[Congressional Record (Bound Edition), Volume 148 (2002), Part 9]
[Senate]
[Pages 12529-12535]
[From the U.S. Government Publishing Office, www.gpo.gov]




           THE NEED TO ENACT ACCOUNTING AND CORPORATE REFORMS

  Mr. LEVIN. Madam President, this week we will hopefully act with 
strength and unity to help bring confidence back to the investing 
public. The last 18 months have shaken the foundation of the public's 
belief in the accuracy of the financial statements of our major U.S. 
corporations, beginning with the precipitous fall of Enron last year. 
The Public Company Accounting Reform and Investor Protection Act 
sponsored by Senator Sarbanes and reported last month by the Banking 
Committee, will make significant headway in restoring the needed 
confidence in our financial markets, and I strongly support it. Senator 
Sarbanes and the supporters of this bill on the Banking Committee have 
shown vision and leadership in tackling the tough issues of corporate 
and auditor misconduct, and the Congress needs to enact this 
legislation as quickly as possible.
  On Monday, July 8, in my role as chairman of the Permanent 
Subcommittee on Investigations, I released an official Subcommittee 
report on the role of the Board of Directors in Enron's collapse. This 
bipartisan report found that much of what was wrong with Enron--from 
its use of high risk accounting, extensive undisclosed off-the-books 
activity, conflict of interest transactions and excessive executive 
compensation--was not hidden from the company's directors but was known 
and permitted to happen. The report also found that Enron board members 
refused to admit any missteps, mistakes, or responsibility for the 
company's demise. The refusal of the Board to accept any share of blame 
for Enron's fall is emblematic of a broader failure in Corporate 
America to acknowledge the ongoing, widespread problems with misleading 
accounting, weak corporate governance, conflicts of interest, and 
excessive executive compensation. Corporate misconduct is not only 
fueling a loss in investors confidence, but also threatens to derail 
the recovery of the American economy.
  The plain truth is that the system of checks and balances in the 
marketplace designed to prevent, expose, and punish corporate 
misconduct is broken and needs to be repaired. Action is critically 
needed on a number of fronts to restore these checks and balances.
  American business success is a vital part of the American dream. That 
dream is that any person in this country who works hard, saves, and 
invests can be a financial success. If that person sets up a company, 
that company's success can be magnified through our capitalist system 
which allows other investors to buy company stock, invest in the 
company's future, and share in the company's financial rewards.
  The American stock market is part of that American dream. In recent 
years it has been the biggest and most successful stock market in the 
world, an engine of growth and prosperity. It has not only brought 
capital to a company so they can set up new businesses and employ more 
people, it has brought financial rewards to individual investors who 
put their money in the market.
  Over the years, the Government has developed checks and balances on 
the marketplace to put cops on the beat to try to make sure that people 
who are using other investors' money play by the rules. That is why we 
have the Securities and Exchange Commission, the Commodity Futures 
Trading Commission, and banking regulators. That is why we have rules 
requiring publicly traded companies to issue financial statements and 
why we have accounting standards to make those financial statements 
understandable and honest. That is why we require companies to submit 
their books to auditors and why auditors certify whether the financial 
statements fairly present the company's financial activity.
  Today we are in the middle of another ugly episode. In the aftermath 
of the go-go 1990s where American business grew at breakneck strength, 
the famed high-tech bubble inflated stock prices and the stock market 
got tagged with the strange new phrase ``irrational exuberance.'' 
Company after company, especially in the high-tech sector, announced 
profits that increased by huge percentages year after year. Mergers and 
acquisitions proliferated, and corporate fees went through the roof. 
Executive pay skyrocketed. The highest paid executives made as much as 
$700 million in a single year. By 2000, average CEO pay at the top 350 
publicly traded companies topped $13 million per executive CEO, while 
the workplace pay gap deepened. In 1989, CEO pay was 100 times the 
average worker pay. By the year 2000, it was 500 times.
  Some pointed to this alleged prosperity during the 1990s as a 
justification for deregulating business, weakening regulators, and 
making it harder to seek corporate insiders and advisers. But now we 
are learning that some portion of the success and profits claimed by 
the companies during the 1990s--we still don't know how much--were 
based on corporate misconduct.
  Lies about income and profits, hidden debt, improper insider trading, 
tax evasion, conflicts of interest--the list of recent corporate 
malfeasance is an alphabet of woe.
  Adelphia Communications. This is a publicly traded company, but the 
company founders, the Rigas family, are accused of using the company 
treasury as if it were the family piggy bank. The allegation is that 
the family borrowed from the company over $2 billion--yes, billion--and 
has yet to pay it back. The company recently declared bankruptcy under 
Chapter 11.
  Dynegy. This high tech energy firm is under SEC investigation for 
possibly inflated earnings and hidden debt. The questions include how 
it valued its energy derivatives, whether it booked imaginary income 
from capacity swaps with other companies, and whether it manipulated 
the California energy market. Senior executives, including CEO Chuck 
Watson, have recently been forced out.
