In its first major stab at Enron-related reform, the House last week overwhelmingly approved legislation that would give the Securities and Exchange Commission (SEC) expanded authority over corporations, create a new public regulatory board to oversee accountants, and demand greater corporate disclosure.

The bill, which cleared the House by a vote of 334 to 90, would set up a system of so-called public regulatory organizations (PRO) to keep close tabs on the accounting industry and discipline rogue auditors. The measure that was voted out by the House Financial Services Committee earlier this month called for the majority of the members of a PRO to be non-accountants, but the legislation that emerged from the House last Wednesday changed this considerably.

The bill now would permit four of the five members of a PRO to be either practicing accountants or former accountants under an amendment that was offered by Rep. Michael Capuano (D-MA). This move, some observers believe, will stand in the way of effective oversight of accountants.

More than one PRO could be established by the SEC. Under the legislation, a PRO would certify accountants who audit the financial statements of public companies; could bar an accountant or accounting firm from certifying financial statements; and could punish accountants who violate securities laws, standards of ethics, competency or independence.

The legislation, the Corporate and Auditing Accountability, Responsibility and Transparency Act, also would give the SEC the authority to bar individuals from serving as officers or directors of public companies. The federal agency in the past has had to obtain court approval to take such action. In addition, the SEC could order corporate officers to relinquish their profits if a company is forced to restate a filing with the agency, and would require auditors to retain their work papers for seven years.

In other reforms directly tied to the Enron scandal, companies would be required to disclose all off-balance sheet transactions to investors; corporate insiders would have to immediately inform the SEC (next business day) and the public (second business day) when they sell their own company stock, rather than waiting up to 40 days, as is currently allowed; and would make it illegal for anyone associated with a company to interfere with the auditing process.

In related action, the SEC announced last week that, as an offshoot of its sweeping investigation into Enron and former auditor Arthur Andersen LLP, it has begun a formal inquiry into the market practices of financial analysts, focusing on potential conflicts of interests between their responsibilities to investors and the investment banks for which they work.

The inquiry will be conducted jointly with the New York Stock Exchange, the National Association of Securities Dealers, the New York Attorney General’s Office, the North American Securities Administrators Association and the states, said SEC Chairman Harvey Pitt.

Meanwhile, the Department of Justice last week reportedly turned down Arthur Andersen’s latest and possibly last settlement offer, according to published reports Without a deal in hand, Andersen faces a criminal trial in Houston on May 6 for obstruction of justice related to its role in the Enron financial scandal. The auditor was indicted by a federal grand jury in Houston for destroying Enron-related documents after being notified that the SEC had begun an investigation into the energy trader.

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