[Congressional Record Volume 148, Number 103 (Thursday, July 25, 2002)]
[Senate]
[Pages S7350-S7365]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
SARBANES-OXLEY ACT OF 2002--CONFERENCE REPORT
The PRESIDING OFFICER. Under the previous order, the Senate will
proceed to the consideration of the conference report to acompany H.R.
3763, which the clerk will report.
The legislative clerk read as follows:
The committee of conference on the disagreeing votes of the
two Houses on the amendment of the Senate to the bill (H.R.
3763), to protect investors by improving the accuracy and
reliability of corporate disclosures made pursuant to the
securities laws, and for other purposes, having met, have
agreed that the House recede from its disagreement to the
amendment of the Senate, and agree to the same with an
amendment, and the Senate agree to the same, signed by a
majority of the conferees on the part of both Houses.
The PRESIDING OFFICER. The Senate will proceed to the consideration
of the conference report.
(The report is printed in the House proceedings of the Record of July
24, 2002.)
The PRESIDING OFFICER. The Senator from Nevada is recognized.
Mr. REID. Madam President, I suggest the absence of a quorum and ask
that the time not be charged against either manager.
The PRESIDING OFFICER. Without objection, it is so ordered. The clerk
will call the roll.
The legislative clerk proceeded to call the roll.
Mr. SARBANES. Madam President, I ask unanimous consent that the order
for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. SARBANES. Madam President, parliamentary inquiry of the Chair:
What is pending before the Senate?
The PRESIDING OFFICER. The debate on the conference report is limited
to 2 hours equally divided.
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Mr. SARBANES. So there is 1 hour on each side.
The PRESIDING OFFICER. The Senator is correct.
Mr. SARBANES. Madam President, I yield myself 10 minutes.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. SARBANES. Madam President, I am very pleased that we are now
considering the conference report on the Public Company Accounting
Reform and Investor Protection Act of 2002. The Senate approved this
legislation on July 15 on a 97-0 vote. Conferees were named promptly
both here and in the House, and the conference committee immediately
went to work.
Agreement was reached yesterday in the early evening, about 7
o'clock, by the conference committee, and the House took up the
conference report this morning and acted on it earlier in the day. The
vote, I believe, was 422--3.
The conference report has now come over to us, and obviously, under
our procedures, it is our turn to proceed to consider it.
This legislation establishes a carefully constructed statutory
framework to deal with the numerous conflicts of interest that in
recent years have undermined the integrity of our capital markets and
betrayed the trust of millions of investors.
I say to my colleagues that in every one of its central provisions,
the conference report closely tracks or parallels the provisions in the
Senate bill for which, as I indicated earlier, all the Members present
at the time, 97 of us, voted only a short time ago.
This legislation establishes a strong independent accounting
oversight board, thereby bringing to an end the system of self-
regulation in the accounting profession which, regrettably, has not
only failed to protect investors, as we have seen in recent months, but
which has in effect abused the confidence in the markets, whose
integrity investors have taken almost as an article of faith.
This legislation reflects the extraordinary efforts of
many colleagues on both sides of the Capitol. I want especially to
recognize and express my deep gratitude to Senators Dodd and Corzine
who early on introduced legislation that in many respects serves as the
basis for titles 1 and 2 of this legislation.
On the House side, Congressman LaFalce introduced comprehensive
legislation on which we drew.
I also wish to acknowledge the many important contributions that my
Republican colleague, Senator Enzi, made at every step in the process.
Senator Enzi had legislation of his own, but in addition we worked very
closely in the course of developing this legislation. Again and again I
was struck by the thoughtfulness and reasonableness of his proposals
for improving in the legislation. While in the end not all of them were
included in the legislation, a significant number are, and I thank him
very much for all his contributions.
Before addressing the major provisions of the legislation, let me
make very clear that it applies exclusively to public companies--that
is, to companies registered with the Securities and Exchange
Commission. It is not applicable to provide companies, who make up the
vast majority of companies across the country.
This legislation prohibits accounting firms from providing certain
specified consulting services if they are also the auditors of the
company. In our considered judgment, there are certain consulting
services which inherently carry with them significant conflicts of
interest. Auditors, in effect, find themselves in the position of
auditing their own work. They may be acting as management of the
company, for instance, on personnel matters when, as the outside
auditor, they were supposed to be standing one step removed from the
company as the outside auditor. This is the reasoning behind the
prohibition.
What has happened in recent years is that the fees earned from the
consulting work have dwarfed the fees earned from the auditors, which
inevitably leads to concerns that punches may be pulled on the audit to
accommodate the significant and remunerative involvement on the
consulting side. Certain enumerated consulting practices are therefore
not allowed, with the exception that a case-by-case exemption can be
obtained from the oversight board that this legislation establishes.
The auditor can engage in the balance of consulting services with the
pre-approval of the audit committee of the corporation. And of course
an auditor can engage in whatever consulting services the firm and the
corporation agree upon so long as the firm is not also acting as the
corporation's auditor.
The bill sets significantly higher standards for corporate
responsibility governance. It requires public companies to have
independent audit committees and also enhances the role of the audit
committee, which will have responsibility for hiring and firing the
auditors and setting their compensation.
The legislation requires full and prompt disclosure of stock sales by
company executives. Senator Carnahan added an important provision to
the bill, requiring electronic filing with respect to such sales. That
requirement would take effect in a year's time, to allow time for the
necessary systems to be put in place; once in place it will assure
prompt and accurate disclosure of these very significant transactions.
The legislation places limits on loans by corporations to their
executive officers. It sets certain requirements for disclosure with
respect to special purpose entities, which were used by some
corporations that have run into such serious difficulty in recent
months. It seeks to address the statement of pro forma earnings, in
order to assure a more complete and accurate picture of a public
company's financial position.
It also addresses the conflicts of interests that arise for stock
analysts to whom investors look for impartial research-based advice
about stocks. Unfortunately, many of these analysts are under pressure
to promote stocks in which their broker-dealer firms may have an
investment banking interest; on the one hand they are supposed to give
unbiased advice to potential purchasers of stock, whether to buy or
sell, but at the same time the firm of which they are a part is
interested in developing a business relationship with the company on
which the analyst is passing judgment. It has been sobering to discover
that analysts have been formally recommending certain stocks to the
investing public, while at the same time discussing them contemptuously
among themselves. We have had too many demonstrations of this
occurring.
The legislation includes provisions to protect analysts against
retaliation, in cases where a negative recommendation may invite
retaliation. Furthermore, the bill authorizes significant increases in
funding for the Securities and Exchange Commission, which for the first
time in many years will give it something close to the funding
resources it needs.
There are also extensive criminal penalties contained in this
legislation. These were initially included in legislation reported by
the Judiciary Committee, which Senator Leahy offered as an amendment to
the bill. The House then passed its own bill with respect to criminal
penalties, a separate standing bill, which in many instances doubled or
even tripled the penalties in the Leahy proposal as it came to the
floor, and the Leahy proposals were further supplemented by an
amendment from Senators Biden and Hatch and another from Senator Lott.
The PRESIDING OFFICER. The Senator has consumed 10 minutes.
Mr. SARBANES. I yield myself 4 additional minutes.
The PRESIDING OFFICER. The Senator has that right.
Mr. SARBANES. These provisions, among other things, require the CEOs
and CFOs to certify their company's financial statements under penalty
of potentially severe punishments.
We provide a $776 million authorization for the SEC. I want to spend
a minute on this point, because it is very important. The Senate
Appropriations Committee is now working on an appropriation that would
contain $750 million for the SEC. It is urgent that we provide adequate
funding for the Commission, whose responsibilities have expanded as the
volume of market activity has grown, but whose funding has lagged.
Clearly, the Commission must have the resources necessary to ensure a
decisive and expeditious response to the scandals we have seen in
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recent months, and to minimize the likelihood that we will see others
in the future.
I must underscore this point. The Commission has been underfunded,
and the result has been understaffing, high staff turnover and low
morale as the Commission seeks to carry out its work. The SEC must be
in a position to address immediately the problems of inadequate staff
resources and inadequate pay.
At the moment, the SEC cannot offer its attorneys and accountants the
same level of salary and benefits that their counterparts receive at
the five Federal bank regulatory agencies. Talented and dedicated staff
attorneys and accountants can increase their compensation by as much as
one-third simply by moving to another agency. This is an intolerable
situation. Pay parity has been authorized and now must be funded; this
legislation specifically provide the necessary funding.
In addition, the authorization provides funding that will enable the
Commission to upgrade its technical capacities, its computer systems,
and it provides significant resources so that the Commission can
augment its staff of attorneys, accountants and examiners at a time
when they are needed to address a very heavy workload burden.
As an aside, I mention that this morning the committee reported to
the Senate four nominees to bring the Securities and Exchange
Commission to its full complement of five members. I very much hope we
will be able to approve them next week so that they will be able to
take their positions before the August recess. If we do, the Commission
will be at full strength. They will all be in place and ready to do the
job, and I think that is highly desirable.
In closing, let me say that I believe this conference report reflects
our best efforts to deal with issues which we know to be numerous and
complex. Throughout the process, we have worked together carefully on
these issues. We have sought advice from the most distinguished and
experienced practitioners in the field. We held 10 hearings in March
with some of the very best experts in the country as our witnesses. We
have consulted extensively, and I hope my colleagues will agree in good
faith and across party lines. Our vision has been broad, our purpose
steady. I think our approach has been reasonable.
We will send to the President legislation establishing a solid
statutory framework for the reforms we know are urgently needed.
Our markets have benefited beyond measure from the statutory
framework that created the SEC nearly 70 years ago. Indeed, I think we
have had a tendency to take that for granted. Those markets have been a
very significant economic asset for the United States, and an integral
part of our economic strength. This legislation will serve to
complement and reinforce that framework, which has served us well, and
I believe it will stand the test of time.
Our markets, which have the reputation of being the fairest, the most
efficient, the most transparent in the world, have suffered greatly in
recent times, so much so that they seem to have lost the confidence of
our investors. It is our purpose, with this legislation and through
other actions that will have to be taken by the regulatory agencies and
by the private sector, to see that once again our capital markets
deserve the enviable reputation for fairness, efficiency, and
transparency that they have enjoyed through the years.
I yield the floor.
The PRESIDING OFFICER. The Senator from Texas.
Mr. GRAMM. Madam President, I yield myself such time as I may
consume.
I want to begin with some thank-yous and congratulations. First, I
want to congratulate Senator Sarbanes on this bill, and I want to make
note that in a very difficult period, where so many were trying to
point the finger of blame, when it seemed almost every day that people
were clamoring to make the strongest statement they could make to get
the sound bite on television, Senator Sarbanes could have taken that
same route in the Banking Committee. We are the committee that has
jurisdiction over the issues that had been at the very heart of our
recent concerns in the capital markets.
However, Senator Sarbanes did not take that route. I congratulate
him. He not only brought good reflection on himself, but he helped
raise the esteem that the Banking Committee is held in and reflected
well on the Senate. We had hearings but we were focusing on what could
be done to fix the problem. As a result, those hearings were the most
productive that were held. They contributed to bringing us to where we
are.
Now let me make it clear, from the very beginning there has been a
broad consensus, and a very deep consensus, on 90 percent of the issues
in this bill. One of my frustrations in this debate--and when you are
debating something as high profile as this is, there are frustrations.
I am not complaining--as my wife says whenever I complain about this
job, not only did nobody force you to take it, but a lot of good people
worked hard to keep you from getting it--I am not complaining, but part
of our problem has been that the media has wanted to present this as a
debate that had to do with how tough people were being, to the
exclusion, often, in my opinion, of how reasonable we need to be.
We have before the Senate a bill that is clearly an improvement over
the status quo. I don't care how disappointed you are in any one
provision--and on several provisions I am very disappointed. No matter
how disappointed a Member is, this is an improvement over the status
quo, and for two reasons. One is obvious. That is, we needed stiffer
criminal penalties. And, second, we needed to create an independently
funded and an independently operating accounting oversight board so
that we could deal with ethics questions in a framework that will
promote high ethical standards, in the framework of independence. In
addition, we desperately needed to have an independently funded FASB.
