[Congressional Record (Bound Edition), Volume 148 (2002), Part 9]
[Senate]
[Pages 12673-12680]
[From the U.S. Government Publishing Office, www.gpo.gov]




 PUBLIC COMPANY ACCOUNTING REFORM AND INVESTOR PROTECTION ACT OF 2002--
                               Continued

  Mr. REID. Madam President, I ask unanimous consent that there be a 
vote immediately on or in relation to the Levin amendment, the second-
degree amendment. Following disposition of that amendment, we vote 
immediately on the Edwards amendment; and following that, we vote on 
cloture, which motion was filed yesterday.
  The PRESIDING OFFICER. Is there objection?
  Mr. GRAMM. Reserving the right to object, I noticed the McCain 
amendment was not listed. Was that an inadvertent error or was it the 
intention to exclude that amendment which was offered after the two 
listed?
  Mr. REID. The last two amendments offered were the Levin and Edwards 
amendments.
  Mr. GRAMM. Madam President, I have to object.
  The PRESIDING OFFICER. Objection is heard. The Senator from Texas.
  Mr. GRAMM. Madam President, I ask unanimous consent that the vote on 
cloture occur immediately; that we proceed with the process of dealing 
with germane amendments; and that we set the time of 8 o'clock for all 
debate on the bill to end.
  The PRESIDING OFFICER. Is there objection?
  Mr. LEVIN. I object.
  The PRESIDING OFFICER. Objection is heard.


                           Amendment No. 4269

  Mr. ENZI. Madam President, I do have to answer some of the questions. 
I am sorely disappointed that the Senator from Arizona left the floor. 
He asked some important questions. He has asked three questions about 
accounting. I don't get to answer questions about accounting very 
often. I was very excited about that.
  Now, I do warn people who may be watching in their offices, or 
somewhere else, that accounting questions often put people to sleep. So 
it might not always be that exciting for them.

[[Page 12674]]

  But I do have to say, from what we saw, there is no passion like the 
passion of a repentant sinner. This is not the first time somebody has 
said we are going to tell FASB what to do.
  On May 4, 1994, the Senate said: We do not care what you said in your 
multiple pages of FASB rules, we are going to tell you what to do. And 
the vote was 88 to 9 the last time we interfered with FASB. I have to 
tell you, the Senator from Arizona was in the 88. He was one of the 
people who said: I know how to do this. I know how to do this better 
than FASB. So listen to me: I am going to vote my conscience on this 
and dictate how FASB is going to handle accounting on stock options.
  If he and several other people had not voted to tell FASB what to do 
at that time, we wouldn't be having this discussion at all.
  Now we have another amendment. It is very important to pay attention 
to the wording.
  What I am trying to do is--as I mentioned, there is no passion like 
the passion of a repentant Senator--I am trying to keep people from 
sinning again. There are some very important reasons. We cannot take a 
complex situation such as stock options, which I think all of us can 
spell but for which not all of us can account, and put it into a simple 
little paragraph on how it should be handled. This amendment, which is 
just one sentence which makes up the whole paragraph, says:

       Any corporation that grants a stock option to an officer 
     employee to purchase a publicly traded security in the United 
     States shall record the granting of the option as an expense 
     in that corporation's income statement for the year in which 
     the option is granted.

