Paul Sarbanes

Mr. SARBANES

Mr. SARBANES. How much time do I have remaining?

Mr. SARBANES. Madam President, I ask unanimous consent that the order for the quorum call be rescinded.

Mr. SARBANES. These provisions, among other things, require the CEOs and CFOs to certify their company's financial statements under penalty of potentially severe punishments. We provide a $776 million authorization for the SEC. I want to spend a minute on this point, because it is very important. The Senate Appropriations Committee is now working on an appropriation that would contain $750 million for the SEC. It is urgent that we provide adequate funding for the Commission, whose responsibilities have expanded as the volume of market activity has grown, but whose funding has lagged. Clearly, the Commission must have the resources necessary to ensure a decisive and expeditious response to the scandals we have seen in recent months, and to minimize the likelihood that we will see others in the future. I must underscore this point. The Commission has been underfunded, and the result has been understaffing, high staff turnover and low morale as the Commission seeks to carry out its work. The SEC must be in a position to address immediately the problems of inadequate staff resources and inadequate pay. At the moment, the SEC cannot offer its attorneys and accountants the same level of salary and benefits that their counterparts receive at the five Federal bank regulatory agencies. Talented and dedicated staff attorneys and accountants can increase their compensation by as much as one-third simply by moving to another agency. This is an intolerable situation. Pay parity has been authorized and now must be funded; this legislation specifically provide the necessary funding. In addition, the authorization provides funding that will enable the Commission to upgrade its technical capacities, its computer systems, and it provides significant resources so that the Commission can augment its staff of attorneys, accountants and examiners at a time when they are needed to address a very heavy workload burden. As an aside, I mention that this morning the committee reported to the Senate four nominees to bring the Securities and Exchange Commission to its full complement of five members. I very much hope we will be able to approve them next week so that they will be able to take their positions before the August recess. If we do, the Commission will be at full strength. They will all be in place and ready to do the job, and I think that is highly desirable. In closing, let me say that I believe this conference report reflects our best efforts to deal with issues which we know to be numerous and complex. Throughout the process, we have worked together carefully on these issues. We have sought advice from the most distinguished and experienced practitioners in the field. We held 10 hearings in March with some of the very best experts in the country as our witnesses. We have consulted extensively, and I hope my colleagues will agree in good faith and across party lines. Our vision has been broad, our purpose steady. I think our approach has been reasonable. We will send to the President legislation establishing a solid statutory framework for the reforms we know are urgently needed. Our markets have benefited beyond measure from the statutory framework that created the SEC nearly 70 years ago. Indeed, I think we have had a tendency to take that for granted. Those markets have been a very significant economic asset for the United States, and an integral part of our economic strength. This legislation will serve to complement and reinforce that framework, which has served us well, and I believe it will stand the test of time. Our markets, which have the reputation of being the fairest, the most efficient, the most transparent in the world, have suffered greatly in recent times, so much so that they seem to have lost the confidence of our investors. It is our purpose, with this legislation and through other actions that will have to be taken by the regulatory agencies and by the private sector, to see that once again our capital markets deserve the enviable reputation for fairness, efficiency, and transparency that they have enjoyed through the years. I yield the floor.

Mr. SARBANES. Mr. President, I ask for the yeas and nays.

Mr. SARBANES. Mr. President, I move to reconsider the vote.

Mr. SARBANES. How much time is remaining?

Mr. SARBANES. Madam President, parliamentary inquiry of the Chair: What is pending before the Senate?

Mr. SARBANES. So there is 1 hour on each side.

Mr. SARBANES. Madam President, I yield myself 10 minutes.

Mr. SARBANES. Mr. President, I yield 8 minutes to the distinguished Senator from Connecticut.

Mr. SARBANES. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

Mr. SARBANES. Mr. President, I thank the able Senator from New Jersey for his kind and gracious remarks about my efforts. I underscore the enormously valuable contribution that Senator Corzine made to the development not only of this legislation but all of the work that has come before the committee. He brought a perspective and perception here that were extremely important, enabling us to work through some difficult issues. I appreciate that. I yield 7 minutes to the Senator from Vermont, chairman of the Judiciary Committee.