I would just say as an aside, Madam President, over the years I have
agreed with FASB in some of their decisions; I have disagreed with FASB
on some of their decisions. However, I am proud to be able to say today
I have never taken the position that Congress ought to override FASB.
As incomprehensible as some of their rulings have been to my way of
thinking, having Congress vote on accounting standards is a very
dangerous thing.
Some of our colleagues want to vote on the whole issue of expensing
stock options. Wherever you come down on that issue, having Congress
vote on accounting standards is very dangerous, very counterproductive.
I hope that will not happen. Certainly, I am not going to vote to
impose accounting standards on this board. We want FASB to set
accounting standards. We want to be sure they have the independence
that is necessary to allow them to do it.
In those areas there has never been a disagreement on this bill. The
disagreements that have occurred have had to do with the perception of
individual Members as to what was practical, what was workable, what
was desirable. The one view I have always subscribed to, and I would
have to say given my period of service in public life I am more
convinced of it than ever, is that Thomas Jefferson was right when he
said good men--he would say good people today, of course--good men with
the same information are prone to have different opinions.
There is a natural tendency in the human mind to think, if people
disagree with you, that either, A, they don't know what they are
talking about; or B, they don't have good intentions. I subscribe to
the Jefferson thesis.
The areas where I disagree with the bill are pretty straightforward.
First of all, I believe there is a very real problem in auditor
independence. If I were a member of this new accounting oversight board
that we are going to put into place and I had to vote on the nine
prohibited areas that are written into law in the bill, I would want to
study them in detail. I might very well support all nine of them. I do
not believe they should be written into law.
The advantages of letting the board set these standards--it seems to
me that there are three:
No. 1, the board is going to have more time and more expertise than
we have and is likely to do a better job.
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No. 2, if we make a mistake and we write it into law, it is hard to
fix things that are written into law. As Alan Greenspan has said, if
Glass-Steagall, Depression-era banking legislation, had been a
regulation, it clearly would have been changed by the 1950s. We did not
change it until 1999. It took a long time to change it.
Finally, and probably of greatest importance, there is a natural
tendency when we are talking about the problem in an era where we are
all reading about Enron and WorldCom and the huge companies, to forget
this law will apply to 16,254 companies. Many of these companies are
quite small. One of the advantages of allowing the accounting oversight
board to set out prohibitions on auditors performing other services in
regulation, instead of prescribing them in law, is that the board can
find a system whereby they can recognize what is practical in dealing
with smaller companies and how that might differ from what is practical
for General Motors.
An example that has come to my mind is one where I am operating a
small public company, stock traded on an exchange or on Nasdaq, and I
employ an accounting firm that has a CPA who basically does my
auditing. He is in Houston. I am trying to hire a new bookkeeper in my
company. I have three candidates. When my auditor is in town auditing
my books, I say: I have these three candidates. I majored in physics in
college, and I don't know anything about accounting. Could you
interview these three bookkeepers and tell me who you think would be
best?
Under this bill, that would be illegal. That would be providing a
personnel service. It is prohibited for my auditor to provide that
service for me as well.
For General Motors, should your auditor be providing a personnel
service? My guess is they probably should not. But for this small
company in College Station, Texas, what this prohibition ultimately
will do is force them to do one of three things: In all probability,
they will hire the bookkeeper without ever getting the advice of a CPA;
No. 2, they can hire another CPA to interview these three candidates
for a bookkeeper and pay them; No. 3, they can file for a waiver
through the SEC and through the board. Each option is a worse choice
from those available to such a small company today, and a worse choice
for its shareholders.
The bill allows a waiver on an individual company by company basis. I
rejoice that is the case. I personally believe we should have given the
board, with the agreement of the SEC, the ability to grant blanket
waivers based on the circumstances of classes of individual companies.
For example, if you have already granted 1,000 waivers where
companies have applied for a waiver for a certain requirement based on
their size, their location, practicality, the cost, whatever, at that
point shouldn't the board be able to say: We have established this
principle, and if your company meets these conditions, you are granted
the waiver? Then, all they have to do is prove they meet the
conditions.
My concern--and who knows, maybe this will be true, maybe it will
not. The problem is we are legislating. We don't know. We can't look
into the future. My concern is that by not granting them the ability to
provide blanket waivers we are going to force a lot of smaller
companies to hire lawyers and lobbyists to come to Washington to
petition the SEC and the board. My concern is that this is going to use
up their time and use up the resources of companies.
There is another side of this story and that is the concern that
blanket waivers could be used to get around the intent of the law. How
do you deal with that? How do you find a happy balance? It is not an
easy question. I would have to say I believe we have imposed a one-
size-fits-all regimentation that is going to be difficult to deal
with--not impossible to deal with, but I think it is going to be
difficult.
Another problem I have is that we have in this bill an accounting
oversight board. Its members are not elected officials. They are not
appointed in the sense that they are not Government officials. They
will have the ability to make decisions that will affect the livelihood
of Americans who are in the accounting profession. They will literally
have the ability to say to a CPA: We are taking your license away and
you can never practice again in providing accounting services to a
publicly traded company.
Clearly, there are cases where that is justified. Clearly, there are
cases where people ought to be fined and, clearly, there are cases
where people ought to be put in prison. But I think when you are taking
people's livelihoods, they ought to have an opportunity to appeal to
the Federal district court where they live.
I think there ought to be a burden on them to make their case, and
obviously the court is going to take into account that this board, that
was duly constituted, made a decision. But I think that is an
opportunity that people ought to have that they do not have under this
bill.
I am also concerned about litigation. During the whole Clinton
administration, there was only one bill where we overrode the
President's veto, and that was a bill having to do with private
securities litigation reform. We had a massive number of predatory
strike suits where people filed lawsuits against companies. They almost
always settled out of court. We had one law firm that filed the lion's
share of the lawsuits. And the chief lawyer in that company said, in
effect, ``It is wonderful to practice law where you don't have
clients.''
That was a mistake when he said that, but he said it.
We took action to try to eliminate or minimize this abuse. In doing
so, we codified a 1991 Supreme Court decision that addressed what
happens if you think you have been wronged. We are not talking about
criminal activity. We are not talking about SEC enforcement. We are not
talking about the Justice Department. We are talking about civil
disputes that people have. Under that law, in codifying what the 1991
Supreme Court decision said, we said that within a year after you
believe you have been wronged, you have to file your lawsuit, and
within 3 years after the event happens, you have to file your lawsuit.
One of the things this bill does, which I oppose, is it raises that
to 2 years and 5 years, respectively. I would say that if there were
evidence that people were not getting these lawsuits filed because of a
lack of time, that under the circumstances I think that increasing the
statute of limitations would have been justified. But as we have looked
at the data, the mean average lawsuit is filed 11 days after the injury
is discovered. Something like 90 percent of the lawsuits are filed in
the first 6 months. It seems to me that this provision and other
provisions of the bill that expand the ability of people to sue may
have a positive effect in making people pay attention to their
business, but we all know, based on our legal system, that it is going
to be abused and that very heavy costs are going to be imposed on the
private sector of the economy as litigation costs ultimately are added
to the cost of the product that is produced and reduced from the stock
value held by shareholders.
I could go on and on. There are other people who want to speak. We
are under a time limit. But let me sum up.
I thought about this long and hard, and as I thought about this bill,
I had to weigh, Does it do more good than harm? I have concluded that
it does. It does less good than it could have done; it does more harm
than it should have done--we could have corrected these things--but,
quite frankly, in the environment we were in it was impossible. In the
environment we were in, where everything was judged on some concept of
being tough rather than on practicality and workability, it was
impossible for us to come back and deal with these problems.
Finally, in the timeframe that we all faced in conference, we never
really got around to discussing the practical kinds of things that do
not seem important when you are writing law but seem very important 2
or 5 years later when you are implementing it.
Having said all that, I cannot stand up here and argue that this bill
has worsened the status quo. This bill is better than the status quo
for two reasons. No. 1, change needs to be made and criminal penalties
need to be raised. These independent boards need to be established, and
90 percent of this bill, in my opinion, clearly represents a step in
the right direction.
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But, second--and this may sound like strange logic but I think it is
important. I think to understand American government you have to
understand it. The American people expect Congress to respond to a
problem. We may not know the answer. We may not have perfect knowledge.
But they expect us to try to do something about it. That in and of
itself is an argument to which we should respond.
I would argue--being a conservative, as everyone engaged in this
debate knows--I would argue we need to be careful. But in the end this
bill is an improvement on the status quo. It could have been better.
There are changes that could have been made that were not. But in the
end, I cannot argue that this bill should not pass, should not become
law. The President is going to sign the bill, and clearly he should.
I do believe we will have to come back after the fact and we will
have to correct some of these issues. I think as time goes on we will
see we may not have done enough in one area. Maybe we went overboard in
another area. But the Congress will meet again, people will be paid to
do this work, and I am confident that it will be done.
So let me conclude on this thought. I believe the marketplace has
gone a long way toward solving this problem. I think the New York Stock
Exchange action was excellent. Once again, they are proving that they
are a great institution. As I have often said about the New York Stock
Exchange, I feel as if I am standing on holy ground at the New York
Stock Exchange.
Every boardroom is different from what it was before this crisis
started. No one sitting on a board, corporate board or an audit
committee, will ever be the same. No auditors will ever look at their
task the way they did before all of this started, at least for a very
long time. or at least for a very long time.
One of the advantages of having structure is when they forget, the
structure won't forget. I totally agree with that. I think this
represents a complement to it.
There is much in here I would have done differently. But in the end,
I think this is a response that people can say the Government did hear,
the Government did care, and Congress did try to fix it. I don't doubt
that there are mistakes in here. I think I could name some, if asked
to. But, on the whole, this is a response that was aimed at the
problem. People went about it in a reasonable manner.
Certainly, the authors of this bill intended to do as good a job as
they could do.
I again want to congratulate Senator Sarbanes. I also want to thank
him, looking back now at how quickly the conference went. I know people
were unhappy when we had this period when the floor was tied up, and
there were numerous amendments people wanted to add to the bill. But I
think, given how the whole thing played out, it worked out from that
point of view pretty much right.
If people on Wall Street are listening to the debate and trying to
figure out whether they should be concerned about this bill, I think
they can rightly feel that this bill could have been much worse. I
think if people had wanted to be irresponsible, this is a bill on which
they could have been irresponsible and almost anything would have
passed on the floor of the Senate.
I think given where we are on this bill that it is a testament to the
fact that our system works pretty well.
I yield the floor.
The PRESIDING OFFICER (Mr. Edwards). Who yields time?
Mr. GRAMM. Mr. President, I yield 12 minutes to the Senator from
Wyoming.
The PRESIDING OFFICER. The Senator from Wyoming.
Mr. ENZI. Thank you, Mr. President.
I am here today to speak in support of the conference report to the
accounting reform bill. I will be encouraging all Senators to vote for
the conference report.
This is earthshaking legislation that has been done with tremendous
speed. It had to be earthshaking because we are trying to counteract
the tremors from the volcanic action of the mountaintop being blown off
such companies as Enron, WorldCom, Global Crossing, and others. Those
collapses have set up a series of tremors across this country.
Congress is not the one to solve all the problems. But as Senator
Gramm just mentioned, we are expected to work at solving all of the
problems. We have put in a huge effort on this bill, and it will make a
difference.
While we have been working, the stock market has been going through
some tremendous gyrations. I think some of those reactions in the stock
market were to see how carefully we would consider and resolve this
issue. I believe, the stock market was worried that we would overreact.
The market watched to see if Congress would keep adding and adding
things, until we destroyed the whole system. They can now see that did
not happen--Congress acted responsibly. We took a long and tough look
at the problem and reacted, but we did not overreact. At the same time
corporations across the country have been making sure they did not have
the kinds of problems brought to light in a few of these companies.