  Enron. This high tech company epitomizes much of the corporate 
misconduct hurting American business today, from deceptive financial 
statements to excessive executive pay. Its executives, directors, 
auditors and lawyers all failed to prevent the abuses, and many 
profited from them.
  Global Crossing. This is another high tech corporate failure with 
outrageous facts. Less than 5 years old, Global Crossing was founded in 
1997 by Chairman of the Board Gary Winnick. In 1998, the company went 
public, touting its plans to establish a worldwide fiber optic network. 
Global Crossing gave Mr. Winnick millions of dollars in pay, plus 
millions more in stock and stock options. In the 4 years the company 
traded on the stock market. Mr. Winnick cashed in company stock for 
more than $735 million. Other company insiders sold almost $4 billion 
in company stock. Then questions began to arise about inflated 
earnings, related party transactions, insider dealing, and board of 
director conflicts. In January 2002, the company suddenly declared 
bankruptcy. The company's shareholders and creditors have lost almost 
everything, while corporate insiders have so far walked away with their 
billions intact.
  Halliburton. The question here is whether this construction company 
improperly booked income from contract cost overruns on construction 
jobs, before the company actually received the income. The company is 
under SEC investigation.
  IBM. This all-American company, once a model of American know-how and 
can-do, has recently acknowledged misreporting about $6 billion in 
revenue and restated its earnings by more than $2 billion. Another high 
tech disaster for investors and American business.
  ImClone. ImClone's CEO, Samuel Waksal, has been indicted for insider 
trading. The company produced a new drug whose effectiveness is still 
in

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question and whose developer, Dr. John Mendelsohn, was not only an 
ImClone board member but also the President of M.D. Andersen Cancer 
Center in Texas. Dr. Mendelsohn arranged for the Center to conduct 
tests on the drug without telling patients that the Center's President 
had a direct economic interest in the drug's success. Dr. Mendelsohn 
was also a board member at Enron.
  Kmart. This once successful company, headquartered in my home state 
of Michigan, is now bankrupt and under scrutiny by the SEC for possible 
accounting fraud. The pain of the employees who lost their jobs and the 
investors who lost their savings is ongoing, not only in Michigan but 
across the country.
  Merrill Lynch. Once a highly respected investment advisor, this 
company has become a poster child for financial advisors who mislead 
their investors, telling them to buy the stock of companies the 
advisers privately think are losers. Merrill Lynch recently paid $100 
million and agreed to change how its financial analysts and investment 
bankers operate to settle a suit filed by New York Attorney General 
Elliot Spitzer.
  Qwest Communications. This is another high tech company under SEC 
investigation. Questions include whether it inflated revenues for 2000 
and 2001 due to capacity swaps and equipment sales. Qwest's CEO Joe 
Nacchio, made $232 million in stock options in 3 years before the stock 
price dropped, leaving investors high and dry. Its Chairman Philip 
Anschutz made $1.9 billion.
  Rite Aid. Last month, three former top executives of Rite Aid 
Corporation, a nationwide drugstore chain, were indicted for an illegal 
accounting scheme that briefly--until WorldCom--qualified as the 
largest corporate earnings restatement in U.S. business history. The 
restatement involved $1.6 billion. The indictment alleges that the 
company used brazen accounting gimmicks to overstate its earnings 
during the late 1990s, and when investigators came after them, made 
false statements and obstructed justice.
  Stanley Works. This company is a leading example of U.S. corporations 
that have pretended to move their headquarters to Bermuda to avoid 
paying U.S. taxes. It joins a growing number of companies that want to 
go on enjoying US banks, US laws, and US workers, but do not want to 
pay their fair share of the costs that make this country work from the 
costs of public education, to police and the courts, to environmental 
protection laws. To me, these companies are not just minimizing their 
taxes, they are demeaning their citizenship. They are taking advantage 
of this country by enjoying its fruits without giving anything back. No 
company ought to be allowed to get away with this fiction and throw 
their tax burden on the backs of other US taxpayers.
  Tyco International. Last month, the CEO of Tyco, Dennis Kozlowski, 
was indicted in New York for failing to pay sales tax due on millions 
of dollars of artwork. The allegation is that Mr. Kozlowski shipped 
empty boxes to New Hampshire in a scam to show that $13 million worth 
of artwork was sent out of state and exempt from sales tax when, in 
fact, the artwork never left New York. This is a millionaire, many 
times over, who could have easily afforded the tax bill but engaged in 
a sham to avoid paying it. The question is whether he ran his company 
the same way he ran his own affairs.
  Tyco is one of those companies that has allegedly moved its 
headquarters to Bermuda. It has numerous offshore subsidiaries, 
including more than 150 in Barbados, the Cayman Islands and Jersey. The 
company's U.S. tax payments have apparently dropped dramatically. 
Allegations of corporate misconduct by insiders have also emerged. 
There was a $20 million payment made to one of the company's directors 
and another $35 million in compensation and loans paid to the company's 
former legal counsel. That's $55 million paid to two corporate 
insiders, allegedly without the knowledge of the Board of Directors. 
Added to that is an ongoing SEC investigation allegedly examining 
whether a Tyco subsidiary paid bribes to win a contract in Venezuela.