Mr. SARBANES. Mr. President, as Senator Gramm was speaking earlier I was thinking to myself that he really was exemplifying on the floor of the Senate the sort of dialog we went through in the committee. As he was making an argument about auditor independence, I was thinking that is really a very reasonable argument and one to which we really paid attention. I want to give the counterargument, and then make a concluding comment about the terrific work of the staff on this bill. Senator Gramm has suggested that the conference report should be changed to give the SEC or the Oversight Board authority to grant broad categorical exemptions from the list of non-audit services that Section 201 of the bill prohibits registered public accounting firms to provide to public company audit clients. Such a change, in my view, would weaken one of the fundamental objectives of the conference report: to draw a bright line around a limited list of non-audit services that accounting firms may not provide to public company audit clients because their doing so creates a fundamental conflict of interest for the accounting firms. This limited list is based on a set of simple principles: A public company auditor, in order to be independent, should not audit its own work (as it would if it provided internal audit outsourcing services, financial information systems design, appraisal or valuation services, actuarial services, or bookkeeping services to an audit client). A public company auditor should not function as part of management or as an employee of the audit client (as it would if it provided human resources services such as recruiting, hiring, and designing compensation packages for the officers, directors, and managers of an audit client). A public company auditor, to be independent, should not act as an advocate of its audit client (as it would if it provided legal and expert services to an audit client in judicial or regulatory proceedings.) A public company auditor should not be a promoter of the company's stock or other financial interests (as it would be if it served as a broker-dealer, investment adviser, or investment banker for the company). I want to emphasize that Section 201 does not bar accounting firms from offering consulting services. It simply requires that they not offer certain consulting services to public companies for which they wish to serve as ``independent auditor.'' An accounting firm is free to offer any services it wants to any public companies it does not audit (or to any private companies). It also may engage in any non-audit service, including tax services, that is not on the list for an audit client if the activity is approved in advance by the audit committee of the public company. The conference report does authorize the new Oversight Board, on a case-by-case basis, to exempt any person, issuer, public accounting firm, or transaction from the prohibition on the provision of non-audit services to the extent that such exemption is necessary or appropriate in the public interest and is consistent with the protection of investors. The exemptive authority provided the Board is intentionally narrow to apply to individual cases where the application of the statutory requirement would impose some extraordinary hardship or circumstance that would merit an exemption consistent with the protection of the public interest and the protection of investors. But the fundamental presumption of the provision is that these non- audit services, by their very nature, present a conflict of interest for an accounting firm if provided to a public company audit client. Arthur Andersen was conflicted because it served Enron as both an auditor and a consultant, and for two years it also served as Enron's internal auditor, essentially auditing its own work. Enron was Andersen's largest client, and in 2000 Andersen earned $27 million in consulting fees from the company ($25 million in audit fees). In its oversight hearing earlier this year on the failure of Superior Bank in Hinsdale, Illinois, the Senate Banking Committee learned first- hand the risks associated with allowing accounting firms to audit their own work. In that case, the accounting firm audited and certified a valuation of risky residual assets calculated according to a methodology it had provided as a consultant. The valuation was excessive and led to the failure of the institution. The SEC's recent actions against one of the large public accounting firms (KPMG) in an enforcement case illustrates the danger of allowing an accounting firm to serve as a broker dealer, investment advisor, or investment banker for a public company audit client (Porta Systems). In that case, the accounting firm set up an affiliate and the affiliate provided ``turn around'' services to the issuer, including functioning as the president of the company. There would have been no need for an SEC action if the non-audit service were simply prohibited. The inherent conflict created by these consulting services has been exacerbated by their rapid growth in the last 15 years. According to the SEC, 55 percent of the average revenue of the big five accounting firms came from accounting and auditing services in 1988. Twenty-two percent of the average revenue came from management consulting services. By 1999, those figures had fallen to 31 percent for accounting and auditing services, and risen to 50 percent for management consulting services. Recent data reported to the SEC showed on average public accounting firms' non-audit fees comprised 73 percent of their total fees, or $2.69 in non-audit fees for every $1.00 in audit fees. A number of the most knowledgeable and thoughtful witnesses who testified before the Senate Banking Committee in the hearings held in preparation for this legislation argued that the growth in the non- audit consulting business done by the large accounting firms for their audit clients has so compromised the independence of the audits that a complete prohibition on the provision of consulting services by accounting firms to their public audit clients is required. Perhaps the strongest advocates of this view have been the managers of large pension funds who are entrusted with people's retirement savings. For example, the California Public Employees' Retirement System (CalPERS), manages pension and health benefits for more than 1.3 million members and has aggregate holdings totaling almost $150 billion. According to CalPERS CEO, James E. Burton: the inherent conflicts created when an external auditor is simultaneously receiving fees from a company for non-audit work cannot