  One of the problems we are having right now is investors are a little 
bit shaken because there are restatements of income being done. Not all 
restatements are because something was hidden. Some of those 
restatements are because of changes in rules. This will be one of the 
biggest changes in rules we have made in decades, and the way this is 
written, while it is intended to move to an expense system, does not 
really say that. It says that you have to expense it in that 
corporation's income statement for the year in which the option is 
granted.
  There are a lot of options that are already granted. Some of them are 
outstanding maybe 25 years. It is more common that it be 2 or 3 years. 
The new stock options are done on a much shorter period of time. Even 
if it is just 2 or 3 years, what this amendment is saying is, redo your 
income statements and restate them for the last 3 years for all of your 
options that are outstanding. We did not make you do that before; now 
we want you to show a huge change or maybe just a small change, but at 
any rate a change, and every time a company announces a change--and I 
have had some call and say: I am going to have to do a restatement and 
that restatement is going to be upward; you know what it is going to do 
to my stock; I am showing an increase in profit, and it is going to 
destroy me. All I can say is, it is the law; you have to restate.
  This will cause the biggest restatement in the history of the United 
States, the way it is done. One cannot dictate in very simple language 
something that will take multiple pages to be able to explain and to 
allow reconciliation. If we listened to the explanation earlier, it 
sounds as if companies are writing this stuff off and nothing ever 
happens with it. That is not true. Every time there is an exercise, 
every time somebody trades their option for real stock, there is an 
accounting for it. At the end of each year there is a reconciliation 
for it to make sure the taxes are paid on the stock options that are 
exercised.
  We heard something earlier about $625 million that we are losing 
because of Enron. It is because they went bankrupt. It is not because 
they are not reconciling, because they are not paying taxes. They do 
not have anything with which to pay the taxes.
  One of the problems with this bill is that we have gotten into a 
feeding frenzy. I think of Enron as this huge, dead carcass. In 
Wyoming, we have kind of a pecking order of feeding. There are the 
grizzly bears, there are the wolves, and there are the coyotes. Each of 
them come up and take their bite out of the carcass, but not until the 
previous one has finished, and that is kind of the way that we are 
handling this bill.
  We have this huge carcass of Enron, and we are trying to figure out 
how to get rid of it and make sure we do not have any more carcasses. 
We have a bill that has the primary right to feed on it. Then we have 
the wolves, which are the germane amendments, that have the right to 
feed on it. Then we have the coyotes, which do not have any right until 
everything else is finished. Those are the nongermane amendments.
  What we are trying to say is let us get this carcass finished off 
before we have a whole bunch more carcasses, before the stock market 
has more problems. They are a little bit worried about us working on 
this stuff at all, and if they see an amendment like this with the 
oversimplification being thrust on this legislative body to make a 
massive accounting decision, they ought to panic. We do not want that 
to happen.
  There are a lot of reasons this amendment should not be passed should 
it ever come to a vote, and I hope everybody would do that. Now, I have 
an option I had drafted up. I have over 25 cosponsors from both sides 
of the aisle now. It deals with stock options. What it does is put it 
back on FASB to come up with a proper solution and gives them some 
guidelines to look at. That would be the way to handle a massive 
problem like this with a lot of detail for which none of us, including 
me, have the expertise.
  I am kind of fascinated that Warren Buffett is the main authority on 
stock options these days. As I look at it, there are several camps of 
people that are opposed to stock options, not opposed to the accounting 
of stock options. They are flat out opposed to stock options. Warren 
Buffett is one of those. And that is because when stock options are 
exercised, it dilutes his stock. I think he probably has more stock 
than anybody else in the whole world, and I guess if I had more stock 
than anybody else in the whole world I would have gotten there by being 
sure that every single piece of that was accounted for. Unfortunately, 
that is not the case. But that would give one some compunction to make 
sure that none of it can be diluted, which is what stock options have 
the possibility of doing.
  It is also based on the premise that the company is going to grow and 
expand, and that is why all of the people who are employees are willing 
to take stock options instead of hard cash. I think all of them would 
love to have hard cash as Berkshire is doing.
  I suspect that the hard cash does not come to quite as much as the 
increase in value of the stock. So given an option between hard cash 
and potential in a company that you yourself can work in, you yourself 
believe in, you yourself know can grow, you want to participate in all 
of that economic growth. So stock options would be something that might 
lure you from another company, that might lure you into a startup 
company, that might lure your expertise to where you can make this 
company grow.
  One of the questions that was asked was: If stock options are not a 
form of compensation, what are they? At the time they are granted, they 
are not anything. There is no assurance of them being worth anything. 
They are a potential liability, and there are some models for 
determining how to calculate that. They are very complicated. I am not 
even sure an accountant can handle all of those things. I think they 
have computer models now that are designed by engineers that go through 
this thing to calculate what that worth would be so they could put down 
some number on their balance sheet. Or they can use the other option, 
which is to disclose it in a footnote. If I wanted to devote more time 
to this, I would bring over a chart that shows the disclosure that is 
in the footnote.
  So if people read the annual report of the corporation, they know 
what the potential dilution and value of those stock options are.

[[Page 12675]]