  WorldCom. WorldCom is the latest in this list of corporate 
embarrassments. It built a glowing earnings record through the 
acquisition of high tech companies like MCI and UUNet. It became a 
favorite investment for pension companies, mutual funds and average 
investors. Then we learn that the longtime CEO Bernard Ebbers borrowed 
over $366 million in company funds and has yet to pay it back. After 
he's forced out and a new CEO takes over, we learn that the company 
booked ordinary expenses as if they were capital investments in order 
to string out the expenses over several years and make the current 
bottom line look great. The result was $3.8 billion that had been 
conveniently left off the books--more than enough to wipe out the 
company's entire earnings for last year; more than enough for 17,000 
workers to lose their jobs; more than enough to wipe out billions in 
investments across the country. Just one example in Michigan is the 
Municipal Employee's Retirement System which lost $116 million that 
supported workers' pensions. At the same time, we're told that Mr. 
Ebbers has a corporate pension that will pay him over $1 million per 
year for life.
  Xerox. This all-American company has already paid $10 million to 
settle an SEC complaint that, for four years, the company used 
fraudulent accounting to improve its financial results. As part of the 
settlement, Xerox agreed to restate its earnings after allegedly 
recording over $3 billion in phony revenues between 1997 and 2000.
  This list is painful in part because it includes some icons of 
American business, symbols of what was right about the American dream. 
Now they symbolize corporate misconduct damaging to the entire country. 
The S&P index has plunged. The Nasdaq has been down 20% and even 30%. 
Mutual funds, the equity of choice for average investors, have dropped 
in value by more than 10%. The average daily trading volume at Charles 
Schwab & Co.--a measure of average investor activity--is down 54% from 
the height of the bull market, according to Fortune Magazine. Investor 
confidence in the U.S. stock market has dramatically declined. Foreign 
investment is fleeing.
  There are many explanations for the corporate misconduct now tainting 
American business. One key factor is the terrible performance of too 
many in the accounting profession.
  Auditors play an essential role in the checks and balances on the 
corporate marketplace. Under current law, a publicly traded company is 
not allowed to participate in the stock market unless its financial 
statements have been audited and found by an independent public 
accounting firm to be fair and honest. Auditors are supposed to be the 
first line of defense against companies cheating on their books.
  The Supreme Court put it this way in United States v. Arthur Young, 
465 U.S. 805, 1984, a case that contrasts the role of auditors with the 
role of lawyers. The Court noted that a lawyer is supposed to be a 
client's confidential advisor, but the:

       . . . independent certified public accountant performs a 
     different role. By certifying the public reports that 
     collectively depict a corporation's financial status, the 
     independent auditor assumes a public responsibility 
     transcending any employment relationship with the client . . 
     . [and] 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.

But that's not what has happened recently.
  In Adelphia, the auditors, Deloitte Touche, allegedly missed the fact 
that the Rigas family borrowed company funds totaling $2 billion.
  At WorldCom, Andersen allegedly never knew that $3.8 billion in 
expenses had been incorrectly accounted for as capital investments.
  At Xerox, KPMG allegedly missed errors involving $6 billion in 
revenue and $2 billion in earnings.
  These are not marginal amounts; they involve billions. How did the 
auditors miss the accounting errors and dishonest financial reports? Or 
are

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these cases like Enron, where the auditor didn't miss the problems--
they knew of them, had misgivings about the accounting, but allowed 
questionable transactions and financial statements to go forward 
anyway?
  And there are many more cases than the high profile scandals I just 
described. In the last few years, there has been a surge in corporate 
restatements--financial filings in which a publicly traded company 
admits that a prior financial statement was inaccurate and corrects the 
earlier information. From 1990 through 1997, publicly traded companies 
averaged 49 of these restatements per year. In 1999 and 2000, that 
number tripled--publicly traded companies filed about 150 each year.
  These restatements go beyond the list of companies I started with, 
reaching much deeper into corporate America. In addition to those 
already reported in the media over the last few years, I asked the 
Congressional Research Service to look at the most recent corporate 
restatements, those filed since January of this year. On June 17th, CRS 
issued a report listing over 100 completed and expected restatements in 
the first six months of 2002, and predicted that the total number of 
restatements in 2002 may exceed 200. A smattering of these 
restatements, another alphabet of corporate woe, include the following.
  American Physicians Service Group. This health services company 
restated its 2000 and 2001 earnings due to a revaluation of a private 
stock investment.
  CMS Energy Corporation. This energy company, which has operations in 
Michigan, has restated its 2000 and 2001 financial statements to 
include $4.4 billion in revenues attributable to ``wash trades'' with 
other companies involving energy commodities.
  Dollar General Corporation. This company has restated its financial 
results for three years, 1998 through 2000.
  Hanover Compression. This company has restated its earnings for seven 
quarters in a row, ending September 2001.
  Microsoft. Following an SEC investigation, the flagship American 
company agreed to restate its earnings for 1995 through 1998, when it 
used accounting devices to ``smooth'' its reported earnings.
  PNC Financial Services. This financial services company has restated 
its financial results for 2001 after questionable accounting under 
investigation by the Federal Reserve and SEC involving the sale of over 
$700 million in problem loans and other non-performing assets to three 
companies it set up with the insurance conglomerate, American 
International Group.
