Mr. President, I spent the congressional recess week holding meetings across Iowa. During that time, 5,000 Iowans jobs were put in jeopardy because of the WorldCom mess. People are mad about what's happened, and they want Congress to respond swiftly and in a responsible way to prevent future abuses by corporate officers and auditors that devastate working Americans and their families. I want to improve the committee-passed version of this legislation and enhance the accountability of these publicly traded corporations to their shareholders and employees.
So, Mr. President, people want action. There's an old saying that good policy makes good politics. That saying has never been more appropriate than on this bill.
Mr. President, I filed a series of amendments with the purpose of improving this bill. The five amendments I filed included: a n amendment providing for a team of oversight auditors;an amendment providing that pre-bankruptcy bonuses paid to top executives be pulled back into the bankrupt corporation's estate; an amendment providing the SEC with disgorgement remedies; an amendment providing that auditors who sell tax shelter products can not opine on the financial effects of the tax shelter deal; and, an amendment providing whistleblower protection to accountants and others who want to disclose financial statement misconduct.
Mr. President, I'm pleased that Senators Leahy and Hatch accepted my whistleblower proposal as part of their amendment that was adopted earlier. I now offer the first amendment I mentioned. It's the one dealing with oversight auditors.
As I said earlier, I congratulate my colleagues, Senators Sarbanes and Enzi on their hard work in moving S. 2673 out of Committee and bringing the bill to the floor for further debate. The reform bill is a great step in the right direction for tackling some of the difficult accounting problems our nation currently faces. Nevertheless, I believe the reform bill isn't quite tough enough on several issues and should be strengthened further. I rise today to offer an amendment that will compliment the underlying proposal and ensure that the comprehensive solution we develop thoroughly addresses the problems at hand.
In my view, the recent rash of accounting scandals did not result from incompetency or lack of rigorous training of accounting professionals. Neither has the problem lied principally with misguided auditing standards known as GAAS or ill-considered accounting rules known as GAAP.
The WorldCom debacle, among others, further demonstrated that the problem does not rest entirely with a company's external auditors--whose best efforts may not detect financial misrepresentations if fraud is repeatedly covered up by corporate insiders or contrived to defeat established internal controls. Instead, each of the most recent corporate accounting scandals appear to have arisen from egregiously bad behavior of corporate insiders and internal accountants, with varying degrees of complicity by those companies' external auditors.
Thus, as a matter of principle, I agree with the "bad apples" theory being offered by many. However, I believe addressing those bad apples requires additional oversight?and not just of a company's external accountants but of the internal accounting function itself.
To that end, I further respond to the President's call for increased oversight and would like to offer an amendment that would strengthen the provisions Sarbanes-Enzi bill by expanding the powers of the oversight board to require the performance of "spot audits". The underlying bill which focuses on monitoring external auditors would be amended to provide additional board oversight of internal corporate accounting.
Specifically, my amendment would charge the Board with responsibility for conducting oversight audits or "spot audits" of public companies. The Board would serve in a role analogous to the Internal Revenue Service or the Federal Bank Examiner. The IRS, for example, achieves voluntary public compliance through review of a very limited number of federal tax returns each year. The IRS does not verify each and every tax return. Similarly, the Federal Bank Examiner sporadically and randomly audits various banks throughout the country. Such "spot auditing" has been an extremely effective oversight tool for the banking industry and one which has resulted in higher levels of regulatory compliance. In similar fashion, I believe that accountants and corporate America will prepare more carefully their financial statements if exposed to the risk of compliance review by the Board's oversight auditors.
Even in self-regulated form, the accounting industry has long recognized the need for a second level of review. To that end, in 1978, the AICPA established the peer review process by which one accounting firm would review audit work of another accounting firm. For example, Deloitte & Touche was for many years the assigned peer reviewer of Arthur Andersen. Industry-wide self-checking on top of industry self-regulation seems ill-conceived and has been widely criticized for its ineffectiveness by lawmakers and the SEC.
Over the past 25 years, a big five accounting firm has never issued a qualified report against another big five accounting firm at the end of any peer review despite the subsequent discovery of numerous irregularities including numerous conflicts of interest from stock ownership in audit clients. This recognized need for a second level of review is longstanding although the mechanism originally established by the accounting industry seems to have proven largely inadequate.
Some may ask why the board should be granted powers which may be exercised currently by the SEC. The answer is resources. Providing an effective mechanism for spot checking the books of various issuers requires a dedicated audit staff to carry out those purposes. Having resources dedicated to a regulatory review process would allow the Oversight Board to take a proactive approach in reviewing for accounting irregularities and take the SEC out of a purely reactive posture with respect to corporate accounting fraud. The SEC has done a great job of investigating corporate scandals once detected. Unfortunately, by the time many of the recent scandals were discovered, things had progressed too far. We were unable to salvage the companies and the life savings of thousands of employees and shareholders . I believe the oversight auditor would provide a deterrent to committing fraud when coupled with tougher criminal sanctions. I further believe that earlier detection could prevent the absolute destruction of companies in which fraud remains uncovered for too long a period of time.