  Then the next two questions are: If compensation is not an expense, 
then what is it? And if expenses should not go in this calculation, 
where should they go? Those are two questions built on a false premise. 
That is why it makes it difficult to answer the last two questions. If 
you answer the first one, the next two are not answerable.
  Like I said, if I were one of those people such as Warren Buffett who 
wanted to do away with stock options, that is the attack I would take. 
I would appreciate it if they were a little more honest: We just want 
to do away with stock options.
  There is another group of people who say all the stock options go to 
the top employees and consequently they do not want stock options 
either, but the honest part of that is that they do not want stock 
options either.
  I heard all the references to the newspapers that say expense these 
things. Of course, I know that all the newspapers have all the 
technical expertise to make that kind of an evaluation. I say that 
facetiously, of course.
  Senator Sarbanes and I have been working on this accounting bill for 
months, and as we went through the hearings that he did with so much 
care, very carefully picking the people with the most expertise to be 
able to explain to us what went wrong in the Enron situation and what 
could be done in the future to prevent that sort of thing from 
happening again, it was very educational and he did a magnificent job.
  While we were going through that process, I was keeping notes and he 
was keeping notes. I think everybody else in the Banking Committee was 
keeping notes. From those notes, several of us drafted up a bill. I 
noticed that an editorial in the Washington Post down near the end said 
something needed to be done, which all of us agree on, and then down at 
the end it says Senator Enzi's bill is a sham.
  My first reaction was to get ahold of them and say: Can I talk to the 
accountant that looked at my bill? Well, the newspaper has journalists, 
not accountants. It might be a small flaw in expertise even on stock 
option expensing. I have not seen anything in there since I continued 
to work with Senator Sarbanes, and some of the principles I had in mind 
were some of the same principles that he had, and those were easy to 
resolve. Some of the other ones that I had wound up in the bill and are 
in this bill that we have before us now. I have not seen any editorial 
that recognizes their expertise of that evaluation either.
  There were comments about Chairman Greenspan, and I did read the 
speech he gave. As soon as I read the speech he gave, I wanted a little 
bit more information. So I asked if I could get together with him, and 
he was nice enough to come to my office. Through the discussion, which, 
again, was educational, I keep learning things every day. This is such 
a marvelous institution for education. One of the things he concluded 
with was to say: Yes, they should be expensed, but Congress should not 
decide how that is done. He was not in favor of us passing something 
that said how to handle stock options. I think he could see the wisdom 
or the folly, whichever way you want to consider it.
  Now, one may have guessed that I am in opposition to the McCain 
amendment on expensing stock options. I think there are some other ways 
of doing it better. I think there are ways that it could actually be 
voted on by this group if it were done better. I do not think the one 
that is presented is the one that is votable, and I assume he will work 
with us and make some changes.
  As we all know, Enron's executives and employees were issued numerous 
stock options. It is now clear that months before Enron filed for 
bankruptcy, executives were aware of the true condition of the company. 
They exercised millions of dollars of options. Enron employees kept in 
the dark on company finances are left with worthless Enron stock, and 
retirement savings, while some bad Enron executives absconded with 
stock openings. The financial fraud causing the collapse of Enron had 
nothing to do with the company's accounting procedures for stock 
options.
  I appreciate my colleagues' effort to try to fix the problems posed 
by Enron, and perhaps WorldCom and Xerox and Global Crossing as we get 
into those. Congress must react to what happened with Enron, but it 
must be careful not to overreact. I have a principle with legislation 
having watched it for a long time: If it is worth reacting to, it is 
worth overreacting to. It goes back to the feeding frenzy on the huge 
carcass that is here--an overreaction, adding things to one up or 
outbid.
  While legislation may be appropriate to ensure employees are 
protected and prevent future Enrons from occurring, we should not do 
anything to hamper rank-and-file employees from receiving stock in 
their company. A couple of years ago we passed a bill that went through 
both Houses by unanimous consent. That bill was so that the rank-and-
file employees could get it without more difficult accounting. We said 
we want the rank-and-file folks to have it. We passed a bill by 
unanimous consent. That means everybody who was here at the time said 
yes, that is good, without any amendments. That is tough to do around 
here. It was a definite recognition we wanted all employees to have 
stock options. When properly used, stock options can be a marvelous 
opportunity for all of the employees.
  In addition, as I mentioned, small businesses and startup companies 
must continue to have an incentive to issue options, which is often 
their only means to attract qualified employees. I feel so strongly 
about protecting stock options for rank-and-file employees in small 
businesses that on April 18 of this year I testified before the Finance 
Committee against the legislation in this McCain amendment, although it 
had more detail to it so it made a little bit more sense. This was 
revised so it could perhaps meet the test of not being blue-slipped by 
the House because it has the potential for being a revenue issue.
  I am against this amendment because it seriously hurts employees, 
small businesses, startup companies, and in general the high-tech 
industry and many listed corporations which employ thousands of 
employees. This legislation will not solve the problem of Enron, that 
dead carcass I referred to, or WorldCom, which is still out there 
kicking a little bit, Xerox, and perhaps failing dot-com companies, but 
instead it will create additional problems for the rank-and-file 
employees of the small and large corporations because they will no 
longer get the benefit of stock options. Why? Because companies will no 
longer have an incentive but, rather, a disincentive to grant them.
  We have all heard that Federal Reserve Chairman Alan Greenspan and 
Warren Buffett support the purpose behind the McCain legislation 
because they believe stock options should be treated as compensation. 
Admittedly, they may at some point become compensation, but there is 
disagreement at what point that is. Even Chairman Greenspan admitted to 
me, as I mentioned earlier, that Congress should not legislate 
expensing but that the Federal Accounting Standards Board, or the FASB, 
should make such a determination.
  This is not an easy determination, although in our discussions we 
make it sound like an easy determination. Concepts are much easier than 
the detail. That is what makes our legislating so difficult. We can all 
agree on huge concepts, but when you figure out the details of how you 
get to that, it becomes very difficult.
  Secretary O'Neill disagrees that expensing of stock options is a 
solution and believes better disclosure provisions would cure the 
current problem with regard to stock options. The McCain-Levin bill is 
creating the same debate over expensing stock options on company 
financial statements that occurred a few years ago. At that time, the 
solution was to give companies the option of listing the number of 
stock options issued by a company in a footnote to the financial sheets 
or directly on its income or financial statements as an expense. Either 
way, investors and employees have the ability to see how much stock is 
outstanding before

[[Page 12676]]

