WASHINGTON (HedgeWorld.com)--Both houses of Congress overwhelmingly passed an act to change the way financial accounting and auditing work in the United States.
The House acted first, July 25, approving the result of this week's conference committee. The Senate first appeared ready to defer action until next week, then changed its institutional mind and passed the bill immediately. President George Bush has promised to sign it.
The resulting bill creates an oversight board for the accounting industry; establishes auditor independence standards in order to avoid auditor/consultant conflicts of interest; requires that a corporation's chief executive certify the accuracy of its financial statements; offers corporate whistleblowers enhanced protection against retaliation; gives the new oversight board, as well as the Financial Accounting Standards Board, a key role in setting the fees by which each will be supported (in the expectation that this will enhance their independence); makes civil penalties exacted by the Securities and Exchange Commission available to the victims of securities fraud; requires more rapid disclosure of key financial information; and orders the SEC to study how best to separate stock analyst research from compensation.
The new Public Company Accounting Oversight Board will have five members, each of whom will have a five year term, except for the initial members, whose terms will vary in length so that terms will subsequently be staggered.
The House vote was 423 to 3. The three dissenters were Reps. Michael Collins (R-Ga.), Jeff Flake (R-Ariz.) and Ron Paul (R-Texas).
The Senate's vote was even more lopsided, 99 to 0. Senator Jesse Helms (R-N.C.) did not vote, due to his failing health. Although Sen. Phil Gramm (R-Texas), ranking member of the Senate Banking Committee, earlier indicated he would vote against this bill, he changed his mind and supported it, making the observation that in the present scandal-influenced environment a far worse bill might have passed, and this one will on the whole improve matters more than make them worse.
Addressing in particular Senator Paul Sarbanes (D-Md.) and Rep. Michael Oxley (R-Ohio), the co-chairs of the conference committee that compiled the final draft, Sen. Gramm said, "I believe that you have put together a bill that will do more good than harm, but I do not believe that the bill does as much good as it could do. I think it will do more harm than it should because it doesn't address the practical problems of making this new law work, not just for the Dow Jones Industrial Average companies, not just for the S&P 500, but for the 16,254 companies that will be governed by this law. I am afraid that we have written a one-size-fits-all prescription when that one size clearly does not fit all."
Despite much earlier discussion, the bill as it awaits Mr. Bush's signature includes no provision relating to the issue of the expensing of stock options. A spokeswoman for Rep. John J. LaFalce (D-N.Y.) denied Thursday that he had abandoned that issue. The congressman, who has been very influential in the drafting process, "hopes Congress can take another shot at it and also, I think, suggested that perhaps even a legislative mandate isn't necessary (for instance on shareholder approval)," said aide Amy Simmons.
In another move related to the creation of the new oversight board, which will work under the supervision of the SEC, the Senate Thursday evening unanimously confirmed four nominees to the SEC: Paul S. Atkins, Roel C. Campos, Cynthia A. Glassman and Harvey J. Goldschmid. Until then, the chairman, Harvey Pitt, was the only sitting commissioner to have received confirmation. Two others, Republican Glassman and outgoing Democrat Isaac Hunt, had received recess appointments in January.
The nomination of Mr. Campos, a Texas broadcasting entrepreneur, had generated more controversy than the others.
Chairman Pitt said that he welcomes this new legislation. "It is deeply gratifying to see members of both parties, under the leadership of Chairman Sarbanes and Chairman Oxley, working together to reach consensus to enact reforms designed to restore integrity to the nation's financial markets and to serve the interests of U.S. investors."