  Pacific Gas & Electric. This energy company has announced that it 
will restate its earnings back to 1999 to account for off-the-books 
``synthetic leases'' involving about $1 billion in financing for 
several power plants.
  Peregrine Systems. This company announced it would restate earnings 
for 2000, 2001, and 2002, and that an SEC investigation was in 
progress.
  Stillwater Mining Co. This company announced that the SEC had 
criticized its accounting practices and a restatement of earnings would 
be issued.
  There are many more examples. What is happening that more and more 
financial results have to be restated, erasing more and more questions 
about the reliability of the original financial reports? Why this surge 
in corporate restatements?
  Part of the answer is that too many accounting firms apparently no 
longer value in their watchdog role. Today, they celebrate instead the 
earnings they receive as tax advisers and business consultants.
  During the 1990s, all the major accounting firms dramatically 
increased the non-audit services they provided to their audit clients. 
By 1999, 50% of firm revenues at the big five accounting firms came 
from consulting, while only 34% came from auditing. A few years later, 
the data indicates that almost 75 percent of the fees earned by the big 
five accounting firms came from non-audit services. Specific company 
proxy statements show that many publicly traded companies now pay 
millions more for consulting than they do for auditing, including such 
companies as Raytheon, Apple Computer, Nike, International Paper, At&T, 
Honeywell and Coca-Cola. A January 2002 Harvard Business School 
publication raising questions about auditor independence cited 
anecdotal evidence that accounting firms were using their positions as 
auditors to obtain consulting work, including by ``lowballing'' audit 
fees if a company simultaneous agreed to a consulting contract. The 
work done by the Permanent Subcommittee on Investigations, which I 
chair, includes evidence that accounting firms are shopping around to 
publicly traded companies, including their audit clients, complex 
accounting arrangements that they say will improve a company's 
financial results and pending complex tax strategies that will lower 
its tax bills.
  The role of Arthur Andersen at Enron illustrates the profession's 
movement from auditor to moneymaker, Andersen was Enron's outside 
auditor from the company's inception in 1985. As Enron grew, Andersen's 
role at the company grew, with more and more of Andersen's time spent 
on financial services other than auditing.
  Andersen began to offer Enron business and tax consulting services 
which included assistance in designing special purpose entities, 
offshore affiliates, and complex structured finance transactions. For 
example, Andersen was paid about $5.7 million to help Enron design the 
LJM and Chewco partnerships and engage in a series of purported asset 
sales to these entities. Andersen was paid more than $1.3 million to 
help Enron set up the Raptors, a series of four complex transactions 
that were an improper attempt by Enron to use the value of its own 
stock to offset losses in its investment portfolio. Andersen also 
helped Enron engage in ever more exotic and complex transactions, such 
as prepaid forward contracts, swaps, and merchant asset sales. For two 
years, Andersen even acted an Enron's internal auditor while also 
serving an Enron's outside auditor.
  By 1999, Andersen was earning more for its non-audit services than 
for its audit services at Enron. By then, Andersen had set up its own 
offices at the company site to enable it to work with Enron employees 
on a daily basis. A number of Andersen employees switched to Enron's 
payroll. Enron became one of Andersen's largest clients, In 2000, 
Andersen was paid $1 million per week for the many services it was 
providing Enron. Andersen partners handling the Enron account earned 
millions in bonuses and partnership income.
  Common sense tells us that as Andersen's joint efforts with Enron 
management increased, it became tougher and tougher for Andersen 
auditors to challenge Enron transactions--after all, these transactions 
had been set up with Andersen's assistance at the cost of millions of 
dollars. How could Andersen auditors say that Andersen consultants were 
wrong? And in many cases the same Andersen employee served as both 
consultant and auditor, essentially auditing his or her own work. We 
now know that internal Andersen documents demonstrate serious 
misgivings up and down the Andersen chain of command with respect to 
Enron's transactions or accounting. To the contrary, one of the few 
Andersen senior partners to raise gentle objections to some Enron 
transactions was, at Enron's request, removed from the Enron account. 
In the end, Andersen approved questionable transactions and financial 
statements that made Enron's financial condition appear better than it 
was.
  Andersen once had a proud tradition that stressed its commitment to 
the public trust to ensure accurate financial reporting and honest 
accounting. But that tradition gave way in the Enron case. And it give 
way in other recent cases of corporate misconduct as well, from Sunbeam 
to Waste Management to the Baptist Foundation of America.
  Worse, Andersen was not alone. Media reports are filled with tales of 
auditors going along with questionable transactions and financial 
reporting.

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PricewaterhouseCoopers and Microstrategy. Ernst & Young and PNC 
Financial. Deloitte Touche and Adelphia. KPMG and Xerox.