``Corporations'' should not be a bad word in this country. This
country was built on business.
I always like to mention that it was primarily built on small
business--small businesses that grew up, in many cases, but
nevertheless ideas that started out as a small business.
We have to keep our focus on those small businesses, and make sure
they are able to continue to operate in the climate that we have in the
United States and under the laws that we pass.
I am pleased to say that the actions we took in this bill provide
some assurance to small businesses and small accounting firms that they
can continue to operate the way they have in the past.
We have given encouragement to the States not to run out and apply
the same types of laws. I hope the States are paying attention because
they will ruin a very good thing if they destroy small business. Keep
the eye on small business, and we will continue to have big business.
Corporations have been checking what has been going on in their firms
to a greater extent than they have ever before. Boards, CEOs, CFOs, and
audit committees have been checking to see if they have the kinds of
problems that brought down these other companies.
It is much like when there is a plane crash. Right after a plane
crash is probably the safest time in the world to fly because everybody
checks their equipment ever so much more carefully to make sure that
the kind of defects that may have caused other problems will not happen
to them. And the effect lasts for a long time afterwards.
Corporations have been checking their books. They have begun changing
procedures. Some of the changes they have made have resulted in
restatements. They have paid a price for doing restatements. But they
have done the right thing by doing a restatement, and they should be
recognized for that. I mentioned speed before. The Senate is not
designed for speed. We started out slow. We held 10 hearings. We looked
at the issues very carefully, everybody resolved in writing their own
ideas.
One of the tough things about legislating is putting it down in
writing. The concepts are so easy, but the details are so tough.
There are a number of people who drafted bills on this--both in the
House and in the Senate. On this side, Senator Gramm and I drafted a
bill. Senator Corzine and Senator Dodd introduced a bill. Of course,
Senator Sarbanes had the overreaching bill, and I believe his benefited
a little bit from having copies of both the House and Senate bills on
which to build his bill. I compliment him for the way he took ideas
from all of these different approaches.
Again, it shows the value of legislating by a wide variety of people.
You get a wide variety of viewpoints, which actually provides some
insights into areas that a person might not have thought about.
But, at any rate, we concluded the hearings, and we merged the bill.
This came to committee the week before the Fourth of July. It passed
out of committee in one day. It came to the floor of this body just 2
weeks ago. And now, it has already been conferenced, and come back to
us for final passage. Part of that is a result of the atmosphere we are
in, and the need for action. Timing can be everything on a bill. But
part of it is because of the concentration of people who worked on
this.
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This legislation is a response to problems highlighted by the recent
corporation failures of Enron, WorldCom, and others. It does send a
clear signal to corporate America that executives can no longer abuse
the trust their shareholders place in them without severe consequences.
This legislation builds a strong and independent board to oversee the
accounting industry. It will eliminate the climate of self-regulation
that has historically guided accounting.
However, I would like to make one point clear. I believe that,
overall, accountants take their responsibilities very seriously. They
did before, and they do now. We have the best system in the world. What
we are doing with this is to maintain that we have the best system in
the world. Most accountants are honest and hard working. They work for
the benefit of the investors with probably the same percentage of
exceptions as other professions.
This legislation will also provide for strong disciplinary action
against executives who break the law. No longer will they be
disciplined with a slap on the wrist. The bill recognizes that
executives who destroy the dreams of investors by irresponsible and
unethical behavior will be given the severe punishment they deserve.
I also want to again thank Senator Sarbanes and Senator Gramm for
their leadership on this issue. They both have worked tirelessly the
past few months to get this bill finished in a timely manner. I
particularly appreciate some of the insights Senator Gramm gave me as
he worked on this bill in more detail than most people ever achieve. It
is his standard, and he carried that out again this time, which did
resolve a number of the problems. I want to congratulate Senator
Sarbanes, and thank him for the way he conducted the hearings. A lot of
people do not realize that the Chairman of a committee usually gets to
pick most of the witnesses, and the ranking member gets to pick a few
of the witnesses.
As we went through these 10 hearings, I couldn't find any witnesses
that I wouldn't have picked were I given the selection. There were some
very qualified people who testified. Some of them were even
accountants. I did appreciate that. I apologize for asking some
questions of them but it was such a great opportunity for me. My staff
noticed that when the camera focused in on the person giving the
answer, the wedge of people behind them were all asleep.
So what we dealt with is not the kind of thing that Americans get
really excited about. It is far too detailed for us to get too excited
about it. For accountants, these kinds of discussions are almost like
watching ESPN.
Senator Sarbanes did continue to meet with me and other Members and
continued to make changes that improved the bill. There was a wide
variety of Senators who worked on this bill. I have mentioned Senators
Dodd and Corzine and Gramm. Senator Edwards worked with me on one
provision that is in this bill to make sure that not only accountants,
analysts, CEOs, CFOs, Boards and audit committees were addressed under
this bill, but lawyers have some responsibility, too.
I find it very exciting we are going to make lawyers have a code of
ethics when they are dealing with the Securities and Exchange
Commission, and that they are going to have an obligation to report
things when they find them. I know that causes some consternation among
some attorneys, but I think it will make, overall, the same kind of
improvements we are expecting from everybody else.
Senators Allen, Gregg, Baucus, Grassley, and Kennedy all worked on
some provisions that we don't talk about too much; again, it is in the
detail area, but it has to do with the blackout period when you are
dealing with pension and other stock sales by executives. I know the
intense hours it took to come up with a solution that would work. And
if you have that many people agreeing on it, there is probably a good
chance it will work.
Again, I congratulate all those people for their constraint in
limiting their ideas to what needed to be done for this bill. A lot of
ideas were floating around here on lots of things we can with
corporations and executives that people want to have fixed, but this
bill did maintain some real constraint to stay on topic.
I do believe the conference report is an improved bill from the one
that passed the Senate. Again, I appreciate Senator Sarbanes working
with me to make some of the changes about which I spoke.
One change we made changes the implication that not all nonaudited
services should be presumed illegal. The bill has been changed to
clearly allow the audit committee to make that determination without
the law implying that it is illegal.
In addition, he made some changes dealing with the testing of
internal compliance. I believe the new language more clearly represents
the true role of auditors. One of the problems we dealt with throughout
this process is educating Members on exactly what the role of an
auditor is. I believe the new language represents that realization, and
I thank the chairman for making the change.
There is another important change in the provision dealing with
corporate loans. The provision would still prohibit corporate
executives from reaping millions of dollars in loans from their
companies, but the new language also realizes that executives need to
use things such as credit cards to conduct their business. So this
section is a vast improvement.
Another item I would like to comment on is the understanding that
insurance companies, many times, have audits they must file with their
State regulators. It would be burdensome and expensive to require these
companies to hire a separate auditing firm to perform this
responsibility. That problem was also recognized, and the needed
changes were made.
However, I also understand that due to the time constraints, a report
will not be filed with the bill. I think this will pose a series of
problems because we will not be defining what the authors actually
intended with certain sections of the bill and allowing the same
written discourse that there would be on the bill. I think this may
especially cause problems with the extraordinary number of regulations
that are going to have to be written to implement the bill.
As the ranking member of the subcommittee with jurisdiction over the
Securities and Exchange Commission, I do intend to work closely with
the Commission to ensure that the new regulations are consistent with
what I see as congressional intent. I will work with others to make
sure these regulations conform.
I ask the ranking member, could I have an additional 3 minutes?
Mr. GRAMM. Sure.
Mr. President, I yield an additional 3 minutes to the Senator from
Wyoming.
The PRESIDING OFFICER. The Senator from Wyoming.
Mr. ENZI. I thank the Senator.
Mr. President, some of the issues that did not come up in this bill
dealt with FASB. We did something marvelous for FASB. We made sure of
its independence. One way we made sure of its independence, besides
citing in the law, was to make sure FASB has independent funding. They
will not have to come to Congress with a budget. And they will not have
to go to corporate America for funding. They will get independent
funding to be able to do the job they need to do. That will inhibit us
from trying to change what they are doing in setting accounting
standards.
I am pleased to state that we have taken a look at the things they
are working on right now. They are working on four issues that are
extremely important to make sure what happened with other companies
will not happen again.
I have to tell you, in those four things they have listed as a
priority, one of them is not stock options and what to do with them.
They do need to address that, but I certainly hope that Congress does
not decide that what we see as a problem does supersede other problems
that may have caused collapses such as Enron's.
So I hope we will not get in a position of dictating now to FASB what
they should be working on, and in what order, and to what degree, or,
worse yet, just going ahead and passing accounting standards on our
own.
With respect to section 302, the conference recognizes that results
presented in financial statements often necessarily require
accompanying disclosures in order to apprise investors of
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the company's true financial condition and results of operations. The
supplemental information contained in these additional disclosures
increases transparency for investors. Accordingly, the relevant
officers must certify that the financial statements together with the
disclosures contained in the periodic report, taken as a whole, are
appropriate and fairly represent, in all material respects, the
operations and financial condition of the issuer.
I also believe the conferees contemplate that the Board will have
discretion to contract or outsource certain tasks to be undertaken
pursuant to this legislation and the regulations promulgated under the
Act. The Board may outsource functions which can be done more
efficiently by existing and established organization. An exercise of
discretion in this manner does not absolve the Board of responsibility
for the proper execution of the contracted or outsourced tasks.
I also believe that the Conferees expect that the Board and the
standard setting body will deem investment companies registered under
Section 8 of the Investment Company Act of 1940 to be a class of
issuers for purposes of establishing the fees pursuant to this section,
and that investment companies as a class will pay a fee rate that is
consistent with the reduced risk they pose to investors when compared
to an individual company. Audits of investment companies are
substantially less complex than audits of corporate entities. The
failure to treat investment companies as a separate class of issuers
would result in investment companies paying a disproportionate level of
fees.
In addition, I believe we need to be clear with respect to the area
of foreign issuers and their coverage under the bill's broad
definitions. While foreign issuers can be listed and traded in the U.S.
if they agree to conform to GAAP and New York Stock Exchange rules, the
SEC historically has permitted the home country of the issuer to
implement corporate governance standards. Foreign issuers are not part
of the current problems being seen in the U.S. capital markets, and I
do not believe it was the intent of the conferees to export U.S.
standards disregarding the sovereignty of other countries as well as
their regulators.
I also realize inconsistencies appear in sections 302 and 906. The
SEC is required to complete rulemaking within 30 days after the date of
enactment with regard to CEO certification under section 302. However,
section 906 suggests that certification would be required upon
enactment, thus the penalties would go into effect before the
certification requirement is completed through the rulemaking process.
I believe it was the intent of the Conferees that the penalties under
section 906 should not become effective until the rulemaking process is
finalized.
Under the conference report, section 3(a) gives the SEC wide
authority to enact implementing regulations that are ``necessary or
appropriate in the public interest.'' I believe it is the intent of the
conferees to permit the Commission wide latitude in using their
rulemaking authority to deal with technical matters such as the scope
of the definitions and their applicability to foreign issuers. I would
encourage the SEC to use its authority to make the act as workable as
possible consistent with longstanding SEC interpretations.
Finally, I not only thank the Senators I have been able to work with
on this, but I also thank the staffs. I thank particularly Katherine
McGuire, my legislative director, and Mike Thompson, who handles my
banking issues. I also thank Kristi Sansonetti, who works on all of my
legal issues, and Ilyse Schuman, who played a very important role in
the blackout pension period.
I thank, on Senator Sarbanes's staff, Steve Harris, Marty Gruenberg,
Steve Kroll, Dean Shahinian, Lynsey Graham, and Vince Meehan.
I thank, on Senator Gramm's staff, Wayne Abernathy, Linda Lord, who
is probably one of the most knowledgeable lawyers in this area I have
ever encountered, Michelle Jackson and Stacie Thomas.
And, on Senator Dodd's staff, I thank Alex Sternhell.
