On Hold: Future of Accounting Legislation Remains Uncertain

By Jay Dismukes

NEW YORK—As both state and federal lawmakers continue to address the Enron situation and other corporate scandals that have rattled investor confidence over the last six months, accounting reform appears to be stuck in a legislative quagmire.

In Washington, lawmaking efforts to strengthen auditor independence, establish greater oversight of the accounting profession, and restore the public’s trust in the financial markets have lost much of their momentum and run the risk of coming to a complete standstill before the November elections. Meanwhile, in Albany, Assemblyman Richard Brodsky has amended his bill (A9831-A) concerning the provision of nonaudit services to include any business that issues or has issued securities—a provision that could have a significant impact on non-SEC (Securities and Exchange Commission) practitioners and their clients.

From the Hill

“Regrettably, it is becoming increasingly clear that we may not get real reform. At a time when Congress should be working to enact substantive improvements, it finds itself gridlocked, thanks to stalling tactics and intense corporate lobbying that’s designed to prevent any meaningful change,” Sen. Jon S. Corzine (D-N.J.) said during a June 4 financial symposium hosted by the Federal Deposit Insurance Corporation.

Since at least late May, the intense corporate lobbying that Corzine spoke of primarily has been orchestrated by the accounting profession and business groups, including The Business Roundtable and the U.S. Chamber of Commerce. With support from Sen. Mike Enzi (R-Wyo.) and Sen. Phil Gramm (R-Texas), the campaign principally targets Sen. Paul Sarbanes’ (D-Md.) “Public Company Accounting Reform and Investor Protection Act.” The bill is widely regarded by Democrats, who narrowly control the Senate, as packing more punch than the “Corporate and Auditing Accountability, Responsibility, and Transparency Act,” better known as the Oxley bill for sponsor Rep. Michael Oxley (R-Ohio), which passed in April in the Republican-controlled House of Representatives.

In addition to prohibiting auditors from providing most consulting services, except in cases where special permission is granted, Sarbanes’ bill also proposes to strip the profession of its 100-plus-year history of standards-setting and self-regulation by establishing an independent public oversight board with a broad range of powers. It also calls for auditor rotation every five years and makes it more difficult for an accountant to be hired by the client he is auditing. The Oxley bill would ban the simultaneous provision of auditing and consulting services too, but creates a new board under the authority of the SEC with the power to regulate and discipline accountants and the publicly traded companies they audit.

“(T)he draft bill contains numerous requirements for audit committees that will enmesh Congress in the internal workings of boards of directors,” The Business Roundtable, an association of corporate CEOs, stated in a May 20 letter to Sarbanes. “Corporate governance reforms are most effectively addressed through a combination of voluntary adoption of best practices, state corporation laws, SEC disclosure requirements and stock exchange listing standards, not federal legislation.”

The lobbying campaign also included a call by the AICPA encouraging their members to contact their legislators, expressing their opposition to the Sarbanes bill. The U.S. Chamber of Commerce followed suit, also urging their chamber members to contact lawmakers with their objections to the bill’s proposals.

The combined lobbying efforts appear to have worked as Sarbanes, chairman of the Senate Banking Committee, has twice postponed “mark-up” sessions on the bill, preventing it from going to a committee vote. On June 6, as reported by the Washington Post, Sen. Zell Miller (D-Ga.) said he will support the legislation, giving the bill the majority backing that it needs to move out of committee. However, the bill would be certain to face stiff Republican opposition on the Senate floor, and its passage is made all the more difficult by the small window of time left before Congress breaks for elections.

The State of Affairs

As in Washington, lawmakers in Albany also continue to struggle to craft legislation that would provide greater protection for the investing public while still permitting accountants to perform their jobs and serve their clients’ needs to the best of their abilities and ethical obligations. For its part, the New York State Society of CPAs continues to help state lawmakers shape legislation that would meet these objectives.

The Society has consistently remained opposed to prohibiting auditors from providing nonaudit services to their clients; requiring mandatory rotation of audit firms; as well as a mandatory “cooling-off” period for an auditor to be employed by an audit client. However, the NYSSCPA strongly supports a restructuring of the New York State Board for Public Accountancy to give it more authority; mandatory peer review of CPA firms; the registration of all CPAs, including those in industry; and the authorization of a code of ethics for all professional services performed by CPAs.

Though it currently lacks a state Senate sponsor and still is in committee, the Brodsky bill, if passed, would prohibit auditors from providing nonaudit services to their clients, and could subject both parties to possible criminal charges and civil liabilities should they violate these terms. The bill initially concerned the audits of SEC registrants, but was amended to cover the audits of any company that sells securities—a point of grave concern, especially to local practitioners and firms that, because of financial considerations and their intimate knowledge of a company, often are relied on by their clients to provide both audit and nonaudit services.

Other legislation currently under consideration includes Sen. John DeFrancisco’s bill (S6248A), which takes the focus off auditors and would make it a crime for corporate officers to knowingly deceive shareholders or anyone having a financial interest in the corporation. Currently on the Senate floor, the bill has an identical counterpart in the Assembly (A11201-A), which still is in committee. Senate bill S6269, sponsored by Sen. Kenneth LaValle, also is on the Senate floor. It would create tighter controls on the relationship between governmental retirement funds, state agencies and instrumentalities, and their auditors, to reduce the risk of conflicts of interest and abuse that could threaten the pensions of state and local employees.

Senate bill S6164 and its similar Assembly counterpart A11325, which are both in committee, would prohibit CPAs from providing accounting services to publicly traded companies that they had audited in the previous five years.