  The conflicts of interest inherent in auditors performing consulting 
services for their audit clients have been building for years and were 
not lost on those concerned about accurate financial reporting by U.S. 
companies. In 2000, SEC Chairman Arthur Levitt waged a highly visible 
campaign to rein in auditor conflicts of interest and restore auditor 
independence. In July 2000, under his leadership, the SEC proposed 
regulations to stop auditors from providing certain non-audit services 
to their audit clients. The rules proposed four principles to determine 
whether, in fact and in appearance, an accountant was independent of 
its audit client. The proposed regulations stated that an accountant 
would not be considered independent if the accountant: (1) had a mutual 
or conflicting interest with the audit client; (2) audited the 
accountant's own work; (3) functioned as an employee of the audit 
client; or (4) acted as an advocate for the audit client. Using these 
four principles, the regulations proposed a ban on audit firms 
performing certain non-audit services for their audit clients.
  The reaction of the accounting profession was to fight the proposal 
tooth and nail. The proposed regulations were also pummeled by the 
corporate community, which lost sight of how important reliable 
financial statements and reliable auditors are to the viability of 
American business and investment.
  In the end, the proposed Levitt regulations were gutted. Instead of 
eliminating auditor conflicts, a compromise emerged that simply 
increased disclosure of the scope of the conflicts and the extent to 
which auditors were auditing their own work. That was the wrong result, 
which I hope the Senate will remedy through enactment of the Sarbanes 
bill.
  What happened to the board?
  In U.S. corporations, Boards of Directors are at the top of a 
company's governing structure. According to the Business Roundtable, 
the Board's ``paramount duty'' is to safeguard the interests of a 
company's shareholders. Persons who serve on corporate boards are 
required by state law to serve as fiduciaries to the shareholders and 
employees of the corporation for which they serve. As the Fifth Circuit 
said in 1984:

       Three broad duties stem from the fiduciary status of 
     corporate directors: namely, the duties of obedience, loyalty 
     and due care. The duty of obedience requires a director to 
     avoid committing . . . acts beyond the scope of the powers of 
     a corporation as defined by its charter or the laws of the 
     state of incorporation. . . . The duty of loyalty dictates 
     that a director must not allow his personal interest to 
     prevail over the interests of the corporation. . . . [T]he 
     duty of care requires a director to be diligent and prudent 
     in managing the corporation's affairs.

  One of the most important duties of the Board--along with corporate 
officers and company auditors--is to make sure that the financial 
statements are in fair representation of the company's financial 
condition. It requires more than technical compliance; it requires, as 
the Second Circuit Court of Appeals said in 1969, that the Board ensure 
that the financial statement ``as a whole fairly present[s] the 
financial position'' of the company.
  The key committee of a board in carrying out that function is the 
Audit Committee, and a Blue Ribbon Commission in 2000 issued a report 
on what Audit Committees should do to meet their obligation to the 
shareholders. Among the responsibilities the Audit Committee should 
meet are: ensuring that the auditor is independent and objective; 
assessing the quality, not just the acceptability, of an auditor's 
work; discussing with the auditor significant auditing issues; and 
making sure that the financial statement are ``in conformity with 
generally accepted accounting principles.''
  As I mentioned at the beginning of this statement, the Permanent 
Subcommittee on Investigations, which I chair, looked in depth at the 
actions of the Board of Directors on the Enron Corporation in light of 
its sudden collapse and bankruptcy. The Subcommittee on a bipartisan 
basis found that the Enron Board failed to safeguard Enron shareholders 
and contributed to Enron's collapse. If failed, we found, because the 
Board allowed Enron to engage in high risk accounting, inappropriate 
conflict of interest transactions, extensive undisclosed off-the-books 
activities, and excessive executive compensation. Based on review of 
the hundreds of thousands of Enron-related documents by the PSI staff 
and dozens of interviews, the Subcommittee concluded that the Board 
knew about numerous questionable practices by Enron management over 
several years, but it chose to ignore these red flags to the detriment 
of Enron shareholders, employees, and business associates. In short, 
the Enron Board failed to meet its fiduciary responsibility to the 
shareholders and employees of Enron.
  When pressed to explain their conduct at a PSI hearing, the Board 
accepted no responsibility for Enron's failure. The Board members 
claimed they didn't know what was going on in the company--that 
management didn't tell them, and that the auditor, Arthur Andersen, 
told them everything was OK. The Subcommittee didn't accept that 
answer, because a review of the documents, the Board meetings, the 
Audit and Finance Committee meetings, and interviews with the Board 
members revealed that the Board Members did know what was happening at 
Enron and went along with it.
  The Board failed with respect to the Enron Corporation, and my guess 
is that the boards of the other corporations now under investigation 
for investor fraud and auditing misconduct will fare little better. 
Although the performance of corporate boards in American corporations 
must be addressed by the corporations themselves, Congress must also do 
everything it can to ensure that this important watchdog of corporate 
governance operates properly in each U.S. company.
  What happened to other corporate players?
  The auditors and the Boards of Directors are not the only ones with 
oversight responsibility for corporate conduct who have let down the 
investing public. Top-name law firms wrote legal opinions that allowed 
some of the worst deceptions to go forward. Financial analysts who 
depend upon large corporations for investment banking business and at 
the same time promote the stock of those corporations to their clients, 
operate with clear conflicts of interest. They may know inside 
information about the financial condition of the companies with which 
they do business, but keep that information from the investors to whom 
they are promoting the company stock.