America will never know all the work these people have done on this
bill, the hours they have spent on it, daytime and nighttime. I have
seen them working in the early morning hours on this, and that is after
spending the previous night working on it. They have just spent
incredible time on this.
There is some incredible expertise among these people. Without their
help, we would have never gotten to this point. So I thank all of them.
I thank the chairman and Senator Gramm and all the others who have
had a part in this. It is time we adopt this bill.
I yield the floor.
The PRESIDING OFFICER. The Senator from Maryland.
Mr. SARBANES. Mr. President, let me first say, I think Senator Enzi
has been extremely gracious in recognizing the extraordinary
contribution that has been made by the staff as we have formulated this
legislation. I appreciate him doing that. I certainly associate myself
with his remarks about the dedication and the perseverance and the
extraordinarily high level of competence that is brought to this matter
by staff on both sides of the aisle--committee staff and personal
staff.
Mr. President, I yield 10 minutes to the Senator from New Jersey.
The PRESIDING OFFICER. The Senator from New Jersey.
Mr. CORZINE. Mr. President, I am honored today to stand before the
Senate to express my strong support and appreciation for the conference
report that I suspect, within an hour or so, we will adopt, and,
hopefully, unanimously, as we did the original bill that came out of
the Senate.
I think it is historic. I think it is truly critical in bringing
about the kind of important reforms that will make a real difference to
our financial system, not just today but I think as a standard it will
be very much an important part of the structure of our financial system
for decades to come.
I have said often, since we have talked about this legislation, that
it really does, in my mind, fill a large gap that has been missing in
our securities laws that were written 70 years ago. I think it very
well may be the most important step we will have taken in that interim
period, to make sure we have a measured but strong securities and
reporting structure in our Nation that makes for the depth and breadth
and beauty and effectiveness of our financial markets.
This legislation, as has been noted, comprehensively deals with
reform of our accounting profession, enhances corporate accountability,
improves transparency, moderates conflicts in a number of parts of our
financial world, deals with the transparency of corporate financial
statements, strengthens the SEC, tightens penalties and more securely
sets the law, and ultimately, I believe, will restore the trust, the
needed trust, and investor confidence in the integrity of America's
capital markets.
This was an absolutely necessary step at this time in our Nation's
history. There has been an enormous betrayal of trust, demonstrated,
certainly, by the headlines and the litany of corporate abuses. Let me
say, it goes deeper than just the headlines. There have been 1,100
corporate earnings restatements in the last 4 years. There is a basic
loss of more than just the simple sense of trust that people get from
the headlines. It is hard for people to make investment decisions when
they don't have good facts, good numbers, and the ability to draw good
conclusions about where the investor dollar should go.
It has led to a misallocation of capital. And there was a serious
need for people to have reform in this area because this betrayal
really went at the heart of why people were employees of various firms,
why investors put their trust in investing in companies, and why the
American system, which so relies on trust, has been called into
question with respect to the integrity of our financial markets in
recent days.
It is an extraordinary step. I am pleased to have been a part of it.
I see the chairman just left the Chamber. I want to take a few
moments to make sure he knows how strongly I feel about the leadership
he played. For those who were not a part of this measured process that
Chairman Sarbanes put forward--I have said this to him personally--the
10 hearings we had were the moral equivalent of a graduate finance
program. I
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suspect that very few times in congressional history have we seen the
breakdown in the detail and presentation of sophisticated information,
complicated topics, presented with the security and integrity that were
presented in our hearings that led to the creation of this legislation.
He did an incredible job of putting together a bill.
I get a little nervous when I hear people say this was a rush to
justice, a rush to an answer. This was one of the most thoughtful and
measured programs of review put in place before the legislation was
written that absolutely could ever have been conceived. He deserves
enormous credit for making sure we were thoughtful in the process.
Like Senator Enzi, I compliment all the staffs who were involved in
this. This was an incredible effort on all of their parts. From the
bottom of my heart--and I am sure all those others who were involved in
this process--I truly appreciate the thoughtfulness and care they all
gave to it.
I also would be remiss if I did not mention Senator Dodd for his
great help in originally putting together our initiatives with regard
to accounting reform, corporate oversight, and resourcing the SEC,
which I think are fundamental parts of the legislation. We feel good
about that. I think Senator Dodd has taken an extraordinary step in
leadership.
Once again, I say to the Senator from Wyoming, this is about making
America better. It is fundamentally about doing the right thing at the
right time. His leadership on that, to make sure we stayed constrained,
as he says, thoughtful, and measured about how we addressed the
problem, has been most appropriate, and I have appreciated the
opportunity to work with him. I compliment him for that effort.
I would say the same about the Presiding Officer. The addition of a
number of the amendments that have come, particularly with regard to
bringing in the responsibility that is associated with lawyering in
America, as important as it is for accountants and CFOs and CEOs, I
think was an important step. There has been a lot of really great
effort here.
Now that the chairman is back in the Chamber, I want to say again,
this is a classic example of quality leadership, of thoughtful
leadership, and getting to a result that will make a difference in the
lives of Americans in the years ahead.
This is a little more personal for me because for the 5 years before
I came here, I was a CEO. Sometimes you want to hide from that moniker
these days since it is not so popular. I think these days about the
words of Andy Grove, who said that he was ashamed and embarrassed by
some of the actions and many of the actions that are associated with
the abuse we have seen. I stand with Andy Grove on that.
This is not one of our prouder moments in our financial system. But
what does make me proud is that we could work together in a bipartisan
way to come to a thoughtful, measured response that will make a
difference, that really will move our securities laws in a direction
that will give the American people confidence in how they read an
income statement, when they look at a balance sheet and when they judge
where they want to work, that they will have the necessary information.
I am not going to go into detail on the bill. Senator Sarbanes and
Senator Enzi did that. It is a great piece of legislation. I don't
think it went too far at all. In fact, I think it is about spot on. I
am sure there will be things we will need to review in time, tweak
with, but this is a good set of initiatives which will make a
difference in America's financial system.
When we address these issues, it does beg to recognize that there are
additional tasks that need to be addressed. I heard the chairman talk
about it is not good enough to authorize; we have to appropriate the
funds to go with the necessary obligations we put on the SEC; we need
to make sure our new advisory board actually has the resources. I think
we do. But their independence, their ability to function, will come
because they have the resources. The same as the SEC; we have to do our
job in the second part of this to make sure those resources are
available.
We do need to make sure the SEC Commissioners are in place so that we
can have a credible process of looking at enforcement and review of
laws and making sure that as we structure the SEC in the days going
forward, we have the best of minds brought to bear there. I hope we can
vote on these Commissioners very quickly.
For myself--I know there are differences of views about this--there
are other unmet items on the agenda. Not necessarily do they apply to
this bill, but in my view we should, as a nation, deal with the stock
options issue. I don't think Congress should write the accounting
rules, but I believe to recognize that stock options are an expense is
relatively self-evident to those who have operated in business. They
are used as a substitute for compensation. Compensation is an expense.
That is why you see Chairman Greenspan and all of what I think is the
critical weight of those who have observed on this issue speaking out
that this is an issue that needs to be addressed. The Bermuda registry
of companies, derivatives regulation are also issues.
Could I have 1 additional minute?
Mr. SARBANES. I yield an additional minute.
The PRESIDING OFFICER. The Senator may continue.
Mr. CORZINE. We need to address these issues. There are missing gaps
in other parts of our oversight of our securities markets and financial
markets that need to be addressed.
Finally, I believe there is a gaping hole in our oversight of what
our investors and employees and the public need to see addressed, and
that is pension reform. I know working their way through Congress right
now are a number of initiatives on it. Fewer than 50 percent of
Americans have pensions. We have a major need to address this. We
should pull it together in as thoughtful a way as Chairman Sarbanes has
led our Senate to this conclusion, led this debate to a positive
conclusion. I hope we will address that in the future. So, once again,
I express my great gratitude to all those involved. I particularly
thank Chairman Sarbanes for his strong leadership.
Mr. SARBANES. Mr. President, I thank the able Senator from New Jersey
for his kind and gracious remarks about my efforts. I underscore the
enormously valuable contribution that Senator Corzine made to the
development not only of this legislation but all of the work that has
come before the committee. He brought a perspective and perception here
that were extremely important, enabling us to work through some
difficult issues. I appreciate that.
I yield 7 minutes to the Senator from Vermont, chairman of the
Judiciary Committee.
The PRESIDING OFFICER. The Senator from Vermont is recognized.
Mr. LEAHY. Mr. President, I thank the chairman. The Senator from
California wishes 1 minute. I yield 1 minute to her.
Mrs. BOXER. Mr. President, I came to the floor to give my deepest
thanks to Senator Sarbanes and Senator Leahy for leading us in just the
way we needed to be led toward a tough, fair reform that would lead to
confidence in our financial system. I also thank Senator Enzi for his
work.
I was a stockbroker years ago, decades ago, and in those days the big
accounting firms were known for their integrity, and CEOs were highly
respected. That check and balance was lost along the way and it must be
restored.
I believe this bill will do it and our people will, once again, have
trust and confidence in our financial system. They will know when they
read an annual report and it is signed off on by an accounting firm
that it means what it says and says what it means. That will bring the
stock market back into balance. It will not happen tomorrow. This isn't
magic legislation. But over time confidence will be restored and our
economy will be on solid footing once again. I thank my friends.
Mr. LEAHY. Mr. President, I thank Chairman Sarbanes for his
leadership on this impressive bill and on the conference agreement. The
then-Congressman Sarbanes was one of the first people I met when I came
to Washington as an elected Member of this body. We have been friends
from that time forward. I have been so pleased to work with him.
I am proud that the conference agreement includes and adopts the
provisions of the Leahy-McCain amendment,
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which the Senate adopted by a 97-to-0 vote--again, with the strong help
and support of the Senator from Maryland.
These provisions are nearly identical to the Corporate and Criminal
Fraud Accountability Act, which I introduced with Majority Leader
Daschle and others in February. It was reported unanimously by the
Senate Judiciary Committee in April.
The Presiding Officer helped get this through the Judiciary
Committee. The Leahy-McCain amendment provides new crimes with tough
criminal penalties to restore accountability and transparency in our
markets. It accomplishes this in three ways: No. 1. It punishes
criminals who commit corporate fraud. No. 2. It preserves evidence that
can prove corporate fraud. No. 3. It protects victims of corporate
fraud.
As a former prosecutor, I know nothing focuses one's attention on the
question of morality like seeing steel bars closing on them for a
number of years because of what they did.
The conference report includes a tough new crime of securities fraud
which will cover any scheme or artifice to defraud investors. We added
the longer jail term of the other body.
There are three key provisions of the Senate-passed bill that were
not in the recently passed House bill but are now in the conference
agreement. I think they are truly an essential part of a comprehensive
reform measure. First, we extend the statute of limitations in
securities fraud cases. In many of the State pension funds cases, the
current short statute has barred fraud victims from seeking recovery
for Enron's misdeeds in 1997 and 1998. For example, Washington State's
policemen, firefighters, and teachers were blocked from recovery of
nearly $50 million in Enron investments by the short statute of
limitations. That is why the last two SEC Chairmen--one a Republican
and the other a Democrat--endorsed a longer short statute of
limitations to provide victims with a fair chance to recoup their
losses.
Secondly, we include meaningful protections for corporate
whistleblowers, as passed by the Senate. We learned from Sherron
Watkins of Enron that these corporate insiders are the key witnesses
that need to be encouraged to report fraud and help prove it in court.
Enron wanted to silence her as a whistleblower because Texas law would
allow them to do it. Look what they were doing on this chart. There is
no way we could have known about this without that kind of a
whistleblower. Look at this. They had all these hidden corporations--
Jedi, Kenobi, Chewco, Big Doe--I guess they must have had ``little
doe''--Yosemite, Cactus, Ponderosa, Raptor, Braveheart. I think they
were probably watching too many old reruns when they put this together.