they invest in the company or before they exercise their stock options. 
These footnotes provide a lot more information to shareholders or 
investors than you might imagine, or than the supporters of the McCain 
amendment would like you to believe.
  Some would like you to believe the average person out there doesn't 
have the ability to read a footnote, let alone understand it. I think 
at any meeting of employees they would have people contesting that. 
They look at some of those annual reports, probably more so than some 
of the major investors. Some of it is difficult to understand. 
Financial literacy is difficult but very important when you are 
investing.
  It was mentioned that Berkshire buys companies and switches to cash 
bonuses. It does not cause any problem. The problem is, except cash 
bonus, you lose your job. Now if they had the option between cash 
bonuses and a stock option, in a growing company, which would they 
take? It is hard to tell.
  Rather than estimate the value of stock options and expense them on 
the balance sheets, the companies estimate them in a footnote using 
something called the Black-Scholes model. That is because they don't 
know what the future value of the stock will be when the option is 
actually exercised and sold. That is very important because I have seen 
a number of different proposals on this, and one of them, unless you 
expensed it and guess exactly what it was at the time you expensed it, 
you are not allowed to claim any additional expense. But they don't 
realize these things are reconciled so that there is a running value of 
actually expensed items.
  Again, that gets into a lot of the accounting detail that would put 
people to sleep. I have some fascinating charts I would love to drag 
out, but I have already lost most of my audience so I won't do that. 
They use that model because they don't know what the future value of 
the stock will be when the stock option is actually exercised and sold. 
So they attempt to make an educated guess. Their footnote predicts what 
the expense might be and the diluted earnings per share for the 
outstanding stock.
  Currently, most companies list the outstanding stock options as a 
note to their financial statements. Unlike Boeing, Microsoft, Winn 
Dixie, and a few other companies, most companies do not want to list 
the options as an expense on their financial statement because it 
creates a perception of a drop in value of the company, even though the 
stock options have not yet been exercised. In other words, there has 
been no expense yet and may not be an expense if the options are never 
exercised. Yet under the McCain amendment, companies must list these 
stock options as an actual expense to their company when granted. This 
would mean taking the estimated value in a footnote and making it an 
expense to the company.
  A problem with expensing early on, how do you value stock options 
which have been granted but not exercised or sold? Almost everyone 
believes the current practice of using the Black-Scholes method to 
value stock options as currently used on footnotes is fatally flawed. 
Under the McCain amendment, companies are going to now have to use this 
flawed model to make a guess at what the value of the options are to 
determine an expense to the company.
  The tax consequences will also be based on this flawed estimate. But 
later, when some of the stock options are exercised and the value is 
different than estimated, this amendment provides no opportunity for a 
reconciliation of company records or taxes. That is kind of an 
accounting principle that there is supposed to be an explanation for 
how taxes match up with the books of the company. Yes, we do force 
different kinds of calculations for taxes than we do for the accounting 
that goes to the stockholders. But the accountants are able to draw the 
reconciliation, they are able to show how one number goes to another 
number. That is a requirement, as well.
  Currently, when the estimates are placed in the footnote, they appear 
as what they are, a best guess at their value, with no effects on the 
company's books and no need for reconciliation of records later. Yet an 
investor can see what outstanding, possible estimated expense might 
occur to the company.
  Another problem with the McCain amendment is it does not provide for 
a method of reconciliation if the stock options are never exercised. So 
what appeared as an expense may never happen, yet the value of that 
stock actually goes down instead of up. No one would buy the option and 
have it cost more than just going out and buying stock. So it is not 
exercised. So what appears as an expense may never happen, yet the 
financial statement prepared months before reflects an expense and a 
decrease in company profit that never occurred. Meanwhile, the current 
footnote method shows this estimate to investors as a worst case 
scenario of what could occur if all the options were exercised but no 
reconciliation were required.
  As a result, the McCain amendment creates a disincentive for 
companies to issue stock options to those rank-and-file employees.
  If this amendment becomes law, many companies will cut back on giving 
stock options to rank-and-file employees rather than list those options 
as an expense, and create a perception of a decrease in the value of a 
company when the stock options are not yet an expense and may never be 
exercised. This means employees will lose a valuable means of 
increasing their income.
  But, these companies are not going to cease offering CEOs and senior 
executives this form of compensation--that is deferred compensation. 
Big companies will continue to issue stock options to attract the best 
talent to top levels of their companies, because this is the only way 
they can get the most talented management personnel. Despite what the 
media and supporters of this amendment want you to believe, stock 
options are not issued to just executives. In fact, those who claim 
only a small percentage of stock options are offered to rank-and-file 
companies are misguided. For example, Sun Microsystems, which has 
approximately 40,000 employees, distributed only 9 percent of its stock 
options to executives in 2000 and 2001. In contrast, distribution of 
stock options to employees who were not executives was a whopping 91 
percent for both those years.
  This is not an isolated example. In 1998, over 66 percent of large 
companies gave options to some portion of their non-executive 
workforce. Of this group, 26 percent granted options to all their 
workers and another 15 percent gave options to at least half of their 
employees. A 2000 survey of Pricewaterhouse-Coopers and the National 
Association of Stock Plan Professionals reported 44 percent of 345 
large domestic companies with stock option plans made grants to all 
employees, including hourly employees. The San Francisco Chronicle 
reports that in the technology sector, this percentage is even higher. 
Of the top 100 e-commerce companies, 97 percent give options to all 
their employees.
  The San Francisco Chronicle also points out that:

       Ten years ago, about a million workers were in a few 
     hundred employee stock programs around the country.

  In 2001, that number had grown to 10 millions Americans receiving 
stock options. The National Center for Employee Ownership confirmed the 
trend is toward more non-managers receiving stock options. However, the 
Levin legislation will stop this trend by having a negative effect on 
companies which offer stock option compensation packages to their rank-
and-file employees. The McCain/Levin Amendment will also hurt small 
businesses and start-up companies which cannot afford to offer the 
salaries larger companies give, so they offer stock options as an 
incentive to attract highly-skilled employees. And it works. They do 
not have the hard cash for bonuses, but they have stock options. In 
turn, employees that risk working for start-up companies have the 
ability to make much more money than through traditional methods of 
payment by salaries or wages.
  The National Commission on Entrepreneurship points out that, without 
stock options, startup companies which are now household names, like 
Intel, Federal Express, Apple, Dell and

[[Page 12677]]

