WASHINGTON, D.C. — Voting 97 to 0, the Senate yesterday approved legislation to tighten regulation of corporate auditors and make executives more accountable for their conduct.
Against a backdrop of accounting abuses, plunging stock prices and public outrage, lawmakers said they were trying to repair investors’ battered trust and prevent further damage to the economy.
The unanimous vote was extraordinary for a major bill in a chamber that is split almost evenly between Democrats and Republicans. But with boardroom scandals looming over the fall congressional campaign, several efforts to strengthen the bill during a week of debate passed without opposition, and in the end even senators who had objections to the bill voted for it.
“Today the Senate took a major step forward — an essential step — toward restoring confidence in our capital markets,” said Banking Committee Chairman Paul S. Sarbanes (D-Md.), who shepherded the bill.
The legislation now goes to a House-Senate conference, where negotiators for the two chambers will try to resolve differences between the Senate bill and a much narrower and less restrictive measure approved by the House in April.
Business lobbyists and lawmakers opposed to aspects of the bill have been saying they want to undo some of the Senate’s work in conference.
But Senate Minority Leader Trent Lott (R-Miss.) predicted that the House “will move toward the Senate bill” and said he suspected the result “will be pretty close to what the Senate has passed.”
Democratic leaders called on the House to adopt the Senate bill and dispense with the need for a conference.
President Bush issued a statement saying, “I am pleased the Senate has now acted on a tough bill that shares my goals and includes all of the accounting and criminal reforms I proposed.” He urged congressional leaders to get a bill to his desk before Congress leaves for its August recess.
Conferences often take place partly or entirely out of public view. Sarbanes said he wants this conference to be open.
House Republican leaders may be ready to begin conference negotiations by the end of the week, their aides said yesterday.
“We’re ready to go,” said Peggy Peterson, spokeswoman for House Financial Services Committee Chairman Michael G. Oxley (R-Ohio), who has said he does not see insurmountable differences between the House and Senate versions of the legislation.
John Feehery, spokesman for House Speaker J. Dennis Hastert (R-Ill.), said the House will probably name its conferees today. A conference could be held as early as next Monday, he added.
The crisis in corporate accounting has been growing for years, but it took the sudden collapse of Enron Corp. last year to focus Congress’s attention on the problem. More recent revelations of alleged accounting fraud, insider dealing or other questionable conduct at companies such as WorldCom Inc., Xerox Corp., Adelphia Communications Corp., Tyco International Ltd., ImClone Systems Inc., Merck & Co. and Bristol Myers-Squibb Co. helped propel through the Senate over the past week legislation that once seemed doomed.
The Senate refrained from addressing whether executive stock options should be counted as an expense on a company’s financial reports. Lawmakers blocked a proposed amendment on the topic yesterday for the third time in a week. Some analysts and politicians say the option grants contribute to accounting abuses by creating powerful incentives for executives to artificially inflate stock prices.
Just before passing the bill yesterday evening, the Senate unanimously added two amendments. One would require companies to electronically disclose insider stock sales within two days. The other would require the Securities and Exchange Commission to issue rules of professional conduct for corporate lawyers. Lawyers who learn about illegal company activity would have to report the violations to top corporate executives and, if they fail to respond, to the company’s board of directors or its audit committee.
Three Republican senators did not vote: Jesse Helms of North Carolina, and Larry E. Craig and Michael D. Crapo, both from Idaho.
The overall bill applies to companies registered with the SEC — generally those whose shares are traded on the stock markets — and their auditors.
The Senate bill would create an oversight board for auditors with power to set auditing rules, inspect accounting firms and discipline wrongdoers. The board would supplant the accounting industry’s system of self-regulation, under which no major accounting firm has ever failed a routine inspection and many violations have gone unpunished.
Addressing concern that accounting firms have acquiesced in corporate fraud and become beholden to the companies they audit, the Senate bill would restrict auditors from doubling as consultants to the same companies.
The Senate bill would give federal prosecutors new weapons to combat securities fraud and would increase prison terms for criminal wrongdoing. The House bill is generally silent on those issues.