  What needs to be done now?
  The Sarbanes bill, with additional amendments, will address the 
duties and failings of their corporate players. After 10 days of 
hearings, the Banking Committee has reported to the Senate floor a bill 
that significantly addresses not only the audition failures, but 
failures of corporate governance and conflicts with financial analysts. 
I understand there may be an amendment to hold the legal profession 
accountable as well.
  We have got to take action on this legislation now, this Congress. We 
need to restore the checks and balances on the marketplace, and we need 
to give our cops on the beat the tools and resources to crack down on 
corporate misconduct.
  We need to change the laws to make it possible to punish corporate 
and auditor misconduct swiftly and with appropriate penalties. We need 
to ensure that crime does not pay for corporate executives seeking to 
profit from corporate misconduct. We need to shake up the auditing 
industry and remind them that their profession calls for them to be 
watchdogs, not lapdogs for their clients. We need to give SEC 
administrative enforcement powers and more funds for investigations and 
civil enforcement actions. We need to increase investor protections to 
restore investor confidence.
  The Sarbanes bill takes many of the actions needed, and I want to 
commend

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the hard work of not only Senator Sarbanes who chairs the Banking 
Committee, but also the many other Senators on that Committee who 
contributed to this much needed bill. It offers strong medicine, and it 
is what this country needs.
  On corporate misconduct, the bill presents a number of new provisions 
to deter and punish wrongdoing. For the first time, CEOs and CFOs would 
be required to certify that company financial statements fairly present 
the company's financial condition. If a misleading financial statement 
later resulted in a restatement, the CEO and CFO would have to forfeit 
and return to the company coffer any bonus, stock or stock option 
compensation received in the 12 months following the misleading 
financial report. The bill would also make it an unlawful act for any 
company officer or director to attempt to mislead or coerce an auditor. 
It would also require auditors to discuss specific accounting issues 
with the company's audit committee, which will not only increase the 
understanding of the company's board of directors, but also prevent 
directors from later claiming they were not informed about the 
company's accounting practices. The bill would also enable the SEC to 
remove unfit officers or directors from office and to bar them from 
holding any future position at a publicly traded corporation. These are 
powerful new tools to help prevent and punish corporate misconduct.
  The Sarbanes bill takes on another great issue of importance that 
I've been working on for years, strengthening the independence of the 
Financial Accounting Standards Board or FASB, which has the task of 
issuing generally accepted accounting principles or GAAP. Among other 
important measures, the bill grants statutory recognition to FASB and 
sets out its obligation to act in the public interest to ensure the 
accuracy and effectiveness of financial reporting; states that the 
trustees who select FASB's members must represent investors and the 
public, not just the accounting industry or corporate interests; and 
streamlines FASB's operations by requiring it to act by majority vote 
instead of through a supermajority.
  Most important of all, the bill sets up a system that provides FASB 
with an independent, stable source of funding through fees assessed on 
publicly traded companies. Once this new system is set up, it will no 
longer be the case, as it has been for years, that FASB will have to go 
hat in hand for funds from the very companies and accounting firms that 
want to affect its decisionmaking. I have no doubt that this conflict 
of interest has contributed to some of the distortions and weaknesses 
in current accounting standards. I proposed a similar change in FASB's 
funding status in my Shareholder Bill of Rights Act, and I appreciate 
the Committee's including the provision for my bill making it clear 
that FASB's funding cannot be affected by the congressional 
appropriations process and the political pressures that can be exerted 
through it. The point of the bill is to set up an independent, stable 
source of funding that is insulated from political pressure and funding 
threats so that FASB can do its work free of such pressures and 
threats. Once the new funding system is in place, I urge FASB to begin 
to reassess U.S. accounting standards and to begin to clear up some of 
the problems that have allowed so many companies to engage in dishonest 
accounting while claiming to be in compliance with GAAP.
  On auditor conflicts of interest, the bill takes concrete action to 
stop auditors from providing non-audit services to their audit clients. 
For the first time, the bill specifically prohibits auditors from 
providing 8 types of non-audit services to their audit clients. The 8 
prohibited services are bookeeping services; financial information 
systems design; appraisal and valuation services and fairness opinions; 
actuarial service; internal auditing services; management functions and 
human resource services; broker-dealer, investment adviser of 
investment banking service; and non-audit legal or expert services. The 
bill also enables a newly established Public Company Accounting 
Oversight Board to specify other prohibited services. Any other non-
audit service can be provided by an auditor to its audit client only if 
the client's audit committee specifically authorizes the auditor to 
undertake the service. While I would have preferred an even stronger 
provision barring auditors from providing any non-audit services to an 
audit client, this bill makes a meaningful change in law that would 
help put an end to auditor conflicts of interest.
  Additional work is needed. For example, many of the key terms in the 
8 prohibited non-audit services were left undefined after the Banking 
Committee, as part of the negotiations over the bill, dropped a 
requirement for the SEC to promulgate the July 2000 Levitt regulations 
which would have defined many of the terms. If enacted into law, the 
new Board and the SEC would need to place a priority on further 
defining the key terms in the 8 prohibited services. That task would be 
a key test of their willingness to use the bill's authority to 
eliminate auditor conflicts of interest and restore auditor 
independence.
