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Congress in Accord on Business Reform Bill

Law: Bush will get the measure today. It offers the most stringent rules since the 1930s, creating an independent board to oversee auditing, ethics.

July 25, 2002|RICHARD SIMON | TIMES STAFF WRITER

WASHINGTON — House and Senate negotiators reached agreement Wednesday on legislation to tighten oversight of the accounting industry and increase criminal penalties for corporate fraud. President Bush will receive the bill today, after final votes in the House and Senate, and is expected to sign it.

The measure authorizes the most far-reaching new business regulation since the 1930s. It creates an independent board to set auditing and ethics rules and to discipline auditors, and it makes corporate officers more accountable for their companies' financial statements.

The unusually swift action and nearly unanimous vote by negotiators from the Republican-controlled House and Democratic-led Senate underscored the anxiety in Washington about the potential economic and political repercussions of the rash of business scandals that have cost investors billions of dollars.

The legislation was drafted in response to the collapse last year of Enron Corp. and to the role played by its auditor, Arthur Andersen, in helping conceal the company's precarious financial condition. After languishing for months, the bill gained momentum from disclosures of accounting abuses at several other big companies--and finally took off after reports emerged in late June of WorldCom's nearly $4-billion accounting misstatement.

The compromise legislation closely resembles the Senate measure, which was regarded as tougher than the bill approved by the House. But it includes provisions approved by the House to mandate prison sentences of as long as 25 years for corporate wrongdoers, to set up a fund to reimburse defrauded investors from fines paid by corporate wrongdoers and to require companies to disclose material changes to their financial conditions in a more timely manner.

Bush, who called the legislation crucial to restoring investor confidence in financial markets, hailed the agreement. "Today was a day of action and a day of accomplishment in Washington, D.C.," said Bush, whose aides are worried about the possibly negative effect the recent rash of corporate scandals could have on the president's approval ratings.

Press Secretary Ari Fleischer used the word "accomplishment" a dozen times in his regular briefing for reporters. He sought to link the White House to the work of Congress, while urging both houses to complete work on the measure before they begin their summer recess.

"The president looks forward to signing it into law," he said.

Sen. Paul S. Sarbanes (D-Md.), a principal author of the legislation, said it "reflects our determination to see that the confidence of investors in our capital markets is restored."

Rep. Michael G. Oxley (R-Ohio), who presided over the negotiations, added that the bill "goes a long way in solving some of the egregious problems that have arisen as a result of corporate misconduct and accounting scandals."

Sen. Phil Gramm (R-Texas), who cast the only conference committee vote against the measure, complained that the politics of the issue had overtaken reason.

"In the environment we're in, virtually anything could have passed the Congress," he said. He objected that the bill creates a "one-size-fits-all prescription" by imposing new rules on 16,254 public companies, regardless of size.

Opinions varied about what effect the legislation would have on the markets.

"I think Congress had to act," said Sen. Robert F. Bennett (R-Utah). "But I think all of us should take a somewhat sobering dose of humility and recognize that the markets don't pay as much attention to us as we pay to ourselves."

Frederick M. Richardson, an accounting professor at Virginia Polytechnic Institute and State University, said: "If market participants believe that the bill will increase accounting independence and get management attention with the stronger penalties for using accounting methods to inflate results, then confidence should improve and the markets improve accordingly."

Greg Valliere, chief strategist for Schwab Washington Research Group, said the bill could provide an important "psychological plus for investors who want to see something, anything, get done."

The legislation will fundamentally change the way public companies--and accountants--do business, experts say.

"For the first time in the history of financial regulation in this country, the legislation will create a truly independent accounting oversight board to enforce rules and prosecute violators," said James Hamilton, an expert in securities law at CCH Inc., a provider of information on tax and business law.

That oversight board will replace the accounting industry's self-policing approach to discipline. It will be funded by publicly traded companies. The Bush administration had expressed concern about jurisdictional conflicts between the new board and the Securities and Exchange Commission. The agreement would strengthen SEC oversight of the board.

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