be remedied by anything less than a bright-line ban. An accounting firm should be an auditor or a consultant, but not both to the same client. John Biggs is CEO of Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF), the largest private pension system in the world, which manages approximately $275 billion in pension assets for over 2 million participants in the education and research community. Mr. Biggs was also a member of the last Public Oversight Board. He told the Committee that: TIAA-CREF does not allow our public audit firm to provide any consulting services to us, and our policy even bars our auditor from providing tax services. The conference report chose not to follow the approach of imposing a complete prohibition on the provision of non-audit services to audit clients. Instead it chose the approach of identifying the non-audit services which by their very nature pose a conflict of interest and should be prohibited. Among those supporting this approach are former Comptroller General Charles Bowsher, former SEC Chairman Arthur Levitt, and former Federal Reserve Board Chairman Paul Volcker. The argument is made that small companies, in particular, may be burdened by this requirement and that the SEC should have broad authority to grant categorical exemptions. It is even argued that so many companies would seek case-by-case exemptions that the SEC would become overwhelmed and would be unable to process the exemptions in a timely manner. The point is that if the provision of a non-audit service to a public company audit client creates a conflict of interest for the accounting firm that non-audit service should be prohibited, whether the public company is large or small. Investors rely on the audit in making their investment decisions, and the independence of the audit should not be compromised by the provision of the non-audit service. If a legitimate exceptional hardship is imposed, then the Oversight Board would have the authority to grant case-by-case exemptions. The present Comptroller General, David Walker, issued a particularly strong statement in support of the approach to auditor independence taken in the bill conference report I would like to quote: I believe that legislation that will provide a framework and guidance for the SEC to use in setting independence standards for public company audits is needed. History has shown that the AICPA [American Institute of Certified Public Accountants] and the SEC have failed to update their independence standards in a timely fashion and that past updates have not adequately protected the public's interests. In addition, the accounting profession has placed too much emphasis on growing non-audit fees and not enough emphasis on modernizing the auditing profession for the 21st century environment. Congress is the proper body to promulgate a framework for the SEC to use in connection with independence related regulatory and enforcement actions in order to help ensure confidence in financial reporting and safeguard investors and the public's interests. The independence provision [of the bill] . . . strikes a reasoned and reasonable balance that will enable auditors to perform a range of non-audit services for their audit clients and an unlimited range of non-audit services for their non-audit clients. . . . In my opinion, the time to act on independence legislation is now. This auditor independence provision is at the very center of this legislation. It goes to the public trust granted to public accounting firms by our securities laws which require comprehensive financial statements that must be prepared, in the words of the Securities Act of 1933, by ``an independent public or certified accountant.'' The statutory independent audit requirement has two sides, a private franchise and a public trust. It grants a franchise to the nation's public accountants--their services, and only their services--must be secured before an issuer of securities can go to market, have the securities listed on the nation's stock exchanges, or comply with the reporting requirements of the securities laws. This is a source of significant private benefit. But the franchise is conditional. It comes in return for the CPA's assumption of a public duty and obligation. As a unanimous Supreme Court noted nearly 20 years ago: In certifying the public reports that collectively depict a corporation's financial status, the independent auditor assumes a public responsibility. . . . [That auditor] owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public. This ``public watchdog'' function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust. We must cut the chord between the audit and the consulting services which by their very nature undermine the independence of the audit. We must break this culture that exists, and to do that we need a bright line. In my view granting broad exemption authority to the Oversight Board or the SEC to permit these non-audit services would undermine the separation the conference report is intended to establish. I wanted to underscore the fact that there was a very reasoned, intense discussion of these issues. There is reason on both sides. I thought the Senator made a very strong statement. I wanted to give the counterstatement here. I share Senator Dodd's view about this exchange of ideas and its importance to the functioning of this institution. The Senator from Texas has certainly made an important contribution in that regard. I wish to take a moment to recognize the terrific work of the staff. Senator Gramm referred to Wayne Abernathy and Linda Lord, and of course Mike Thompson and Katherine McGuire of Senator Enzi's staff; Laura Ayoud of the legislative counsel who worked day and night to put this thing in legislative language; the staff of the Banking Committee led by Steve Harris, Dean Shahinian, Steve Kroll, Lynsey Graham, Vincent Meehan, Sarah Kline, Judy Keenan, Jesse Jacobs, Craig Davis, Marty Gruenberg, Gary Gensler, and, as I said, all led so ably by Steve Harris. We had the very able staff of the Senators on the committee: Alex Sternhell, Naomi Camper, Jon Berger, Jimmy Williams, Catherine Cruz Wojtasik, Leslie Wooley, Margaret Simmons, Matt Young, Roger Hollingsworth, and Matt Pippin. I thank again all my colleagues who participated. I think I recognized most of them in the course of the day, and I want to say just a word about Chairman Oxley and Congressman LaFalce on the House side, who made it possible for us to work through this conference and with whom we have worked so cooperatively on so many issues that have come before our committee.