Starbuck, would not exist. In addition, the McCain-Levin bill will 
cause the whole tax structure to dramatically change. Currently, when 
stock options are granted or issued there is no tax consequence for 
either the employer or employee. But when stock options are exercised, 
the employees are taxed as if it is ordinary income. The income amount 
is based on the difference between the market price and the exercise 
price.
  Of course, if it goes down and there are not stock options exercised, 
then there is no income tax because there is no gain.
  I do have some charts, again, too, that show that the Federal 
Government does receive the taxes that are due, unless there is a 
bankruptcy.
  At the same time, the employer can take a deduction based on the 
amount equal to what is considered income to the employees. For 
example, if the amount is $25,000 worth of income to employees, the 
company may take a deduction based on the same amount, $25,000, times 
its marginal tax rate. If the marginal tax rate is 35 percent, the 
company would have a tax savings of $8,700. This deduction provides a 
useful incentive for a company to offer options to its rank-and-file 
employees. Unfortunately, the McCain-Levin bill will force companies to 
list the numbers of stock options issued as an expense on its financial 
statement before they can take the current tax deduction. And they way 
that this particular amendment is written, it will have to be a 
restatement for all the years for which there are stock options out. As 
I mentioned, this added expense to the financial statement alone is a 
disincentive for companies to issue stock options. In addition, under 
the McCain-Levin amendment, the tax treatment of the deduction totally 
changes, becoming much more complicated because it involves valuing 
stock that has never been exercised. The tax complexity created by this 
amendment is another disincentive for companies to issue stock options 
to rank-and-file employees.
  Add to all of this, the fact that stock options are not all exercised 
at the same time. But that is the optional part of it. When you are 
given a stock option, you have the control over when you personally 
want to take the stock option or not take the stock option.
  Then there are some other interesting amendments out there that could 
deal with stock options and whether lawyers could ever exercise them, 
or whether they would have to reinvest them--a lot of complications. 
But even assuming they are exercised at the same time, the McCain 
amendment imposes much more complexity to the current system.
  Again, I have some charts that could show how all that complexity 
comes about, but it looks as if we are ready to move on to another 
decision here so I will pass on that.
  If I have confused anybody, I know that I have not confused them 
nearly as much as if I showed them how this actually worked. This is 
not easy stuff. I guess that is what keeps accountants in business. It 
really isn't all the taxes that people pay, although a lot of the 
revenue comes from figuring the taxes.
  I do hear from accountants who say: You really need to simplify the 
system. Yes, I do hear from accountants that way--not just about this 
system but the tax system as well. There is plenty of work out there 
for them to do and not enough accountants, and there are less and less 
every day. However, I think I have made one thing crystal clear--99 
Senators with no accounting degree, and 1 Senator with an accounting 
degree, have no business trying to rewrite the accounting methods of 
publicly listed companies. In other words, if you or your staff don't 
understand any of this, then you shouldn't vote for the McCain-Levin 
amendment. Instead, the Federal Accounting Standards Board, or even the 
Securities and Exchange Commission, have much more expertise to make 
these determinations. We can direct them to look at current accounting 
methods, rather than passing specific legislation on replacing the 
current system. We can direct them to look at possibly developing a 
better pricing model to value stock options than the Black Scholes 
method. We can ask it to look at possibly improving disclosure 
provisions to better inform investors, including using plain English 
and charts and graphs. We should direct them to create rules that 
continue to promote ownership of company stock by employees, rather 
than providing disincentives to companies in granting stock options. 
Let's let the entities with expertise study and recommend what will 
prevent future Enrons. Otherwise, we may create a remedy that is worse 
than the disease.
  As mentioned before, I worked with Senator Lieberman and Senator 
Allen and Senator Boxer and numerous other Senators to come up with an 
amendment that would give some direction to FASB. It would show them 
that we do want them to take a look at this, that it is a priority, and 
that we would like to have a solution as soon as possible, but not one 
that will destroy the entire market, not one that will require 
retroactive restatements for all of the companies to bring them up to a 
specific present point.
  There will be companies that will choose to do that, but in the 
present atmosphere that could be very detrimental to the entire stock 
market. So I hope we will not try to go with something oversimplified 
as the McCain amendment is, and that we will take a look at making sure 
that options are treated properly, as we are trying to do in this bill, 
with all accounting. We are trying to set up a mechanism--a mechanism, 
not specific language on accounting--a mechanism for determining proper 
accounting, and I think the bill before us does a good job of doing 
that. It sets up oversight for discipline and ethics. It will be the 
first time that we have had centralized any profession. But it will 
solve some problems, and it needs to be done quickly for the sake of 
the stock market. I am sure we will get to address this at a later 
time.
  I heard the threat of the Senator from Arizona. I hope in the 
meantime that his threat will include a little rewrite that gives a 
little bit more latitude and puts the situation in the hands of the 
people who actually have some expertise on this.
  I yield the floor.
  Mr. LIEBERMAN. Mr. President, I want to talk briefly today about how 
America got caught in the current quicksand of corporate scandal and 
how we can help dig our economy out of it.
  Our economy is in trouble today not because we have a shortage of 
parts, labor, or ingenuity, but because the American people have a 
shortage of confidence in the basic mechanics of the marketplace. Every 
new corporate scandal jostles our markets with the force of a jab or an 
uppercut. If the punches keep coming and we don't react, our economy 
will get even wobblier. It may even get knocked down.
  Investors are shaken. They don't know what's real anymore. Trust has 
eroded. The stock exchanges are suffering. These are serious problems 
that demand a serious response, which is why I strongly support Senator 
Sarbanes' legislation to reform accounting oversight and strengthen 
corporate accountability.
  I welcome President Bush's voice to this discussion, and appreciated 
the principled remarks he made in New York on Tuesday. But the 
President's substantive proposals were late and they were limited. I 
regret that he still hasn't committed, and committed forcefully, to the 
meaningful, systemic reforms in the legislation before the Senate 
today. This is a responsive bill. It is a responsible bill. A vote for 
it is a strong vote of confidence in the American economy. And the 
President's failure to speak out in favor of it, in my view, sends the 
wrong message to our markets.
  In the wake of Enron's collapse, I had hopes that self-regulation 
could heal many of the wounds inflicted on our markets and on our 
economy. I have called for the markets to toughen listing standards, 
and for companies to make ethics a front-burner issue, not a footnote. 
Many companies have made progress. The stock exchanges and other 
business groups have worked to

[[Page 12678]]