The fact is, they were hiding hundreds of millions of dollars of
stockholders' money in their pension funds. The provisions Senator
Grassley and I worked out in Judiciary Committee make sure
whistleblowers are protected.
Third, we include new anti-shredding crimes and the requirement that
corporate audit documents be preserved for 5 years with a 10 year
maximum penalty for willful violations. Prosecutors cannot prove their
cases without evidence. As the Andersen case showed, instead of just
incorporating the loopholes from existing crimes and raising the
penalties, we need tough new provisions that will make sure key
documents do not get shredded in the first place.
It only takes a minute to warm up the shredder, but it can take years
for prosecutors and victims to prove a case.
The conference report also maintains almost identical provisions to
those authored by Senator Biden and approved unanimously by the Senate.
These include enhanced criminal penalties for pension fraud, mail
fraud, wire fraud, and a new crime for certifying false financial
reports. As chairman of the Judiciary's Subcommittee on Crime and
Drugs, Senator Biden deserves praise for his leadership of these
issues.
It is time for action--decisive and comprehensive reforms that will
restore confidence and accountability in our public markets for the
millions of Americans whose economic security is threatened by
corporate greed.
We cannot stop greed, but we can keep greed from succeeding.
We have seized this moment to make a good beginning to fashion
protections for corporate fraud victims, preserve evidence of corporate
crimes and hold corporate wrongdoers accountable. We have much to do to
help repair the breaches of trust that have so shattered confidence in
our markets and market information. We have made a good start today
toward restoring that confidence but more will be needed. In addition
we will need swift and strong enforcement actions and good faith
administration of the reform set forth in our conference report. Our
conference is concluding but our work is just beginning.
Again, I thank the Senator from Maryland.
Mr. SARBANES. Mr. President, I thank the Senator from Vermont. I
underscore again how important his contributions were. The Senate
Judiciary Committee reported out a bill without opposition in the
committee. That is something which accompanied this legislation.
I yield 4 minutes to the Senator from South Dakota, and then it is my
intention to go to the Senator from North Carolina.
Mr. JOHNSON. Mr. President, most of all I thank him for his
extraordinary leadership on the development of this landmark
legislation. I think it is fair to say this is the most critically
important piece of investor protection legislation since the Securities
Act of 1933 or the Securities Exchange Act of 1934.
This comes on the heels of the disclosure of corporate corruption
that has been endemic in recent months, where we have witnessed lost
jobs, lost savings, lost pensions, and ultimately lost confidence
worldwide in America's capital markets.
There is an urgency that strong legislation be passed by this body
and the Congress to restore confidence--restore both the perception and
the reality of integrity in our capital markets.
This legislation is strong legislation. That is why it has been
applauded by editorial writers from the east coast to the west coast.
Senator Sarbanes has been the subject of much congratulatory
observation on the part of so many. This comes on the heels of,
frankly, much weaker legislation that had been passed previously in the
House of Representatives, the other body.
By passing a strong Senate bill, we were able to go to conference. I
am proud to have served on that conference committee and to craft
legislation there that goes in the direction of the Senate rather than
in the direction of the other body and gives this Nation strong
securities legislation. It provides a stiff penalty for corporate
wrongdoing, creates a strong oversight board to ensure that corporate
audits are done properly, and that the books, in fact, are not cooked.
It imposes tough new corporate responsibility standards and implements
control over stock analysts' conflicts of interest, so they are not
making a fortune while advising their clients to invest. It requires
public companies to quickly and accurately disclose financial
information. It ensures that the Securities and Exchange Commission has
the resources to accomplish its mission of regulating the securities
markets.
These important provisions will ensure that America's financial
markets remain efficient and transparent and the envy of the world. It
will benefit average people who may not have had enough information to
make informed decisions in the past and certainly could not have
possibly known that the books were cooked, that the audits were
incorrect, and that corruption was running rife. They had no way of
knowing that.
This will turn that around. This is not the last word, but this is a
critically important step in the right direction to returning integrity
to our markets. We can observe, having come through this horrible
experience in recent months of disclosure after disclosure of
corruption having taken place, a recognition that free market economies
can only work when there is a cop on the beat. Free market economies
can only work when there are fair, well-enforced, and strictly enforced
rules. A free market economy without rules, without a cop on the beat,
is not an economy that will ever work at all.
This goes a long way, I believe, to reviving confidence in America's
economic future. It goes a long way to restoring the fairness and
transparency
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so that people may make their investments--and investments may go up,
and they may go down, but they can know when they make those
investments, they are making those investments based on true and
accurate analysis and not on bogus numbers that some audit firm on the
take has been willing to put forward as the truth when, in fact, they
are not the truth.
Again, the whole Nation owes a great deal of gratitude to Chairman
Sarbanes and to the Senate, in this case, for what I am confident is
going to be an overwhelming vote in favor of this legislation.
I yield the floor.
Mr. SARBANES. Mr. President, I yield 6 minutes to the Senator from
North Carolina.
The PRESIDING OFFICER (Mr. Corzine). The Senator from North Carolina.
Mr. EDWARDS. Mr. President, I thank, along with all my colleagues,
Senator Sarbanes for the extraordinary work he has done on this bill.
We are proud of him. America appreciates very much what he and others
who have worked with him have done.
I also thank Senator Enzi, who is in the Chamber, and Senator
Corzine, who is presiding, for the work they have done with me on what
I think is an important part of this legislation which, in addition to
corporate CEOs and accountants, is holding the lawyers involved in
these transactions responsible and accountable; that if they see
something wrong occurring, they should do something about it--report it
to their client, to the corporation, report it to the CEO, the chief
legal officer and, if necessary, report it to the board.
In Congress, we are doing what needs to be done and stepping to the
plate with regard to corporate responsibility. That is in striking
contrast to what is going on in my home State right now.
At a time when Americans are demanding more corporate responsibility,
when Congress is stepping up and doing what needs to be done, the
President has gone to North Carolina today to ask for less corporate
responsibility, to make it easier on insurance companies and to make it
harder on victims.
The President is in North Carolina today proposing some of the
smallest limits that have ever been proposed for families who have
suffered tragedies, serious problems, as a result of poor medical care
at a time when medical malpractice insurance premiums constitute way
less than 1 percent, substantially less than 1 percent, of medical care
costs in this country.
The President is holding a roundtable, as I speak, on this subject. I
would like to see how many victims of medical negligence, of medical
malpractice, people who have been devastated and their lives
devastated, are participating in this roundtable. I know these people.
For many years I have represented them. I have been in their homes. I
have been in homes and spent time with families whose child will never
walk, who have been blinded for life, who have been crippled for life,
who have suffered injuries from which they will never recover.
These children blinded for life, crippled for life, severely injured
for life--there is a description in the HHS report on which the
President is relying which talks about when juries find they have been
hurt and award money to them, they describe it as ``winning the lottery
ticket.'' The parents of a child who has been blinded for life, the
parents of a child who will never walk, rest assured they do not
believe they have the winning lottery ticket.
My question is: How many of those people are the President talking to
when he is in North Carolina today? The next time he comes back to
North Carolina, we invite him to talk to some of those people because
those are the ordinary Americans to whom he should be talking. Those
are the people who are going to be impacted. The children who have
suffered serious injuries are the ones who are going to have the
greatest impact and have their rights taken away by what the President
is proposing.
Unfortunately, listening to ordinary people is not what this
administration does. They have done it time and time again. It is
stunning, but it is sad and consistent. When this administration has a
choice between protecting the rights of big companies, big insurance
companies versus the rights of ordinary people, they choose the big
insurance company, the big companies every single time. They have been
dragged kicking and screaming to do something about corporate
responsibility, which we are doing in the Congress.
On the Patients' Bill of Rights, on which Senator Kennedy, Senator
McCain, and I have worked so hard, they have consistently sided with
the big HMOs, which is why we do not have a Patients' Bill of Rights in
this country.
On prescription drugs, when we tried to do something about the cost
of prescription drugs on the floor of the Senate, this administration
consistently sided with the big drug companies. When it comes to the
environment, this administration has weakened clean air laws that
protect the air for our children and consistently sided with the big
energy companies that are polluting our air.
Today the President adds to that list, in going to the State of North
Carolina, the big insurance companies. This President loves to talk
about compassion. My question to him is: Where is his compassion for
the victims?
Mr. President, I yield the floor.
Mr. BAYH. Mr. President, I rise today in support of the accounting
reform and corporate responsibility conference agreement. I do so,
because I believe very strongly that it is in the best interests of
America at this critical time in our history.
I believe it goes way beyond mere accounting issues. What we are
agreeing to today deals with the financial security of millions of
individual investors across this country, the security of their
pensions, their 401(k) programs, and their other investments for the
future of their children and their grandchildren.
What we are talking about today involves the very vitality of our
economy, the amount of investment that will take place in the economy,
the number of jobs that will be created, and the vitality of farms. It
involves the standing of America in the international economy, whether
we will continue to be a safe haven for investments from those abroad,
attracting the capital that helps us build a strong foundation for
America's economy.
More than anything else, this bill embodies the basic values upon
which this has been based. It clearly answers the question: Will we
continue to encourage those virtues that have always characterized
America and will our Nation continue to be the land of opportunity
based upon hard work, honesty, and playing by the rules or, will we be
perceived as the land of opportunity based upon deceit. I believe that
the right answer, based upon traditional values and virtues, is
embodied in the accounting reform and corporate responsibility bill.
I congratulate our colleagues, Senators Sarbanes, Dodd, Corzine and
Enzi. They demonstrated leadership and foresight in this issue.
Since the tragedies of 9/11, our country has been involved in twin
struggles: One, the physical national security of this country; and,
second, getting this economy moving again to ensure the economic
security of Americans across this country. There are parallels between
these two challenges. Both occurred as a result of unexpected tragedies
but have presented us with opportunities to make this an even better,
stronger, more secure Nation. Both involve breaking the political
gridlock and the bureaucratic inertia that all too often make progress
in this Capitol difficult. And both involve striking the right balance
between individual freedom and liberty on the one hand, that we
cherish, and collective security, which makes individual liberty
meaningful, on the other.
Let me conclude where I began. This issue goes a long way beyond mere
accounting issues. It goes a long way beyond economic policy. It goes
to the very heart of who we are, what we stand for as a people, and the
kind of values we cherish in the United States of America. This will
protect individual investors. It will help to ensure the integrity of
our economy. But more than anything else, it will ensure that those
Americans who have embraced our tradition with virtues, who have worked
hard and saved their money, who have played by the rules, and are
honest are able to get ahead in this society.
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It will send a loud and clear signal to those who practice corporate
fraud that they do not have an avenue to success in this country. That
does not embody the best values of America. I strongly support the
accounting reform and corporate responsibility conference agreement. I
urge my colleagues to enact this important legislation.
Mr. KERRY. Mr. President, I strongly support the Sarbanes-Oxley Act
of 2002 because it will help end the corporate abuses that in recent
months have plagued our economy and will help restore confidence in our
economy. I would like to take this opportunity to express my
appreciation for the efforts that Senator Paul Sarbanes, Chairman of
the Senate Banking, Housing and Urban Affairs Committee, has made to
develop and enact this important legislation. As a former member of the
Banking Committee, I know how difficult it is to respond quickly to
recent events that affected our capital markets. However, Senator
Sarbanes has put together a coalition which led to a unanimous vote in
support of his bill in the Senate, and the provisions of which is the
base text for this conference report.
The United States must stand for the fairest, most transparent and
efficient financial markets in the world. However, the trust and
confidence of the American people in their financial markets have been
dangerously eroded by the emergence of serious accounting
irregularities by some companies and possible fraudulent actions by
companies like WorldCom, Inc., Enron, Arthur Andersen and others. Some
investment banks have been charged with publicly recommending stocks
for public purchase that their own analysts regarded as junk.