Mr. SARBANES. I yield 1 minute to the Senator from Minnesota.

Mr. SARBANES

Mr. SARBANES. Madam President, I rise to express my disappointment about the outcome of the Senate's recent vote on Medicare prescription drug coverage. The Senate missed an opportunity to provide one of the most important expansions of Medicare benefits since the system was created in 1965. Senator Graham's proposal, of which I was proud to be an original cosponsor with a number of my Democratic colleagues, would have provided comprehensive, voluntary, and affordable prescription drug coverage for all Medicare beneficiaries. Though the majority of the Senate supported this proposal, it lacked the votes necessary to proceed. We know that more than 1 in 3 Medicare beneficiaries lack prescription drug coverage. We know, too, many seniors struggle to pay for the medicine they need to keep them healthy and treat their diseases and illnesses. We know that doctors are now put in the unthinkable position of considering a patient's financial situation when developing a course of treatment. Doctors are conflicted by this, but know that it does not benefit the patient to prescribe a drug, even though it may be the best method of treating or curing an illness, if the patient cannot afford the medicine. More importantly, I, like most of my colleagues, continually hear from constituents who face this dilemma directly. They are ill, they are frustrated, and too many times, they are embarrassed to have made it this far in life and have to ask for help after years of independence. I have heard from those who may not have a direct need, but who are desperately seeking assistance for a loved one who needs help. They are frustrated to learn that there is nowhere for them to turn because Medicare provides nothing for outpatient drugs, yet they have too much income or too many assets to qualify for state offered assistance. The Graham proposal would provide drug coverage for all Medicare beneficiaries for a $25 monthly premium, no deductible, a $10 copayment for generic drugs, and a $40 copayment for preferred brand name drugs. In addition, Medicare beneficiaries would have all of their prescription costs covered after they spend $4,000 in out-of-pocket costs. Assistance would begin with the very first prescription, and there would be no gaps or limits on the coverage provided. Under Senator Graham's proposal, low-income seniors would not be required to pay premiums or copayments for their coverage. Regrettably, some of my colleagues did not support the Graham amendment. They voted instead for an alternative that required seniors to pay a $250 deductible, while only covering 50 percent of their prescription costs up to $3450. After a Medicare beneficiary's costs exceed $3450, he or she would receive no assistance whatsoever until his or her costs reach $3700. Above $3700, the government would then only pay 90 percent of drug costs. Under this proposal, those who are the sickest, with the highest drug costs, would be forced to pay more when they require assistance the most. Many of those who opposed the Graham proposal complained about the cost of this proposal. I find it perplexing that we can find money for other things, but not for the mothers, fathers, grandparents and other Americans that need our help in their older years. Opponents of the Graham bill found money to fund a large tax cut costing $1.35 trillion last year a tax cut that primarily benefit the very wealthiest Americans. Many of my fears about the decision to pass such a large and unreasonable tax cut have been realized raids on Social Security and Medicare, a return to budget deficits, instability in the financial markets. It has forced us unnecessarily to limit resources for those things that should be national priorities. I remain astonished that some believe tax cuts should be a priority over providing prescription drug coverage to everyday Americans who have worked hard and paid their taxes all their lives. Yesterday, we had the chance to mark the 107th Congress with the greatest overhaul of Medicare benefits since its inception 37 years ago. I supported the Graham prescription drug plan along with 51 of my colleagues because I believe it is the only proposal that would provide Medicare beneficiaries with real comprehensive prescription drug coverage. I only hope that we can find a way to enact a meaningful Medicare prescription drug benefit this year. Our older Americans deserve no less.

