On June 18, 2002, the Senate Banking Committee voted 17-4 to approve a bill to tighten oversight of the audits of publicly-held companies. The approval came despite a strong lobbying effort by the American Institute of CPAs (AICPA) and some of the larger accounting firms who opposed the measure.
The approved bill incorporated several last-minute compromises. Full details are not yet available on the Web. According to press accounts, the compromise version would:
- Create a single five-member board to oversee all the standards that relate to the conduct of audits of public companies. This board will not be made up exclusively of accountants and auditors, but it can include up to two members of the accounting profession.
- Authorize the new board to set or approve standards, enforce the standards through disciplinary sanctions, and operate as a private, independent entity subject to supervision by the Securities and Exchange Commission (SEC).
- Mandate a higher standard of auditor independence by barring auditors from providing nine types of consulting services to audit clients. Exemptions will be allowed on a case-by-case basis. If the value of the service is less than 5% of the total revenue paid to the auditor by the corporate client, the auditor will be able to perform the service and seek SEC approval afterwards.
The AICPA, which currently sets rules and standards for audits conducted by CPAs, opposed the bill on the grounds it would harm smaller firms, impose a meddlesome bureaucracy, and open the industry to more lawsuits. Senator Phil Gramm proposed an amendment that would have left any decision on restricting consulting services up to the new oversight body. He argued that smaller businesses would not be able to afford separate auditors for accounting and consulting, and he warned that thousands of companies would seek the exemptions. But the Senate Banking Committee rejected the proposed amendment. Committee Chairman Paul Sarbanes explained that the Senate bill only applies to publicly-traded companies.
This legislative action comes two days before the SEC is scheduled to vote on the release of its proposal for an accounting oversight board. SEC Chairman Harvey Pitt has said he will defer to Congress if it passes an accounting bill. The next step for the Senate bill is a vote by the full Senate. If this vote is not blocked by a threatened filibuster and the bill passes the Senate floor, it will then go to a joint committee where the differences between the Senate bill and the House bill will be negotiated.