The shocking malfeasance by these businesses and accounting firms has
put a strain on the growth of our economy. The misconduct by a few
senior executives has cost the jobs of hard-working Americans,
including 17,000 at WorldCom and thousands more at companies accused of
similar wrongdoing. The lack of faith in our financial markets
contributed to an overall decline in stock values and has caused grave
losses to individual investors and pension funds. For example, the
losses to the California Public Employees Retirement System from the
recent WorldCom disclosures total more than $580 million.
The conference report creates a new Public Company Accounting
Oversight Board to oversee the auditing of companies that are subject
to the federal securities laws. The Board will establish auditing,
quality control, and ethical standards for accounting firms. The
conference report restricts accounting firms from providing a number of
non-audit services to its audit clients to preserve the firm's
independence. It also requires accounting firms to change the lead or
coordinating partners for a company every five years.
The conference report requires CEOs to certify their financial
statements or face up to 20 years in prison for falsifying information
on reports. It keeps executives from obtaining corporate loans that are
not available to outsiders. It requires public companies to provide
periodic reports to the SEC on off-balance transactions, arrangements,
obligations and other relationships that may have a material current or
future effect on the company's financial condition. It requires
directors, officers and 10 percent equity holders to report their
purchases and sales of company securities within two days of the
transaction.
I am pleased that the conference report includes the Corporate Fraud
and Criminal Fraud Accountability Act which will provide for criminal
prosecution and enhanced penalties of persons who defraud investors in
publicly traded securities or alter or destroy evidence in Federal
investigations. It will also prohibit debts incurred in violation of
securities fraud laws from being discharged in bankruptcy and protect
whistle blowers who report fraud against retaliation by their
employers.
The conference report requires the SEC to adopt rules to foster
greater public confidence in securities research including: protecting
the objectivity and independence of stock analysts who publish research
intended for the public by prohibiting the pre-publication clearance of
such research or recommendations by investment banking or other staff
not directly responsible for investment research; disclosing whether
the public company being analyzed has been a client of the analyst's
firm and what services the firm provided; limiting the supervision of
research analysts to officials not engaged in investment banking
activities; protecting securities analysts from retaliation by
investment banking staff.
The provisions included in this legislation will help restore
confidence in our capital markets and in turn will help provide for
future economic growth. It is an important first step, not a last. Mr.
President, I am pleased to support the Conference Report and will
continue to look for ways to improve investor confidence in our
financial markets.
Mr. SCHUMER. Mr. President, everyone knows that New York City is the
financial capital of the world. Yet as we continue to rebuild our city
in light of the tragic events of September 11, we are now faced with
the devastating effects of depressed markets and unsure investors, who
are once again victims. With more than half of American households
investing in the markets, we're all affected by a crisis in investor
confidence.
I can't think of a more appropriate time than the present for the
Senate to debate legislation to restore dwindling investor confidence
and bring sound footing back to our financial markets. Isn't it ironic?
Just a few weeks ago, the headlines read ``Sarbanes bill dead'' or
``Accounting Reform Fading.''
In the wake of recent revelations about WorldCom and just 2 days ago
Merck, corporate corruption has reached an all-time high; we are now at
a new level of corporate corruption. We've reached a new low and the
question every member of the Senate must be asking is: ``Where does it
end?''
Buzzwords like ``accounting fraud,'' ``corporate corruption,''
``Restatements,'' ``Cooking the books,'' are being bandied about in the
press, in the coffee shops, at the dinner tables across America. Just
this weekend at the Taste of Buffalo, people came up to me and said
``Throw `em in jail, Chuck!'' They were talking about the Ken Lay's,
Bernard Ebers', the Andrew Fasdow's of the corporate world. White
collar criminals who ran giant corporations and used tricky gimmicks to
rob investors of not only their hard money but also their confidence in
the strongest and fairest markets in the world. * * * They are the
investment giants: Enron, Arthur Andersen, Adelphia, CMS Energy,
Reliant Resources, Dynergy, Tyco International, and now Xerox and
WorldCom. A mere handful of our nations top companies who have gone
under as a result of misrepresented earnings and poor management. In
less than a years time, these so-called investment giants through the
great gift of deceit and tricky accounting practices have reduced
themselves to mere shells of their former existence.
As a result, their use of tricky gimmicks to hide the real picture
and literally milk the system dry have caused investors around the
globe to question integrity of our nations markets, which are supposed
to be the strongest and most resilient because they are perceived as
the most open, most transparent markets in the world. Up until now, the
United States had been a magnet for foreign investment. Yet, the
selfish, greedy actions of a small few have led to a steady and
precipitous drop in foreign investment in our financial markets.
It is no secret that greed played a major role in our markets rapid
decline and slow demise. The heads of these entities stole millions,
some billions of dollars from investors, and it is now time that we
make them pay for their actions.
I commend the NASDAQ and the New York Stock Exchange for their
announcements of new, tough corporate governance standards. The New
York markets have taken the first steps to correct corporate
corruption, and now it is our turn to find the right balance in light
of these unsteady markets and times.
So what is the right balance? The right balance is one that will not
only offer strict corporate governance laws, protect the average
investor from being swindled out of his or her hard earned savings by a
fast-talking, wheeling and dealing broker, but will
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also severely punish those individuals who intentionally mislead
investors with faulty practices. That is why I am introducing the
following amendments to the Public Company Accounting Reform and
Investor Protection Act of 2002 to further limit the ability of company
execs from personally manipulating and rigging the system for their
personal benefit and interest.
The first amendment prohibits companies from issuing personal loans
to company executives as seen with Worldcom, whose CEO received more
than $300,000 in loans from the technology giant. Instead, CEOs will
have to go to the bank, just like everyone else, to acquire a loan;
which, will reduce the risk of CEOs ability to use company funds for
personal purposes.
The second amendment requires company execs to forfeit any and all
bonuses and additional compensation if their restatements occur along
with criminal liability.
It is my hope that by revealing the few bad apples at the bottom of
the barrel, and punishing these individuals for their immoral behavior,
we can save the rest of the industry and restore confidence in our
markets.
The legislation pending before us will make it harder for companies
to lie about their assets. Thats the least we can do in re-establishing
public confidence in corporate America. Our common purpose today is to
ensure that the Enron's, the Tyco's, and the WorldCom's never happen
again.
Now is the time for us to act. It is the least we can do to shore up
the investing public's confidence in our markets.
Mr. WELLSTONE. Mr. President, 2 years ago it was pretty lonely being
in favor of the auditor independence reforms that then-SEC Chairman
Arthur Levitt said were necessary to guard against unprecedented
accounting scandals. I am proud that I was one of the few who thought
Chairman Levitt was going in the right direction. Unfortunately it took
the implosion of several multi-billion dollar firms, and a loss of tens
of thousands of jobs and hundreds of billions of dollars in investor
equity, to prove that he was right. Now America's capital markets have
been shaken by a dramatic loss in investor confidence, threatening the
economic recovery.
But today, Congress has acted. I rise today in strong support of the
Public Company Accounting Reform and Investor Protection Act conference
report. I commend the Senator from Maryland, the Chairman of the
Banking Committee for putting together significant, structural reform
of corporate governance and auditor independence and for defending it
in conference.
And I am heartened that the President and the House leadership have
finally agreed to comprehensive reform instead of mere half-measures
and tough rhetoric.
This bill holds the bad actors accountable for their fraud and
deception. But the legislation goes much further, as it should, because
the problem goes much deeper. We are faced with more than the wrong
doing of individual executives, we are faced with a crisis in
confidence in American capital markets and American business.
This conference report retains the strong Senate reforms virtually
intact. It bars an auditor from offering audit services and other
consulting services to the same client. It says publically traded
companies must change the partner in charge of the audit every five
years. It strengthens oversight of accountants, by establishing an
independent board to set and enforce standards. And it enhances
disclosure. This alone is real reform. But the bill does more. It makes
corporate executives more accountable to their shareholders. It makes
investment analysts more accountable to the public. And it's bill
contains strong penalties for corporate wrong-doers.
All and all, this legislation lets the sunshine back into the smoke-
filled corporate board rooms so that insiders have harder time cheating
the outsiders. It is structural reform that restores checks and
balances that will protect against fraud, deception, and reckless
carelessness.
We need to restore America's faith in corporate America. It has gone
beyond individual wrong doing. The system hides and encourages
corruption. Today the Congress passes strong reform. Now I call on the
President to make enactment and enforcement of this new law a priority.
Mr. BOND. Mr. President, last night, the conference committee
released its final report on comprehensive accounting reform and
corporate governance legislation. The reaction of our financial markets
confirms that this legislation is absolutely necessary to help restore
integrity and confidence to our free market system and our investment
community.
However, in our rush to enact broad reforms, we may be damaging the
economic framework for small companies to reach our capital markets. In
the long term, the reforms will make our economy stronger. In the short
term, we will be creating complete chaos for small publicly traded
companies and companies trying to gain the capital for growth through
stock offerings.
I am extremely disappointed in the conferees' decision not to
recognize this fact and provide the Securities and Exchange Commission
and the proposed Public Company Accounting Oversight Board with greater
flexibility in dealing with small firms. Small business has been the
driving force of our economy for well over a decade. The high hurdles
in the legislation are necessary for large, conglomerate companies but
they may be a trip wire for our small business entrepreneurial
community.
Mr. SARBANES. Mr. President, I note that the Congress, in the
Enhanced Review of Periodic Disclosures section in the Sarbanes-Oxley
Act, provides for regular and systematic reviews by the Securities and
Exchange Commission of the periodic reports filed by public companies
that are listed on a national securities exchange or on Nasdaq. The
section requires that there be some review of issuers' disclosures at
least once every three years. The bill identifies factors which the
Commission should consider in scheduling reviews, including the
issuer's capitalization, stock price volatility and restatements of
earnings. We expect the Commission to exercise its discretion to
determine the appropriate level and scope of review for each company's
reports in the furtherance of the protection of investors and the
public interest.
The PRESIDING OFFICER. Who yields time?
Mr. SARBANES. Mr. President, may I ask what the time situation is?
The PRESIDING OFFICER. The Senator from Maryland has 15 minutes 10
seconds. The Senator from Wyoming has 21 minutes 30 seconds.
Mr. SARBANES. I yield 3 minutes to the Senator from New York.
The PRESIDING OFFICER. The Senator from New York.
Mr. SCHUMER. I thank the Chair.
Mr. President, this is an extremely important day for our capital
markets, for our country, and for the future of our economy. As we all
know, capitalism has its ups and downs and works in ups and downs, and
there have been periods throughout our history--I can think of the S&L
crisis a decade ago--where things get off track, out of control. It is
our job as Government not to interfere with entrepreneurial vigor, not
to create such regulation that they become a straitjacketed company,
but at the time when the markets show that things have gotten off
track, it is our job to help put them back on track.
There is a bottom line principle here: If investors, whether
throughout the United States or the rest of the world, do not believe
companies are on the level, they will not invest. Unfortunately, the
revelations of the last year have given people the view that they are
not on the level. That it is not the same for them in terms of even
information as it is for somebody at the top, that the information they
may be getting may be wrong or distorted far beyond what they normally
would in the world. So this bill puts that back.
I think it is a carefully balanced bill. There are some changes in
it. There are some changes not in it that I would like to have seen,
but the perfect should not be the enemy of the good. It is a good bill,
a fine bill. In fact, when the agreement was reached, the Dow Jones
went up 400 points. I do not think it was coincidental. Whether it be
CEOs of large companies or individual investors, the public is saying
to us, make it right. Look at the abuses that occurred in the past and
make sure they cannot occur again, and do it
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in a careful way that keeps our markets fluid, liquid, deep, and
important. I think this bill does it.
I want to pay a great deal of tribute to our chairman, Senator
Sarbanes, and to so many others who made this bill a reality. With the
passage of this bill, we can tell investors, while we have not cleared
up every problem, and perhaps we will come back and address this
later--I think we will have to in a couple areas--we have certainly
made things better.
A few weeks ago, Washington looked as if it was dithering in the face
of crisis, but today we proudly act in a bipartisan way to restore
faith in our markets, the deepest, strongest, and best markets in the
world.