Some investor advocates have said the Senate bill is much stronger than the version passed by the House but may not solve the problems it was intended to fix.
“I think there is still a very real risk . . . that this board the Senate bill creates will become a puppet of the industry it is supposed to regulate,” said Barbara Roper of the Consumer Federation of America. “In the House bill, it’s guaranteed.”
The National Association of Manufacturers said the Senate went too far.
The bill “is too heavy on detailed mandates and does not allow enough flexibility to deal with changing conditions inherently faced when running a major corporation,” NAM President Jerry Jasinowski said, adding that “new, ill-defined personal liabilities” for executives “could make it much harder for companies to attract strong executive leadership.”
Ann Yerger of the Council of Institutional Investors said the bill “will result in more objective audits and stronger discipline when audits fail.”
Sen. Jon S. Corzine, (D-N.J.), a former co-chairman of the investment bank Goldman Sachs, said the bill was “probably the most important piece of legislation for the financial markets since the original securities act” became law during the administration of Franklin D. Roosevelt.
Under the bill, auditors would be prohibited from providing non-audit services to companies they audit unless they got special waivers — from the oversight board in some cases and from the audit committee of a corporate board in other instances.
The House bill would ban only two types of consulting services by external auditors, both of which some major accounting firms have expressed a willingness to give up: internal auditing and the design or implementation of systems companies use to track their finances.
The House bill would allow the SEC to recognize the authority of one or more auditor oversight boards. It doesn’t say who would create those boards.
But nothing in the bill would prohibit members of the accounting industry or corporations from taking the initiative. The bill would largely leave it to the SEC to decide what criteria the boards had to meet.
Under the House bill, four of the five members of an oversight board could have accounting backgrounds. Under the Senate bill, only two of the five members could be accountants.
The SEC has ordered the top executives of 945 big companies to attest to the truthfulness of their recent financial statements in the coming weeks, and that could prompt them to air any undisclosed accounting problems.
The Senate bill would require CEOs and chief financial officers to routinely certify future financial statements.
The Senate bill would prohibit companies from making the type of loans to officers and directors that President Bush now condemns but once received as a director of Harken Energy Corp.
In some respects, the oversight system proposed by the Senate would be less open than the current system. Problems uncovered during routine inspections could remain undisclosed for at least a year, and, unlike current SEC professional misconduct cases, disciplinary actions could remain undisclosed pending appeal.
Under the Senate bill, auditors would continue to be paid by the companies they are responsible for auditing, but they would no longer answer to the executives whose work they must scrutinize. Instead, committees of outside directors would choose them and set their compensation.
Stock options were a major topic of the debate in the final afternoon of action on the bill. Sen. Carl M. Levin (D-Mich.) described stock options as “stealth compensation” that serves as a “driving force behind the deceptive accounting practices that have bedeviled this nation.”
Levin proposed that the Financial Accounting Standards Board, an industry group that writes accounting rules, be directed to study how to properly account for stock options and act on its findings within a year.
But Sen. Phil Gramm (R-Tex.) objected to Levin’s proposal, saying it was akin to ordering “a fair trial and then a hanging,” meaning that it was aimed at requiring companies to record stock options as expenses. He said it should be considered at another time in connection with other proposals dealing with stock options. Under rules in effect as the debate ended, a single senator could block a vote on any amendment, and Gramm’s objection effectively killed Levin’s proposal.
Senate Majority Leader Thomas A. Daschle (D-S.D.) said he intended to get a vote on Levin’s proposal at some point this year. “Today or tomorrow or next week . . . we’re going to have a vote on this amendment,” he said.
Republicans objected to other proposals, including one from Sen. Byron L. Dorgan (D-N.D.) that would have forced corporate executives and directors to give back bonuses, stock options and other incentive pay granted within one year of a company’s bankruptcy.
In the end, even Gramm, the ranking Republican on the Banking Committee, who had opposed the overall bill in committee, voted in favor of the final version, predicting it would improve in conference.