  Let me give you an example. The bill currently prohibits auditors 
from providing their audit clients with ``investment banking services'' 
but does not define this term. Based upon the work of the Permanent 
Subcommittee on Investigations into the Enron scandal, I believe it is 
crucial for that term to include prohibiting auditors from working with 
their audit clients to design special purpose entities and structured 
finance arrangements, as investment bankers do, and then audit the 
structures they helped to create. In the case of Enron, Andersen was 
paid about $7 million to help Enron design the LJM, Chewco and Raptor 
structures, which Andersen then audited and approved. That never should 
happen. Auditors should not be auditing their own work. To make sure 
that this conduct is stopped, the SEC and Board would have to prohibit 
it either by further defining the term ``investment banking services'' 
or by specifying another prohibited service. The public companies' 
audit committees could also accomplish this goal by prohibiting the 
company's auditor from designing these structures and then auditing its 
own work.
  In addition to defining the key terms in the 8 prohibited services, 
additional work is needed to clarify how auditors and companies are 
supposed to treat the issue of ``tax services.'' The bill states 
explicitly that an auditor may provide ``tax services'' to an audit 
client if the specific tax services are cleared beforehand by the 
company's audit committee. There are several problems with this 
approach. First, like investment banking services, one danger is that 
an auditor will end up auditing its own work, which means that a 
critical check and balance on possible company misconduct will be 
circumvented. No auditor should assist a company in designing a tax 
strategy to lower the company's tax bill and then also serve as the 
auditor approving the accounting for that tax strategy. Two different 
parties must be involved--one to design the strategy and one to audit 
it for improper accounting and possible illegal tax evasion. A second 
problem involves the fees paid for various types of tax services. In 
the July 2000 regulations proposed by the SEC under former Chairman 
Levitt, concerns were raised about allowing an auditor to provide an 
audit client with written opinions related to a tax shelter or other 
tax strategy to lower the client's tax bill. Providing these opinions, 
especially for complex or questionable tax strategies, can lead to 
lucrative fees for an accounting firm and, in so doing, raise the same 
conflict of interest concerns that have so damaged auditor 
independence.
  These and other non-audit service issues needed to be examined by the 
Board and the SEC, not only to develop definitions for key terms, but 
also to determine whether additional non-auditing services should be 
added to the list of 8 prohibited services now specified in the Senate 
bill. Audit committees must also confront these issues and take the 
steps necessary to prohibit the company's auditor from engaging in non-
auditing services that

[[Page 12534]]

raise conflict of interest concerns or lead to an auditor's auditing 
its own work for the company.
  On auditor misconduct and oversight of accounting firms, the Sarbanes 
bill offers fundamental change that is sorely needed. The new Public 
Company Accounting Oversight Board that the bill would establish is 
designed to be free of domination by either accounting or corporate 
interests and would enjoy an independent and stable source of funding. 
This Board would have several duties including issuing auditing, 
auditor independence, and auditor ethical standards; inspecting and 
reporting on the internal controls and operations of registered public 
accounting firms; and conducting disciplinary proceedings regarding 
accountants suspected of wrongdoing.
  With respect to investigating possible auditor misconduct, the Board 
will have the authority to subpoena documents, take sworn testimony, 
and impose meaningful sanctions on individual accountants and 
accounting firms found to have engaged in wrongdoing. The sanctions 
include revoking the registration that a firm needs to audit public 
companies, barring a person from participating in a public company 
audit, imposing a civil fine on an individual or firm, and issuing a 
censure. The Board must also disclose its disciplinary proceedings to 
the public so that we will know what misconduct was involved and what 
sanction was imposed.
  This provision represents significant improvement over existing 
disciplinary proceedings which are dominated by the accounting 
industry, secretive, time-consuming, and ineffective. It also has at 
least two weaknesses. First, although the bill requires the Board to 
issue a public report on any disciplinary proceeding that results in a 
sanction on an auditor, the bill is silent on public disclosure of 
disciplinary proceedings that do not result in a sanction. The bill 
apparently leaves it to the discretion of the Board on whether to 
disclose these disciplinary proceedings, but a better approach might 
have been to direct the Board to disclose such proceedings when doing 
so would be in the public interest. A second, more serious weakness is 
that the provision imposes an automatic, unlimited stay on any auditor 
sanction imposed by the Board if the sanction is appealed to the SEC. 
Until the SEC lifts the stay, the Board is prohibited from disclosing 
to the public the name of the auditor, the sanction imposed, or the 
reasons for the disciplinary action. These provisions are out of line 
with broker-dealer disciplinary proceedings and only serve to prolong 
criticisms of auditor disciplinary practices as overly secretive and 
slow moving.
  On the issue of auditing, auditor independence, and auditor ethical 
standards, I fully support making the Board the final arbiter of these 
standards. The standard-setting process has for too long been under the 
direct control of the accounting industry, and one of the most 
important changes the bill makes is to put an end to this arrangement. 