I dare say, I know there are some who are against any change or any
regulation, but our markets will be stronger tomorrow than they were
this morning when this bill passes the House, the Senate, and is signed
by the President.
The PRESIDING OFFICER. Who yields time?
Mr. SARBANES. Mr. President, we are down quite far in our time.
Senator Dodd, who wishes to speak, is at a memorial service. I suggest
if the other side could use some of its time, it would be helpful in
balancing this out. I ask unanimous consent that while we are trying to
work this out the time not be charged to either party, and I suggest
the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. ENZI. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. ENZI. 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. SARBANES. Mr. President, I ask unanimous consent that the order
for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. SARBANES. Mr. President, I yield 8 minutes to the distinguished
Senator from Connecticut.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. DODD. Mr. President, when we opened the conference on this
legislation a week or so ago, I said my hope was the passage of this
bill would be quick, decisive, and unanimous. Two out of three is not
bad. We got quick and decisive and almost unanimous. Our colleague from
Texas, and our friend, was unable to support the final product for
reasons he has already explained.
I thought we did an excellent job in moving as quickly as we did. I
believe passage of the legislation and the quick and decisive manner
and nearly unanimous way we achieved the result and overwhelming
support of the Senate and the House fulfill a responsibility of
Congress to protect investors. There is more work to be done, but we
have begun a significant part of the journey. In fact, we traveled a
great distance down the road in fulfilling a congressional
responsibility in responding to the events that began to unfold, at
least to the public's awareness, last October. And the story is not yet
complete. We do not know the final results.
I have a few minutes in which to share some thoughts. I am going to
move quickly to share comments. I begin by commending my colleague from
Maryland, the chairman of the Banking Committee, for the tremendous job
he has done. I said yesterday, any students of the Congress of the
United States who want to seek out good examples of how a legislative
product can be developed, nurtured, analyzed, discussed, debated, and
finally passed, this is about as good an example as I have seen in
recent years of how one ought to proceed. Certainly the hearings we
held in the Banking Committee I don't recall attracting much attention.
I don't recall a single one of the 12 hearings we held appearing on the
nightly news or being lead stories on some of the 24-hour news
stations.
I recall a great many hearings where people sat there, raised their
right hand, and took the fifth amendment. That got a lot of attention.
The 12 hearings held in the Banking Committee of the Senate, where we
went through the deliberate, slow, ponderous process of actually
listening to people who had something to say about what ought to be
done to clean up this mess, never made it on the nightly news that I am
aware of.
I commend again my friend and colleague with whom I have enjoyed my
service in the Congress of the United States for more than a quarter of
a century. We have sat next to each other for a good part of that time
in both the House and in this Chamber. I sit next to him on the Foreign
Affairs Committee and on the Banking Committee. If I could make the
choice and it would not be determined by seniority, I would make him my
choice for seatmate. I have great respect for him and admire him
immensely. He has proven the value of having Paul Sarbanes as a Member
of this body.
I also point out the Presiding Officer, one of the most junior
Members of this Chamber, who provided an incredible, invaluable support
and source of ideas, guidance. Rarely does a new Member play such an
important role on such an important piece of legislation. Of any Member
who was involved in this process, Mike Enzi of Wyoming and others all
would agree, in any history written of the development of the bill, the
role of a freshman Senator from the State of New Jersey named Jon
Corzine needs to be talked about. He played a very important role. We
would not be here without him. I tip my hat to him and to Mike Enzi,
the only Member of this Chamber who actually knew something at a
practical level about what it was to be an accountant and what life was
like in the trenches.
For the staff and others who worked on this legislation, this was not
the most popular idea in the world. Had it not been for unfolding
events, I am not sure we would have developed that kind of support. I
will love to one day tell my daughter, who is only an infant, that it
was the power of our persuasion which convinced a majority here to go
along.
Not many understood the value, the substantive value, of this bill.
Mike Enzi did, a number of others did, there were many in the House who
did, but an awful lot of people, even as late as a week ago, were
suggesting maybe this bill was a bad idea, and that it would not go
anywhere, and it shouldn't go anywhere; we ought to spend another
couple of months thinking about it.
Those notices were not a month old, or 2 months old; that was 5 or 6
day ago. I understand it was the public's demand that we respond to
this that had an awful lot to do with the support we garnered. That is
all right. I never argue about how you get support around here as long
as you get it in the end. We got it in the end, and that is the
important news.
The fact is, we are about to vote overwhelmingly to support a very
critical piece of legislation. I am confident, as he has already
indicated, that the President will sign this bill into law. We are
already seeing markets respond, not entirely because of this, but
certainly in no small measure because of the events that have unfolded
and the parts Congress played.
The chairman of the committee has talked about part of the bill.
There are very important pieces, including the auditor independence.
The board will be revolutionary in how it operates. Someone pointed out
today, a lot of what the regulators do will determine the value of what
we have written legislatively. I am confident that will be the case.
Having FASB now be compensated for and paid for from public money and
not relying on the largess and generosity of the accounting industry to
receive compensation will make a significant difference in establishing
accounting rules and procedures. Certainly having prohibitions against
those going from the industry, working for the clients for whom they
have done audits, will have a beneficial effect on slowing down this
not only appearance of conflict, but certainly the conflicts of
interest that have occurred too often.
There are many other parts of the bill, including corporate
penalties, that were crafted by our colleague from Vermont and other
Members of the Judiciary Committee, that deserve a great deal of credit
for their contribution to this process. The leadership,
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Senator Daschle, certainly for insisting we move as rapidly as we did
to get the product done in committee and get it on the floor of the
Senate, understanding how important this issue would be to the
shareholder interests and pensioners and to others who depend upon a
solid, strong economy for their well-being--certainly their
contribution is extremely important as well.
We have seen the economy begin to do a bit better. I don't think our
work is done, despite the accomplishments in this legislation. My hope
would be that before this Senate adjourns in a week and a half from
now, we might deal with the pension issue. I don't know if that will be
possible. I know there are a lot of other issues that need to be
considered. My hope is if we are not able to do that in the next week
and a half, we will come back soon after we reconvene in September.
I sit on the Health, Education, Labor, and Pensions Committee with
the presiding officer who is interested in that committee. My hope is
that we can deal with the pension reform matters that are necessary, as
well, for adoption by this Congress before the 107th Congress adjourns.
Again, I commend all those involved. I thank Alex Sternhill of my
office, Steve Harris, Marty Gruenberg, all the Members who worked with
the chairman's committee and the full committee of the Senate Banking
Committee, and those on the minority side, as well, who played an
extremely important role.
While he disagreed with the final outcome of the bill, the Senator
from Texas and I have had a great relationship over these many years we
have served together. I have always enjoyed being on his side. He is a
tough opponent, but when we worked together we have done some pretty
good work around here and passed some pretty good bills.
He is leaving and I believe the Senate will be less vibrant an
institution because of his absence. It is important that this place be
a place of ideas for debate to occur, and the Senator from Texas has
always made that kind of contribution.
The PRESIDING OFFICER. The time of the Senator has expired.
Mr. DODD. Hang on. I am commending him. He is going to give me more
time.
Mr. GRAMM. The Senator can have all the time he wants.
Mr. DODD. Mr. President, I have learned after more than 20 years that
if you want the minority to give you a little more time, start
complementing them. It is amazing. Egos are alive and well in the
Senate.
I am going to miss him. He is not done. We have more work, obviously,
in the remaining weeks, but this may be one of the last major bills the
Banking Committee considers. I don't know what life holds for him down
the road, but the good Lord is not done with him yet.
I look forward to your vibrancy, your ideas, and your passion in
whatever role you decide to assume in the next part of your life, and
thank you for the tremendous work you have given to the committee and
this body through your service.
I thank again the chairman and other members of the committee for
contributing to what may be one of the most important pieces of
legislation this body will consider in the 107th Congress and one of
the most important in the area of financial services in many, many
decades.
I yield the floor.
The PRESIDING OFFICER. Who yields time?
Mr. GRAMM. Mr. President, how much time do we have?
The PRESIDING OFFICER. The Senator from Texas has 14 minutes.
Mr. GRAMM. We were going to shoot for about 4:30 so I may yield some
of it back, depending on who comes over.
Let me, first, thank my dear colleague, Senator Dodd, for his kind
comments. I have enjoyed working with him over the years. I very much
appreciate the comments he made.
I want to say something about my staff. A famous philosopher once
said: In no way can you get a keener insight into the true nature of a
leader than by looking at the people by whom he surrounds himself.
I would always be happy to have anybody judge me by Linda Lord and by
Wayne Abernathy. It is amazing how much impact staffers have on the
Senate. I am blessed in this area to have two of the best staff people
who have ever served any Senator in the history of this country. On
most issues on which I worked with Linda Lord, she knows more about
this subject than anybody, and generally more than everybody else
combined. In working with her, I see that the Lord was a great
discriminator; he gave some people incredible ability and most of us he
gave relatively few, in the way of talents. I thank her for the great
job she has done.
I thank Wayne Abernathy. In the years I was chairman of the Banking
Committee, Wayne Abernathy was chairman of the Banking Committee. In
the day-to-day work, he has made an incredible contribution. If there
is an unfairness to it, it is that I have gotten credit for all the
good work that they have done, and I am grateful for that.
I reserve the remainder of my time.
The PRESIDING OFFICER. Who yields time?
Mr. SARBANES. How much time do I have remaining?
The PRESIDING OFFICER. The Senator has 3 minutes remaining.
Mr. SARBANES. I yield 1 minute to the Senator from Minnesota.
Mr. WELLSTONE. I thank the Senator from Maryland. I thank him forhis
great leadership and the other Senators working on this. I can only say
this in 1 minute: I remember when Arthur Levitt came by several years
ago to talk with me about the need for audit independence. Senator
Sarbanes and others have made that possible. Many people took their
savings, converted it to stock, and thought it would be there for their
children or grandchildren. Many people had 401(k)s they were counting
on. All of this has eroded in value. Investors do not have the
confidence in the economy. I think the key is to make the structural
change and make sure people can count on the independent audits, that
no one is cooking their books. This is the best of government
oversight. I am very proud to support this legislation.
Once again, I thank the chair of the Banking Committee for
exceptional leadership.
I yield the floor.
The PRESIDING OFFICER. The Senator from Maryland.
Mr. SARBANES. Mr. President, as Senator Gramm was speaking earlier I
was thinking to myself that he really was exemplifying on the floor of
the Senate the sort of dialog we went through in the committee. As he
was making an argument about auditor independence, I was thinking that
is really a very reasonable argument and one to which we really paid
attention. I want to give the counterargument, and then make a
concluding comment about the terrific work of the staff on this bill.
Senator Gramm has suggested that the conference report should be
changed to give the SEC or the Oversight Board authority to grant broad
categorical exemptions from the list of non-audit services that Section
201 of the bill prohibits registered public accounting firms to provide
to public company audit clients.
Such a change, in my view, would weaken one of the fundamental
objectives of the conference report: to draw a bright line around a
limited list of non-audit services that accounting firms may not
provide to public company audit clients because their doing so creates
a fundamental conflict of interest for the accounting firms.
This limited list is based on a set of simple principles:
A public company auditor, in order to be independent, should not
audit its own work (as it would if it provided internal audit
outsourcing services, financial information systems design, appraisal
or valuation services, actuarial services, or bookkeeping services to
an audit client).
A public company auditor should not function as part of management or
as an employee of the audit client (as it would if it provided human
resources services such as recruiting, hiring, and designing
compensation packages for the officers, directors, and managers of an
audit client).
A public company auditor, to be independent, should not act as an
advocate of its audit client (as it would if it provided legal and
expert services to an audit client in judicial or regulatory
proceedings.)
[[Page S7364]]
A public company auditor should not be a promoter of the company's
stock or other financial interests (as it would be if it served as a
broker-dealer, investment adviser, or investment banker for the
company).
