Law-Makers Draft Toughest Accounting Reform Bill Yet
Differences of opinion between House Democrats and Republicans have resulted in the introduction of a second bill in the House Financial Services Committee. Known as the Comprehensive Investor Protection Act (CIPA), this new proposal is the toughest accounting reform bill yet. It was the result of close coordination with the Securities and Exchange Commission (SEC), and it is supported by the AFL-CIO, consumer groups, and former SEC Chief Accountant Lynn Turner.
Among other things, CIPA would:
- Create a Public Accountability Board with a 7-member majority selected from the public and the remaining 6 members drawn from groups representing institutional investors and pension funds.
- Empower the Board to conduct reviews of audits and audit firms, institute disciplinary actions and set standards for quality control of audits, auditor independence, and ethics.
- Impose tougher legal penalties on auditors by restoring joint and several liability in certain circumstances and restoring the aiding and abetting liability for accountants and outside professionals.
- Require the SEC to review more filings more systematically based on a risk-rating system that uses analytics (such as price-earnings ratios) to determine the frequency of reviews.
- Restrict auditors from providing a list of specified nonaudit services and require audit committee approval of any nonaudit services not listed in the bill, such as tax services.
- Require a 4-year rotation of auditors, with the possibility of one 4-year extension, if approved by the Public Accounting Regulatory Board.
- Require audit committees to meet quarterly with auditors and have an opportunity to do so outside the presence of management.
- Require a 2-year cooling off period for certain former auditor employees before they could work for an audit client.
- Prohibit directors from providing consulting services to the companies on whose boards they sit.
- Double the resources for SEC’s Division of Enforcement, Corporation Finance, and Office of the Chief Accountant.
- Set restrictions on security analysts to prevent conflicts of interest.
In introducing the bill, Representative John LaFalce said, the reforms are not "cosmetic" and do not "paper over the problem." Georgetown University law professor Donald Langevoort told Reuters, "If it were just the little guy who got trounced [by the Enron collapse], we would simply get cosmetic changes. But this has hurt more than the little guy."
Read the news release. Read the summary of the bill. View a side-by-side comparison with the bill introduced by the House Financial Services Committee Republicans.
-Rosemary Schlank
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ROTATE THE AUDIT FIRMS NOT THE AUDITORS
It is not the auditors that should be rotated every four years, but rather the audit firm that should be. The audit firm should be rotated every three to four years to preserve independence within the audit firm or group.
Clear That Congress Members Don't Know What They Don't Know
Evident from LaFalce speeches and legislative proposal that he is delving into an area about which he lacks competence, e.g., establishing a review board for auditors that has no auditor competency. How would any of the proposed members know what is a good audit and what is good audit quality? Road to Hell is paved with good intentions and this is a "Freeway to Hell." Looks like it does something, but ends up doing nothing of substance. Watch for "Enron II" in 5-10 years!Note also one of the prposals supporters is Lynn Turner who was the SEC Chief Accountant, when the Enron debacle was in full swing.