well as partnership rotation of lead auditors. In addition, the bill 
would codify a list of banned services or nonauditing services that an 
auditing company might conduct for a company that it audits.
  While some of these elements clearly are necessary to restore 
confidence, and I think are going to be dealt with by regulatory action 
and maybe even by the industry itself, no one knows how these 
requirements will affect the small firms. It has been argued that the 
bill allows for a case-by-case exemption, but that exemption process 
itself could be extremely costly and untimely for small firms and lead 
to inconsistent results.
  I fear that some of these small auditing firms will not have the 
resources to implement these requirements and will stop auditing 
services or just go out of business. The result may be that small, 
publicly traded companies may not be able to obtain auditing services 
at reasonable cost. As a result, the bill might be setting up a hurdle 
for small companies to reach the public markets, one that is too 
expensive and too great to overcome.
  Clearly, when we deal with the major problems we ought not cause 
significant problems for the smaller, growing entrepreneurial sector of 
our country.
  As for publicly traded companies, the bill also places new 
requirements for auditing committees and for corporate responsibility. 
Again, many of these may be necessary. However, we need to look at how 
these requirements will affect the small, publicly traded companies.
  The entrepreneurial spirit of our country is really the envy of the 
world. People know that entrepreneurship works in America. That is 
where we get the new ideas. That is where we get the growth. That is 
where we get the new services and the products. We should be careful as 
we adopt reforms not to put a disproportionate burden on these 
companies, dampening the entrepreneurial spirit or impeding access to 
the public markets.
  I fully support accounting reform and the taking of steps necessary 
to restore investor confidence in the market. I think we should pass a 
balanced bill that will not overburden small firms and not create 
additional hurdles that will impede them from growing. We don't want an 
incidental consequence of this bill to be a monopoly of large 
accounting firms when it comes to corporate audits.
  I agree with the other speakers that the American public is looking 
to us for answers. I intend to work to see that the needs of the small 
businesses, publicly traded small companies, and small auditing firms 
are protected. I am committed, and I think we all are committed, to 
restoring the public's confidence in the markets so families can feel 
safe once again in investing in America and in America's future.
  I look forward to working with my colleagues to secure a balanced 
bill which will do that without bringing unnecessary hardship on the 
entrepreneurial sector of our economy.
  I thank my colleague from Wyoming for the courtesy in allowing me to 
go ahead. I yield the floor.
  Mr. ENZI. Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. SPECTER. Mr. President, during the course of the Fourth of July 
recess, I traveled through Pennsylvania holding some 16 town meetings, 
and I found many concerns among my constituents: The issue of 
prescription drugs; the concern about what is happening with respect to 
Iraq; the issue of terrorism, which confronts the United States; the 
concern about what might happen on July 4; concern about the suicide 
bombers from the Palestinians terrorizing Israel.
  But high on the list of public concern was what has happened with 
Enron, WorldCom, and many other companies on the stock exchange, where 
so many of my constituents in Pennsylvania--like tens of millions of 
Americans, really, and even more--have had their savings decimated in 
their retirement accounts of a variety of sorts. The issue that was 
raised consistently was: What happens next?
  I think it is very good that the Senate is now considering 
legislation to deal with the fraudulent conduct that has plagued so 
many companies in corporate America. There is no doubt that there is a 
clear-cut conflict of interest for an accounting firm to be both an 
adviser and an auditor. An adviser has a close relationship with a 
company--call it cozy, or intimate, or friendly--but that is very 
different from the function of an auditor, which ought to

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be at arm's length, scrutinizing what the company has done. That kind 
of a conflict should certainly be prohibited in the future. If the 
accounting firms do not have enough understanding of the ethics, then 
laws have to be enacted, with very tough penalties to follow. When you 
find companies having so much debt off the books, subsidiary 
corporations, that is a matter of fraud. Fraud is a misrepresentation 
of a fact where someone relies to their detriment, and that is a crime. 
When you have companies putting expenses in, say, a capital account 
that shows billions of dollars in additional income or assets of the 
corporation, that too is fraud.
  A good part of my career has been as an assistant DA and then as 
district attorney. I believe this kind of white-collar crime is 
certainly susceptible of deterrence, providing that standards are 
established and penalties are provided for a breach. It is my hope that 
from the Senate's current consideration, some very tough legislation 
will follow.
  (Mr. DAYTON assumed the Chair.)

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