I want to emphasize that Section 201 does not bar accounting firms
from offering consulting services. It simply requires that they not
offer certain consulting services to public companies for which they
wish to serve as ``independent auditor.'' An accounting firm is free to
offer any services it wants to any public companies it does not audit
(or to any private companies). It also may engage in any non-audit
service, including tax services, that is not on the list for an audit
client if the activity is approved in advance by the audit committee of
the public company.
The conference report does authorize the new Oversight Board, on a
case-by-case basis, to exempt any person, issuer, public accounting
firm, or transaction from the prohibition on the provision of non-audit
services to the extent that such exemption is necessary or appropriate
in the public interest and is consistent with the protection of
investors.
The exemptive authority provided the Board is intentionally narrow to
apply to individual cases where the application of the statutory
requirement would impose some extraordinary hardship or circumstance
that would merit an exemption consistent with the protection of the
public interest and the protection of investors.
But the fundamental presumption of the provision is that these non-
audit services, by their very nature, present a conflict of interest
for an accounting firm if provided to a public company audit client.
Arthur Andersen was conflicted because it served Enron as both an
auditor and a consultant, and for two years it also served as Enron's
internal auditor, essentially auditing its own work. Enron was
Andersen's largest client, and in 2000 Andersen earned $27 million in
consulting fees from the company ($25 million in audit fees).
In its oversight hearing earlier this year on the failure of Superior
Bank in Hinsdale, Illinois, the Senate Banking Committee learned first-
hand the risks associated with allowing accounting firms to audit their
own work. In that case, the accounting firm audited and certified a
valuation of risky residual assets calculated according to a
methodology it had provided as a consultant. The valuation was
excessive and led to the failure of the institution.
The SEC's recent actions against one of the large public accounting
firms (KPMG) in an enforcement case illustrates the danger of allowing
an accounting firm to serve as a broker dealer, investment advisor, or
investment banker for a public company audit client (Porta Systems). In
that case, the accounting firm set up an affiliate and the affiliate
provided ``turn around'' services to the issuer, including functioning
as the president of the company. There would have been no need for an
SEC action if the non-audit service were simply prohibited.
The inherent conflict created by these consulting services has been
exacerbated by their rapid growth in the last 15 years. According to
the SEC, 55 percent of the average revenue of the big five accounting
firms came from accounting and auditing services in 1988. Twenty-two
percent of the average revenue came from management consulting
services. By 1999, those figures had fallen to 31 percent for
accounting and auditing services, and risen to 50 percent for
management consulting services. Recent data reported to the SEC showed
on average public accounting firms' non-audit fees comprised 73 percent
of their total fees, or $2.69 in non-audit fees for every $1.00 in
audit fees.
A number of the most knowledgeable and thoughtful witnesses who
testified before the Senate Banking Committee in the hearings held in
preparation for this legislation argued that the growth in the non-
audit consulting business done by the large accounting firms for their
audit clients has so compromised the independence of the audits that a
complete prohibition on the provision of consulting services by
accounting firms to their public audit clients is required. Perhaps the
strongest advocates of this view have been the managers of large
pension funds who are entrusted with people's retirement savings.
For example, the California Public Employees' Retirement System
(CalPERS), manages pension and health benefits for more than 1.3
million members and has aggregate holdings totaling almost $150
billion. According to CalPERS CEO, James E. Burton:
the inherent conflicts created when an external auditor is
simultaneously receiving fees from a company for non-audit
work cannot be remedied by anything less than a bright-line
ban. An accounting firm should be an auditor or a consultant,
but not both to the same client.
John Biggs is CEO of Teachers Insurance and Annuity Association
College Retirement Equities Fund (TIAA-CREF), the largest private
pension system in the world, which manages approximately $275 billion
in pension assets for over 2 million participants in the education and
research community. Mr. Biggs was also a member of the last Public
Oversight Board. He told the Committee that:
TIAA-CREF does not allow our public audit firm to provide
any consulting services to us, and our policy even bars our
auditor from providing tax services.
The conference report chose not to follow the approach of imposing a
complete prohibition on the provision of non-audit services to audit
clients. Instead it chose the approach of identifying the non-audit
services which by their very nature pose a conflict of interest and
should be prohibited. Among those supporting this approach are former
Comptroller General Charles Bowsher, former SEC Chairman Arthur Levitt,
and former Federal Reserve Board Chairman Paul Volcker.
The argument is made that small companies, in particular, may be
burdened by this requirement and that the SEC should have broad
authority to grant categorical exemptions. It is even argued that so
many companies would seek case-by-case exemptions that the SEC would
become overwhelmed and would be unable to process the exemptions in a
timely manner.
The point is that if the provision of a non-audit service to a public
company audit client creates a conflict of interest for the accounting
firm that non-audit service should be prohibited, whether the public
company is large or small. Investors rely on the audit in making their
investment decisions, and the independence of the audit should not be
compromised by the provision of the non-audit service. If a legitimate
exceptional hardship is imposed, then the Oversight Board would have
the authority to grant case-by-case exemptions.
The present Comptroller General, David Walker, issued a particularly
strong statement in support of the approach to auditor independence
taken in the bill conference report I would like to quote:
I believe that legislation that will provide a framework
and guidance for the SEC to use in setting independence
standards for public company audits is needed. History has
shown that the AICPA [American Institute of Certified Public
Accountants] and the SEC have failed to update their
independence standards in a timely fashion and that past
updates have not adequately protected the public's interests.
In addition, the accounting profession has placed too much
emphasis on growing non-audit fees and not enough emphasis on
modernizing the auditing profession for the 21st century
environment. Congress is the proper body to promulgate a
framework for the SEC to use in connection with independence
related regulatory and enforcement actions in order to help
ensure confidence in financial reporting and safeguard
investors and the public's interests. The independence
provision [of the bill] . . . strikes a reasoned and
reasonable balance that will enable auditors to perform a
range of non-audit services for their audit clients and an
unlimited range of non-audit services for their non-audit
clients. . . . In my opinion, the time to act on independence
legislation is now.
This auditor independence provision is at the very center of this
legislation. It goes to the public trust granted to public accounting
firms by our securities laws which require comprehensive financial
statements that must be prepared, in the words of the Securities Act of
1933, by ``an independent public or certified accountant.''
The statutory independent audit requirement has two sides, a private
franchise and a public trust. It grants a franchise to the nation's
public accountants--their services, and only their services--must be
secured before an issuer of securities can go to market, have the
securities listed on the nation's stock exchanges, or comply
[[Page S7365]]
with the reporting requirements of the securities laws. This is a
source of significant private benefit.
But the franchise is conditional. It comes in return for the CPA's
assumption of a public duty and obligation. As a unanimous Supreme
Court noted nearly 20 years ago:
In certifying the public reports that collectively depict a
corporation's financial status, the independent auditor
assumes a public responsibility. . . . [That auditor] owes
ultimate allegiance to the corporation's creditors and
stockholders, as well as to the investing public. This
``public watchdog'' function demands that the accountant
maintain total independence from the client at all times and
requires complete fidelity to the public trust.
We must cut the chord between the audit and the consulting services
which by their very nature undermine the independence of the audit. We
must break this culture that exists, and to do that we need a bright
line. In my view granting broad exemption authority to the Oversight
Board or the SEC to permit these non-audit services would undermine the
separation the conference report is intended to establish.
I wanted to underscore the fact that there was a very reasoned,
intense discussion of these issues. There is reason on both sides. I
thought the Senator made a very strong statement. I wanted to give the
counterstatement here.
I share Senator Dodd's view about this exchange of ideas and its
importance to the functioning of this institution. The Senator from
Texas has certainly made an important contribution in that regard.
I wish to take a moment to recognize the terrific work of the staff.
Senator Gramm referred to Wayne Abernathy and Linda Lord, and of course
Mike Thompson and Katherine McGuire of Senator Enzi's staff; Laura
Ayoud of the legislative counsel who worked day and night to put this
thing in legislative language; the staff of the Banking Committee led
by Steve Harris, Dean Shahinian, Steve Kroll, Lynsey Graham, Vincent
Meehan, Sarah Kline, Judy Keenan, Jesse Jacobs, Craig Davis, Marty
Gruenberg, Gary Gensler, and, as I said, all led so ably by Steve
Harris.
We had the very able staff of the Senators on the committee: Alex
Sternhell, Naomi Camper, Jon Berger, Jimmy Williams, Catherine Cruz
Wojtasik, Leslie Wooley, Margaret Simmons, Matt Young, Roger
Hollingsworth, and Matt Pippin.
I thank again all my colleagues who participated. I think I
recognized most of them in the course of the day, and I want to say
just a word about Chairman Oxley and Congressman LaFalce on the House
side, who made it possible for us to work through this conference and
with whom we have worked so cooperatively on so many issues that have
come before our committee.
The PRESIDING OFFICER. The time of the Senator has expired. Who
yields time?
Mr. SARBANES. How much time is remaining?
The PRESIDING OFFICER. The Senator from Maryland is without time.
There are 12 minutes for the Senator from Texas.
Mr. GRAMM. Mr. President, we have reached the hour that we set for a
vote. I am ready to yield back the 12 minutes and have the vote
proceed.
I reiterate that this is a bill that was fraught with danger in the
environment that we were in. Literally anything could have passed. I
think, by a combination of good work and some good fortune, that has
not been the case. We have a vehicle before us that I think will be
complicated. It will be difficult to implement.
I think we will probably change it in the future. But I think in
terms of our ability to prosper under the bill, and for the economy to
survive not only the illness but the prescription of the doctor in this
case, I think it is doable.
I yield the remainder of our time.
The PRESIDING OFFICER. The question is on agreeing to the conference
report.
Mr. SARBANES. Mr. President, I ask for the yeas and nays.
The PRESIDING OFFICER. Is there a sufficient second?
There is a sufficient second.
The clerk will call the roll.
The assistant legislative clerk called the roll.
Mr. NICKLES. I announce that the Senator from North Carolina (Mr.
Helms) is necessarily absent.
I further announce that if present and voting the Senator from North
Carolina (Mr. Helms) would vote ``yea.''
The PRESIDING OFFICER. Are there any other Senators in the Chamber
desiring to vote?
The result was announced--yeas 99, nays 0, as follows:
[Rollcall Vote No. 192 Leg.]
YEAS--99
Akaka
Allard
Allen
Baucus
Bayh
Bennett
Biden
Bingaman
Bond
Boxer
Breaux
Brownback
Bunning
Burns
Byrd
Campbell
Cantwell
Carnahan
Carper
Chafee
Cleland
Clinton
Cochran
Collins
Conrad
Corzine
Craig
Crapo
Daschle
Dayton
DeWine
Dodd
Domenici
Dorgan
Durbin
Edwards
Ensign
Enzi
Feingold
Feinstein
Fitzgerald
Frist
Graham
Gramm
Grassley
Gregg
Hagel
Harkin
Hatch
Hollings
Hutchinson
Hutchison
Inhofe
Inouye
Jeffords
Johnson
Kennedy
Kerry
Kohl
Kyl
Landrieu
Leahy
Levin
Lieberman
Lincoln
Lott
Lugar
McCain
McConnell
Mikulski
Miller
Murkowski
Murray
Nelson (FL)
Nelson (NE)
Nickles
Reed
Reid
Roberts
Rockefeller
Santorum
Sarbanes
Schumer
Sessions
Shelby
Smith (NH)
Smith (OR)
Snowe
Specter
Stabenow
Stevens
Thomas
Thompson
Thurmond
Torricelli
Voinovich
Warner
Wellstone
Wyden
NOT VOTING--1
Helms
The conference report was agreed to.
Mr. SARBANES. Mr. President, I move to reconsider the vote.
Mr. DASCHLE. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
Mr. REID. I suggest the absence of a quorum.
The PRESIDING OFFICER (Mr. Dayton). The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. REID. Madam President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER (Ms. Cantwell). Without objection, it is so
ordered.
____________________