Mr. SARBANES

Mr. SARBANES. I have a couple of minutes?

Mr. SARBANES. I yield 1 minute.

Mr. SARBANES. Mr. President, I move to reconsider the vote.

Mr. SARBANES. Mr. President, what is the time situation?

Mr. SARBANES. Mr. President, we have been trying to clear amendments. We have yesterday--not yesterday, but on Friday we adopted three amendments on the basis of a unanimous consent request. We have worked through two additional amendments. I am going to offer them now. One is an amendment by Senator Shelby for a study with respect to aider and abettor violations of the Federal securities law. I ask unanimous consent that the pending amendment be set aside; that the Shelby amendment, No. 4261, be called up and modified with a modification that I send to the desk; that the amendment as modified be agreed to; and then we then return to the regular order which, as I understand it, would be the Edwards as modified by the Carnahan amendment.

Mr. SARBANES. Mr. President, in the regular order we are back with the Edwards and Carnahan amendments pending?

Mr. SARBANES. Mr. President, I yield 10 minutes to the distinguished Senator from Connecticut.

Mr. SARBANES. Mr. President, I think the Senate is about to take a major step to contributing to the restoration of investor confidence. This legislation establishes a strong independent board to oversee auditors of the public companies. The board can set standards, investigate, and discipline accountants. It will be overseen by the SEC, but it will have independent funding and membership. I think this marks the end of weak self-regulation with respect to public company auditors. It addresses pervasive conflicts of interest by ensuring auditor independence by restricting them from providing a defined list of consulting services. Other consulting services on the part of the auditor can be permitted if preapproved by the company's audit company. This legislation strengthens corporate responsibility. It establishes safeguards to protect investment/analyst conflicts, and it gives the SEC expanded staff resources so it has the resources to carry out its mandate of protecting investors in this critical time. It is no exaggeration to say the crisis in our markets has put the plans and hopes and dreams of millions of Americans at risk. To restore market integrity on which investor confidence depends, we should move expeditiously to move this legislation into law. I want to express my deep appreciation to my colleagues with whom we have worked for many weeks: To Senator Gramm, the ranking member of the committee with whom we interact in an interesting and, on occasions, exciting fashion; to Senator Enzi, who made a major contribution; to Senators Dodd and Corzine on our side of the aisle who played an essential role and introduced vital legislation on this issue very early on; to Senator Durbin who also introduced significant legislation on this subject, and to many other colleagues; and to Senator Reid, who has been extraordinarily helpful here on the floor of the U.S. Senate.

Mr. SARBANES. I yield 4 minutes to the Senator from Missouri.

Mr. SARBANES. Madam President, I move to reconsider the vote.