I note that the concept of an oversight auditor within the public oversight board was rejected in the accounting reform proposal offered by the SEC and Harvey Pitt on June 20. The draft emphasized that the SEC's vision of a newly created public oversight board reassured corporate America that the newly-created oversight board would require the cooperation of audited corporations "only to the extent necessary to further ... reviews or proceedings regarding the [audited corporation's] accountant." The draft further promised that the new oversight board would not conduct "roving investigations" of audited corporations nor would the board sanction those corporations. It occurs to me that by shifting exclusive focus and responsibility to accounting firms, we ignore the underlying behavior of corporate wrongdoers who have principal responsibility for fair and accurate financial reporting to corporate shareholders.
Under my proposal, the newly created oversight board would be charged with reviewing the financial statements of issuers and focusing its resources on highest-risk audit areas and questionable accounting practices of which it is aware from the SEC Division of Enforcement or other sources such as whistleblowers under provisions I heartily supported.
Upon discovery, the board would refer findings of possible accounting or auditing irregularity to the Division of Enforcement with respect to issuers or other appropriate federal and state enforcement officials such as the President's newly-created Fraud Task Force within the Department of Justice. This referral mechanism would ensure that those agencies continue to have primary authority and responsibility for conducting comprehensive corporate investigations of possible wrongdoing. The oversight board, of course, would have authority to conduct investigations of possible wrongdoing with respect to the involvement of accounting firms within its jurisdiction.
That is a basic summary of what this amendment would accomplish. I urge my colleagues to support establishment of an oversight auditor as a means of improving the compliance of corporate issuers and their external accounting firms and detecting irregularities at a much earlier point in the system when a shareholder value remains salvageable.
Mr. President, it seems to me that my amendment comes down to common sense. The auditors need to be audited. If auditors know that their work will itself be audited, they will think twice about looking the other way on shady deals. My amendment puts some very specific teeth in the Sarbanes-Enzi bill, the important bill that is before the Senate. This legislation addresses the most important question today. That question is restoring confidence in our financial markets and, most importantly, reforming the public accounting system. I praise the bill's authors, Senators Sarbanes and Enzi, for their bipartisan product. I urge the Senate to adopt it.
Now on one other matter, it has been widely reported in the press that the Democratic leadership wishes to use the Enron and WorldCom events as a political issue. Democrats are hopeful for a "November storm" in which our economy is weak and no progress is made on accounting reforms. I hope that politics does not prevail over our responsibility to our constituents.
Furthermore, Mr. President, the premise of this political strategy is flawed. If one side wants to point the finger, and lay the current problems entirely at the foot of the opposition, that side will find the facts don't support the argument. This applies to Republicans and Democrats.
For instance, the distinguished majority leader, Sen. Daschle, on Face the Nation, recently attributed the current crisis to the alleged "permissive" attitude in the Bush Administration toward business. Does anybody perceive any "permissiveness" in the President's speech last week? I sure didn't.
A review of the facts, shows that through the last twelve years, most of it the "roaring 90s," both parties had a say in financial market policy and oversight of accountants. We had divided government most of the time. From 1990-1992, Democrats controlled Congress and Republicans controlled the White House. From 1993-1994, Democrats controlled both the White House and Congress. From 1995-2000, Republicans controlled the Congress and Democrats controlled the White House. For 135 days in 2001 Republicans controlled the Congress and the White House. That's it, only 135 days in the decade of the 90s up until the current date, have Republicans been in control of financial market policy and oversight of accountants.
As everyone knows, Congress and the administration have roles in oversight of the financial market policy and the accounting profession. The heads of the FCC, FTC, and Justice Department are appointed by the President and confirmed by the Senate. The agencies they run are accountable to the White House and to the committees that oversee them in Congress. And, of course, these agencies are funded by the Congress.
For instance, WorldCom grew during years the Clinton White House ran the FCC and the Justice Department. The same could be said for Enron. Policies allowing Worldcom to grow came in the telecom reform bill which passed with overwhelming bipartisan support in 1996.
So, if folks want to point fingers, or play the blame game, they better be ready to finger themselves.
Now, let's say the Democratic leadership's pundits and pollsters are mapping a strategy of tying Republicans to these problems. Maybe they think they can obscure the record I just laid out. Well, I've got news for them. This Republican senator is not going to let them get away with it. I believe we can do even better. The bar is too low. We need to make this bill tougher. The American people are tired of the political games.