Of course, the accounting industry is not and should not be excluded 
from the Board's standard-setting process; the bill requires the Board 
to engage in an ongoing dialog with the accounting, corporate and 
investor communities to take advantage of their expertise. The bill 
explicitly requires the Board to ``cooperate'' with any designated 
professional group of accountants or any advisory board convened by the 
Board to assist its deliberations. The bill also states that the Board 
must ``respond in a timely fashion'' to any request for a change in the 
standards if the request is made by a designated professional group or 
advisory committee. It is important to note, however, that the bill 
does not grant any preferential status to these groups compared to 
other participants in the standard-setting process, and participants 
such as the SEC, state accounting boards, other federal and state 
agencies and standard-setting bodies, and investors are entitled to 
receive equal consideration from the Board in its standard-setting 
deliberations.
  On the issue of accounting oversight, the Sarbanes bill again offers 
vast improvement over the status quo. The newly created Board offers 
oversight authority that will be more independent, more systematic and 
more public than the existing system. And, again, one comment. With 
respect to the inspection reports that the Board is supposed to 
disclose to the public regarding a registered public accounting firm's 
operations, the bill states that the Board must develop a procedure to 
allow the registered public accounting firm that is the subject of the 
inspection an opportunity to comment on the draft report before it is 
finalized. I support this process. However, it is also my understanding 
after consulting with the Committee, that the bill is not intended to 
require the Board to submit the actual text of its draft report to the 
subject firm prior to making it public, but rather to inform and 
discuss the key points with the firm and provide the firm with a 
meaningful opportunity to comment on the Board's analysis, commit to 
specific steps to cure any defects in the firm's quality control 
systems, and commit to other reforms.
  Finally, on the issue of increased resources, the Sarbanes bill takes 
long needed steps to beef up the SEC's enforcement staff through 
authority to hire new accountants, lawyers, investigators and support 
personnel. It also increases the SEC's budgetary authority. Once this 
is enacted into law, it will be up to the Bush Administration and the 
Appropriations Committees to give the SEC what it needs to respond to 
the current wave of corporate scandals and help restore investor 
confidence.
  There are many other provisions in the bill that I could comment on, 
but I will stop here. The bottom line is that the Sarbanes bill is a 
strong bill. It provides new tools and resources to go after corporate 
misconduct. It offers fundamental change in the way we oversee the 
accounting industry and punish auditor wrongdoing. It tackles auditor 
conflicts of interest by setting up, for the first time, prohibitions 
on the non-auditing services that an auditor can provide to an audit 
client. It provides new ways to hold corporate insiders accountable, so 
the next time a public company erupts in scandal, the senior officers 
and directors can't claim that they were out of the loop and not 
responsible.
  As strong as it is, the Sarbanes bill would benefit from a number of 
strengthening measures. This includes the amendment by Senator Leahy to 
strengthen criminal penalties for corporate misconduct and to protect 
corporate whistleblowers, which I am cosponsoring, and an amendment by 
Senator Edwards to require legal counsel to play a more active role in 
deterring corporate misconduct.
  I intend to offer several amendments myself.
  Administrative penalties: Senators Bill Nelson, Tom Harkin, and I 
will offer an amendment to give new authority to the SEC to impose 
administrative penalties for corporate wrongdoing. The amendments would 
allow the SEC to impose civil monetary penalties on persons who violate 
the securities laws such as companies, officers, directors, auditors, 
and lawyers and to bar unfit officers and directors of publicly traded 
corporations without having to go to court to do so. The amendment 
would also allow the SEC to subpoena financial records as part of an 
official SEC investigation without notifying the subject of the records 
request. This amendment would also increase the maximum civil fines the 
SEC can impose on securities laws violators under current law and the 
new authority provided by this amendments. Today's fines of $6,500 to 
$600,000 per violation would increase to $100,000 to $10 million.
  Auditor certification. A second amendment I intend to offer would 
require that auditors of publicly traded corporation provide a written 
opinion on whether a client company's financial statements fairly 
present the financial condition of the company. The Sarbanes bill has a 
similar provision with respect to CEOs and CFOs. Many think this is 
already required of auditors of publicly traded companies, but there is 
no provision in current law that imposes such a requirement; there

[[Page 12535]]

is only guidance pursuant to SEC regulation.
  Auditors communication with board of directors: My third amendment 
would require that an auditor of a publicly traded corporation discuss 
with the Audit Committee on the Board of Directors the ``quality, 
acceptability, clarity, and aggressiveness'' of the company's financial 
statements and accounting principles. This amendment will eliminate any 
excuse that the Board of Directors of a company didn't know what the 
company was doing.
  There were many investors and commentators in the 1990's who 
expressed their awe of the astronomical growth in the stock market by 
saying it was too good to be true. Well, they were right. It was too 
good to be true, and now we know that. This bill, particularly with 
some strengthening amendments will bring credibility and accuracy back 
to the financial statements of our publicly traded corporations. It 
will bring reality into the marketplace and make the deceptive 
practices of the 1990's the true exception rather than the rule.
  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. NELSON of Florida. Madam President, I ask unanimous consent the 
order for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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