root out conflicts of interest and to demand more independent corporate 
oversight.
  But the new revelations, which seem to come daily, have demonstrated 
that these problems go far beyond a bad company or two or three. We now 
have to ask not whether there are more scandals lurking in the fine 
print, but how many more are there? And we have to ask, what is it 
about the shape of the system that needs to be corrected to prevent 
similar debacles from happening again?
  The system isn't broken, but it is strained. And we all now 
understand that self-regulation, as critical as it is, will not do 
enough to fix the damage.
  The stakes are high. Over the last two decades we have witnessed an 
explosion in middle-class participation in the capital markets. A 
majority of Americans now have a direct stake in stock or mutual funds, 
usually, through their 401-k plans. Those American investors have 
discovered, through the painful shock of every new recent revelation, 
that the basic, traditional ethical values of small businesses, where 
you respect every dollar, pay back your investors, treat your employees 
well, and serve your customers honestly, are not always shared in the 
boardrooms of some large corporations.
  Today and tomorrow, the American people deserve every confidence that 
their government is setting the highest standards of honesty, 
transparency, and accountability and enforcing those standards without 
hesitation.
  That is why I strongly support Senator Sarbanes' bill. It is a potent 
prescription for the serious ethical ills that ail our economy. The aim 
here is not just to penalize individuals when fraud happens; it is to 
prevent future economic catastrophes, to the degree that we can, and 
re-instill confidence in the marketplace. I regret that after the 
collapse of Enron and the pretty pathetic parade that has followed of 
Global Crossings, Tycos, ImClones, and WorldComs, the President still 
hasn't awakened to the full scope of the problem or the need for a 
strong solution like that proposed by Senator Sarbanes.
  Gene Sperling, former Economic Adviser to President Clinton, put it 
well. After September 11, we all understood what was necessary to get 
people back in airports and on airplanes. Cracking down on hijackers 
with tough new criminal penalties wouldn't be enough. We knew that we 
needed to improve baggage and passenger screening, fortify cabin doors, 
and make a whole host of other changes that addressed the systemic 
problems that let the attacks happen in the first place.
  The same is true here. If we want Americans to regain confidence in 
our economy and get back in the market, as they have gotten back in the 
skies, we need to not only get tough on offenders, but to get tough on 
the structural problems that enable the offenses. That means closing 
loopholes and rooting out the endemic conflicts of interest that put 
even decent people in difficult if not untenable situations.
  Senator Sarbanes' bill would set up a strong, independent board to 
oversee accountants--a critical step that will give Americans reason to 
believe their numbers again. The President hasn't come out clearly in 
favor of that. The bill would restrict firms from doing both consulting 
and auditing for the same company in most cases, addressing what is a 
corrosive conflict in the system today. The President hasn't supported 
that as a law yet. The bill would also go further than the new NASD or 
NYSE rules to address the inherent conflicts of interest that currently 
prevent Wall Street analysts, who make the judgments so many Americans 
rely upon in making their investment decisions, from thoroughly and 
independently scrutinizing the companies they cover. In the hearings of 
the Senate Governmental Affairs Committee I chair, we discovered that 
those conflicts are real, deep, and widespread. Unfortunately, the 
President hasn't been strong enough or sharp enough on this issue. And 
the bill would require disclosure within 7 days anytime a corporate 
executive takes a loan from the company he is working for.
  We in Washington cannot and should not pretend to be able to fix all 
these problems single-handedly, but we have an essential role to play. 
We must lead. And at the same time, we must take care not to let this 
turn into an anti-business crusade. I believe in American business. My 
father was a small business owner in Stamford, CT. Through hard work he 
bought a house, sent his kids to college, prepared for retirement, and 
bettered his community.
  You cannot be pro-jobs and anti-business. You can't be pro-growth and 
anti-business. You can't be pro-opportunity and anti-business. Business 
has created our unprecedented prosperity, and business will continue to 
extend more and more opportunities to more and more Americans and 
people around the world. But not if we let this erosion of confidence, 
this rust of distrust, keep eating away at our markets.
  American values are better than Enron's values. They're better than 
Global Crossing's values. They're better than WorldCom's values. And so 
is the American economy better and stronger than these companies' 
ethical and economic breaches of trust. This bill will point the way to 
both better ethics and better economics. It should become law.
  Mr. FEINGOLD. Mr. President, I support S. 2673, the Public Company 
Accounting Reform and Investor Protection Act of 2002, and I commend 
Senator Sarbanes for his efforts to produce this measure. That it is 
needed is a sad commentary on the state of corporate finance, but it is 
also a reminder that free markets do not work well without a set of 
rules and regulations in which the marketplace can be confident. It is 
also a reminder that if government is to farm out the task of 
regulating corporate finance, then those entities that are designated 
to patrol corporate activities must also have the confidence of the 
marketplace.
  The Enron and WorldCom disasters were notable but not isolated. 
Observers have noted the increase in corporate financial restatements 
in recent years. In testimony on this point, Robert Litan of the 
Brookings Institution reports that the number of American corporations 
whose earnings have been restated had been modestly rising throughout 
the 1990s, but then took a big jump in 1998 and hit a peak of over 200 
in 1999. Many reasons have been offered for this development. Some 
point to the tying of executive compensation to stock performance. 
Others have noted the potential conflict of interest that arises when a 
firm provides both auditing and consulting services to the same firm. 
Both explanations have some merit.
  And I will add to both of those reasons the enactment of a so-called 
securities reform measure in December of 1995, a law that made it more 
difficult for stockholders to hold corporations and accounting firms 
accountable for bad behavior. One newspaper has characterized that law 
as expanding ``a climate that invites the kinds of securities and 
accounting abuses that investors and employees suffered in Enron's 
colossal collapse.'' In reviewing the history of that bill, the 
Washington Post reported that ``accountants at what were then the Big 
Six firms lobbied aggressively for the measure, spending millions of 
dollars.'' The Post story also adds a foreboding note that ``leaders of 
Arthur Andersen were so pleased with their efforts they encased the 
text of the new law in a paperweight and handed it out as a souvenir.''
  The reforms we consider today are extremely modest, and I look 
forward to supporting amendments that will further strengthen this 
bill, including Senator Leahy's amendment that will strengthen 
enforcement and sanctions for securities fraud. That amendment passed 
unanimously out of the Judiciary Committee earlier this year. It 
creates new criminal laws for altering or shredding documents and 
provides tough new penalties specifically for securities fraud. It 
prevents wrongdoers from avoiding those monetary damages by filing for 
bankruptcy. It provides specific whistleblower protections for 
employees who provide information to Federal regulators or criminal 
investigator about corporate wrongdoing. And

