Legislators Hear Varying Voices on Accountability Laws

Bills on Hold Until January By Simon Eskow

By Simon Eskow

NEW YORK—Representatives of business, consumer and watchdog groups gave differing views on how fast the New York state legislature should move—if at all—on proposed corporate governance and accountability laws, during a hearing in September.

Witnesses speaking at a joint public hearing of the state legislature on Sept. 27 in New York City suggested that local laws on top of the Sarbanes-Oxley Act could chase business out of the state. They asked lawmakers not to act “precipitously,” at least until the full impact of the federal legislation could be determined.

“We do not really understand what else can be done,” Kathryn Wylde, president of the New York City Partnership and Chamber of Commerce, said. “Imposing practices will be damaging to American competitiveness—and it will have a disproportional impact on New York.”

The hearing was the first to include members of both the state Senate and Assembly since lawmakers began introducing bills in Albany responding to corporate governance and accounting scandals of the last year. Sen. Kenneth P. LaValle, Sen. Nicholas A. Spano and Assemblyman Richard L. Brodsky—who held the hearing—have introduced legislation covering auditor rotation, CPA registration, nonaudit services and criminal penalties for corporations engaged in misconduct or corporate officers violating generally accepted accounting practices.

But the discussion veered away from legislative specifics as witnesses disagreed over the roots of the continuing spate of accounting scandals, with one side blaming a small portion of the business community, and another side pointing to a societal lapse in ethics beyond the control of new laws.

“In every bull market there have inevitably been excesses where people get excited and think the money is flowing in every direction,” Wylde said. The problem, she said, wasn’t widespread law-breaking, “just finding loopholes with enthusiasm,” and the scandals are “not widespread.”

David John of The Heritage Foundation said the problem with corporate malfeasance stemmed from a much wider decline in ethical standards, and that wrongdoers will always find ways around the law.

“The joke has been that FASB (Financial Accounting Standards Board) takes three to four years to come up with a standard and it takes a Wall Street attorney three to four minutes to come up with a way around it,” he said.

While some witnesses advocated that the legislature do nothing, others argued in favor of strong state legislation. George Bell, of Consumers Union, said his organization supported a ban on nonaudit services, mandatory rotation, stronger licensing standards, increased watchdog powers and the right for clients to sue accountants who fail to disclose irregularities, among other things.

“We need vigorous watchdogs and state licensing,” he said.

Lawmakers were not specific about how they would use the opinions gathered in testimony during the two-hour hearing. Asked if the hearing could eventually lead to consolidation of the myriad bills floating in Albany, Sen. Spano said, given that Sen. LaValle had already made headway, he would “work with LaValle to speak with one voice on the issue” in the Senate.

Brodsky had no comment about the question, but did mention the possibility of an amendment to the state constitution four or five years down the road that would change how corporations are formed. However, none of the legislators gave specifics about the idea of an amendment.

The legislature is likely not to move on any of the proposed bills until after it goes into session again in January.

For its part, the New York Society of CPAs continues to work closely with New York state lawmakers to help shape post-Enron accounting legislation. 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.

For a summary of bills introduced in the state legislature, visit www.nysscpa.org/enron/bills.htm.