The reform bill is designed to protect investors from future accounting and financial deceptions, such as those that occurred at Enron and its former accountant, Arthur Andersen.
“It’s a tough bill that imposes much-needed reforms,” said Rep. Michael G. Oxley (R-Ohio), chairman of the House Financial Services Committee, who co-authored the bill with Louisiana Republican Richard Baker.
Despite its wide margin of support, Democratic leaders characterized the bill as toothless, saying it would not prevent future corporate financial deceptions.
“The Republican leadership, once again, is selling out to special interests. It is refusing to hold executives accountable for their actions,” House Minority Leader Dick Gephardt (D-Mo.), said at a news conference.
Rep. John D. Dingell (D-Mich.) called it “a sad, sorry and repugnant joke” and “a gift to the accounting industry.”
The bill would establish a five-member regulatory panel, governed by the Securities and Exchange Commission, which would monitor accounting firms and financial audits of all publicly traded companies. Under the current system, the accounting industry is largely self-regulated.
Accounting firms would be restricted from providing certain consulting services to the companies they audit. The new legislation would also mandate financial disclosure of off-balance-sheet transactions similar to those that contributed to Enron’s bankruptcy.
The SEC would be given authority to directly prohibit unscrupulous corporate executives and directors from serving on other companies’ boards, lifting the present requirement that the Commission would first have to obtain a court order.
A Democratic version of the bill, rejected by a 219-202 vote, sought tougher restrictions on accounting firms and imposed harsher penalties against executives involved in deceptive financial practices. The bill required companies to change corporate auditors every few years, and would have demanded that corporate executives vouch personally for the accuracy of company financial statements. It also would have enabled the SEC to revoke stock bonuses from corporate officials caught falsifying statements.
The House bill included several Democrat-backed provisions, such as requiring companies to report financial transactions currently left off balance sheets and enforcing corporate executives to disclose sales of company stock within two business days. Under the present system, insider stock sales do not have to be reported for 40 days.
The bill now moves to the Democrat-controlled Senate, where it is not expected to receive strong bipartisan support.
Although the Senate has not announced when it would complete its own legislation, it has promised to impose far tougher regulations on the accounting industry.