[[Page 12679]]

it increases the statutes of limitation in securities fraud cases, 
responding to clear evidence that the shorter time limits put in place 
by the 1995 securities reform law have allowed wrongdoers to escape 
liability. These are necessary steps, and I applaud the chairman of the 
Judiciary Committee for bringing this amendment forward on this bill.
  We should also consider other steps, if not on this bill then as part 
of another vehicle, to close down abusive tax shelters that encourage 
the kind of creative bookkeeping used by Enron, and to address the 
double standard of allowing certain forms of executive compensation to 
be deducted from taxes, while remaining hidden from investors.
  All of these steps face opposition by interests who are more 
concerned with their own profits and survival than with the public 
interest. Unfortunately, these interests have held great sway over the 
Congress over the last decade, using soft money contributions and 
lobbying might to smother reform proposals before they could receive a 
fair hearing and action by the Congress. It is very unfortunate that 
the measures we are considering today were not enacted years ago. If 
they had been in place, thousands of employees might not have lost 
their jobs and millions of investors might not have lost their life 
savings.
  Let us not forget that the central players in the scandals of the 
past year are not rogue companies operating at the fringe of American 
economic life. No, they are some of the biggest companies in the 
country, and they have been central players in a corrupt campaign 
finance system that this Congress finally started to address by passing 
the McCain-Feingold/Shays-Meehan bill a few months ago.
  We have all heard of how Enron curried favor in Government. It gave a 
total of nearly $3.7 million in soft money to the political parties 
from the 1992 election cycle through June 3 of this year according to 
Democracy 21. Arthur Anderson made about $645,000 in soft money 
contributions during that period. Global Crossing gave just over $3 
million to the parties in soft money from the 1998 election cycle to 
the present. And WorldCom, whose failure has brought us to the point 
where we will actually pass these long needed reforms, has given over 
$4 million in soft money, dating back to the 1992 cycle. Just in this 
cycle, with all its problems, WorldCom has already made $400,000 in 
soft money contributions, according to the Center for Responsive 
Politics.
  These are enormous sums. They show, frankly, that our political 
parties are among those who were unjustly enriched by these companies 
who cheated their shareholders and employees. I understand that some 
contributions have been returned, but just as in the case of the 
employees who lost their jobs or the investors who lost their life 
savings, the damage has been done. The contributions had their intended 
effect when they were given.
  As I mentioned before, and as we all know, Congress passed and the 
President signed a bill to ban soft money earlier this year. So these 
enormous soft money contributions should be a thing of the past 
starting in the next election cycle. Members of Congress will no longer 
be allowed to call up the CEOs of Enron, or Arthur Anderson, or Global 
Crossing or WorldCom, or any other corporation, and ask for enormous 
contributions for the political parties and then have to come back to 
this floor and vote on legislation that might affect their activities. 
At least that is what we intended. But in just the last few weeks, the 
Federal Election Commission has undermined the law that we passed after 
so many years of effort. The new regulations on our soft money ban that 
are about to be promulgated open enormous new loopholes in the law 
before it even goes into effect. If we want to remove the stain of soft 
money from the legislation we pass in this Congress, we cannot allow 
that to happen.
  The sponsors of campaign finance reform intend to invoke the 
Congressional Review Act to overturn these regulations. That will send 
the FEC back to the drawing board to do the job of implementing the law 
right. Doing this is part and parcel of addressing the corporate 
scandals that have led to our work on the floor today on this important 
bill. Unless we defend the soft money ban, the influence of 
unscrupulous corporations on the Congress will continue, and we will 
find ourselves again in the situation of trying to explain to America 
why we didn't act to prevent further corporate and accounting scandals 
or other scandals before they happened.
  According to Consumers Union, just over half of all U.S. households 
are investing in the stock market, many through their retirement 
savings. If the public is to have confidence in the financial markets, 
they must have a complete and honest accounting of the financial health 
of the firms in which they invest. This bill is a good starting place, 
and I look forward to supporting it. And I look forward to maintaining 
public confidence in the Bipartisan Campaign Reform Act of 2002 by 
overturning the FEC's loophole-ridden regulations before they take 
effect.
  Mr. KYL. Mr. President, as Congress debates S. 2673, the Public 
Company Accounting Reform and Investor Protection Act of 2002, it is 
important to keep in mind certain facts: The United States of America 
is the most successful country in the world. No other country outworks, 
outproduces, or economically outperforms the United States. Americans 
have much to be proud of and it is due to the vigor of our businesses, 
the entrepreneurial spirit of our citizens, and the willingness of both 
to take risks. For hundreds of years, people from every corner of the 
globe have chosen to come to our country and pursue what has become 
known to the world as the American Dream.
  The American Dream can and should be available to all Americans who, 
with diligence, determination, and a sound moral compass, choose to 
pursue it. Unquestionably, our government has an important role to play 
in ensuring its viability. By the passage and enforcement of laws to 
protect Americans seeking to achieve success, lawmakers reaffirm that 
America's prosperity rests on the rule of law, on the existence of 
safeguards, checks, and balances to ensure that all compete fairly in 
the marketplace. These protections must be transparent and easy to 
understand. This is not only so that businesses and individuals can 
readily determine what distinguishes appropriate from inappropriate 
action, but so that all may have faith in the governmental bodies 
tasked with enforcing the rules.
  The implosion of Enron, Global Crossing, WorldCom, and other public 
companies has caused widespread concern about the soundness of American 
businesses. Public confidence in corporate practices has been 
undermined, and serious questions have been raised about the accuracy 
of corporate audits and the integrity of auditors. Many Americans have 
become worried that neither internal corporate safeguards nor the 
government's financial oversight mechanisms are functioning properly.
  I share these concerns and I am glad that the Senate is seeking to 
address them. All Americans have a stake in a healthy business climate, 
and we know that health depends on having an ethical business climate. 
While the past two decades have unleashed a tidal wave of 
entrepreneurship and successful business growth, we have also 
witnessed, most notably throughout the late 1990's, an ``anything 
goes'' relativism that has increasingly penetrated our corporate 
business and political culture.
  We've always taught our children a moral principle well expressed by 
Macauley: that ``The measure of a man's real character is what he would 
do if he knew he would never be found out.'' We do so because, as 
parents, we know that we cannot supervise our children forever. When 
they face, as they inevitably will, a choice between the easy road of 
cheating or the tough road of following the rules, we want them to 
choose right, not wrong.
  Sadly, this lesson seems to have been forgotten lately. In the haze 
of morally gray areas, corporate executives have come right up against 
the limits of

