The U.S. Senate Monday unanimously (97-0) passed a sweeping corporate reform bill aimed at boosting investor confidence by creating penalties for business fraud and strengthening oversight of the accounting industry.
The legislation was prompted by a series of corporate scandals, including the bankruptcy of Enron and accounting misdeeds at WorldCom.
Democratic Senator Paul Sarbanes of Maryland sponsored the bill and said, "Financial irresponsibility and deception of the sort that we have seen in all of the instances that keep appearing on the front pages of our newspapers are a real threat to our economic recovery. We cannot afford to wait for the next corporate deception followed by the next round of layoffs followed by the next collapse of the companies' pension fund. We need to take action to restore public trust in our financial markets."
The legislation would create new fines and penalties for securities fraud. For example, corporate executives who certify false company financial reports would be slapped with prison terms of up to 10 years and fines of up to $1 million. The measure would ban personal loans from companies to their top officials and directors.
The bill would ban auditors from performing certain consulting functions. It would set up an independent oversight board to carry out inspections and impose penalties on accounting firms found to be in violation of the rules.
That provision concerns Senator Phil Gramm, a Texas Republican and a former economics professor even though he supported the overall bill. Senator Gramm said, "We are setting up a board with massive power that is going to make decisions that affect all accountants and everybody they work for, which directly or indirectly is every breathing person in the country. They are going to have massive unchecked powers."
Passage of the bill came on a volatile day on Wall Street, where the Dow Jones Industrial Average fell more than 400 points before rallying to close down 45 points. The stock market has been on a steady decline in recent months.
Senator Wayne Allard, a Republican from Colorado and member of the Banking Committee, said the bill could not have come at a more critical time. In the long," he said, "it will do the country good and it will do our economy well, and it will help us be more competitive and restore confidence worldwide in our stock and markets here."
Earlier, the Senate blocked efforts to review the accounting treatment of stock options, blamed by many experts for inflating earnings and tempting executives to manipulate company profit reports with accounting gimmicks.
The Senate bill must now be reconciled with a House-passed version that does not contain penalties for corporate fraud and does not go as far in tightening oversight of accountants.
President Bush has indicated his general support for the legislation, and will likely sign a final compromise bill into law.