[[Page 12680]]

what is acceptable behavior, and in several cases, have gone beyond it. 
What's worse, these companies' boards of directors have stood by in the 
face of wrongdoing, either unable to discover it or unwilling to rouse 
themselves to take corrective action.
  I am very troubled by the inability of the markets to see through the 
phony numbers being generated by these enterprises. As a result, 
average investors no longer enjoy the protections put in place to 
ensure accountability and transparency. I agree with President Bush, 
who said that ``to properly inform shareholders and the investing 
public we must adopt better standards of disclosure and accounting 
practices for all of corporate America.''
  Yesterday, President Bush outlined an aggressive plan to rejuvenate 
the mechanisms that ensure corporate responsibility. This plan will 
expose and punish acts of corruption, make corporate accounting 
standards more transparent, and protect small investors and pension 
holders. The President has urged Congress to adopt tough new criminal 
penalties and enforcement provisions in order to punish those who 
refuse to play by the rules and who choose to undermine the integrity 
of our financial markets.
  The House of Representatives have already passed legislation 
addressing this slippage in corporate responsibility, while also 
permitting enough legal and regulatory flexibility to tackle future 
problems. Rather than seeking to provide a statutory answer for every 
current deficiency and every recent transgression, the House bill 
recognizes that this is a job for experts and gives the Securities and 
Exchange Commission the authority necessary to prevent future abuses.
  By attempting to legislate detailed accounting standards, the bill 
before us puts Congress in the position of micro-managing details that 
we know less about than SEC experts. So, the legislation before the 
Senate represents a less workable approach than the President's 
proposal. Although I support its goals, particularly the need to 
improve the quality of independent audits and financial reporting and 
ensure meaningful accountability by executives of public companies, 
this bill has other specific problems.
  For example, the Public Company Accounting Oversight Board, which 
would be created by the bill, would be allowed to begin proceedings 
against accounting firms without affording them the same due-process 
protections they would have in court. Their livelihood could be at 
stake. Certainly, bad actors should be held accountable for wrongdoing. 
But our system of justice has always had safeguards to protect the 
innocent; checks need to be in placed to prevent the wielding of 
unbridled government power.
  The bill would make accountants liable for not reporting ``any 
material noncompliance'' with the law that auditors ``should know'' 
about. What does that mean? That standard is so vague that it is 
certain to invite a flood of litigation. Unfortunately, we have had 
some experience with frivolous lawsuits trumped up by trial lawyers 
over alleged securities violations.
  Section 105 of the bill establishes liability for any ``failure to 
supervise,'' another vague standard that is likely to invite 
litigation.
  Again, let me say that bad actors must be held accountable for 
wrongdoing. But as we attempt to root out and punish the wrongdoers, we 
must be mindful of the impact legislation will have on the greater 
number of people who are acting in good faith. Setting up a system that 
is too costly to comply with, or one that even good people find too 
onerous to comply with, will ultimately harm the very people we are 
trying to protect--employees, retirees, and others who have invested in 
American corporations. If the liability potential is too great, it will 
be hard for many businesses to obtain accounting services at a 
reasonable cost.
  Fortunately, we can still improve the bill in conference, before we 
send it to the President and he must decide whether to sign it.
  And while we're at it, the Senate would be wise to look at its own 
financial practices. We, too, are accountable to the American people. 
The Budget Enforcement Act of 1974 requires Congress to approve a 
budget resolution on how much the government can spend each fiscal 
year. Yet, this year, the Majority has refused to bring a budget to the 
Senate floor. This is unprecedented and unacceptable. The majority is 
abrogating its duty to the Senate and the American people. Its stubborn 
refusal to do what is right, while the whole country watches, is 
indefensible. Its eagerness to hammer away at what are admittedly acts 
of wrongdoing in American business, while gliding over its own 
dereliction of duty in the same general area--is breathtakingly 
hypocritical.
  So while we work to pass these important reforms, we must remember 
that, like the CEOs of public companies, we, too, have an ethical duty 
to protect and use wisely other people's money. I would remind my 
colleagues that it is thoroughly disingenuous to rise today to demand 
clean accounting practices by the private sector, while failing to 
ensure even basic general accounting standards for the federal 
government.
  In closing, consider the thoughts of George Will on capitalism and 
ethics. Mr. Will wrote that a properly functioning free-market system 
is ``a complex creation of laws and mores that guarantee, among much 
else, transparency, meaning a sufficient stream, a torrent, really, of 
reliable information about the condition and conduct of corporations. 
By casting a cool eye on Enron's debris and those who made it, 
government can strengthen an economic system that depends on it.''
  I am confident that, despite these recent abuses of the public's 
trust, our economy and our system remain fundamentally sound and 
strong. The vast majority of businesspeople respect legal norms and 
live by them. We will make our free enterprise system better for them, 
and for all Americans, by penalizing those who did wrong and repairing 
creaky enforcement mechanisms. The President has acted. The House has 
acted. Now it is time for the Senate to act, to return trust, 
accountability and transparency to our financial institutions.
  The PRESIDING OFFICER (Ms. Cantwell). The Senator from Nevada.

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