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. Last Updated: 07/27/2016

Audit Law Floated in Enron Scandal's Wake

WASHINGTON -- House Republicans are circulating proposals for post-Enron U.S. legislation that they say would strengthen standards for auditor independence and corporate financial disclosure.

After several weeks of hearings into the Enron bankruptcy, lawmakers are proposing various measures they hope will prevent similar corporate meltdowns. Republicans on the House of Representatives Financial Services Committee, which has broad authority over accounting and financial institutions, are circulating a draft that would create an independent body to oversee the accounting industry and would forbid auditing firms to perform consulting work for the same client.

The examination of Enron continued Tuesday, when Kenneth Lay, Enron's former chairman, was expected to appear before the Senate Commerce Committee and invoke his Fifth Amendment right against self-incrimination.

Lay's brief appearance will be followed by testimony from William Powers Jr., the dean of the University of Texas School of Law, who reported this month that Lay "bears significant responsibility" for complex partnership deals that helped bring Enron down.

The Republican draft of new financial regulations calls for creation of a public accounting regulatory body, two-thirds of whose members would be non-accountants. The proposal is similar to one offered by Securities and Exchange Commission Chairman Harvey Pitt, although Republican aides said Monday that their proposal would be broader.

The Republican plan also calls for prohibiting external auditors from doing certain consulting jobs for their auditing clients, a measure that the Big Five accounting firms have already backed. It calls for the immediate disclosure of important financial information by publicly traded companies, echoing a proposal from Pitt. It would also bar executives from trading in their own company's stock during "blackout" periods, during which employees are unable to trade in their 401(k) plans.

Democrats are considering whether to put forward their own proposals for auditing and financial disclosure reforms. A number of Democrats want the accounting industry's oversight body to have more investigative and disciplinary power. Earlier this month, LaFalce called for creation of a new auditing oversight body made up entirely of representatives of institutional investors, labor, universities and other public interests.

But Democrats might also agree with other provisions in the draft Republican proposals by the Financial Services Committee. For example, stock trades by senior executives would have to be disclosed to the SEC on the next business day, and to the public the day after that. Currently, disclosure must be made by the 10th day of the following month. But there are exceptions, such as stock sales back to one's own company, which do not have to be disclosed until the following year.

The Republican proposal also calls for the SEC to get a more than 40 percent boost for its fiscal year 2003 budget, to $700 million, although those levels would have to be approved in the appropriations process. Democrats have strongly supported increased financing of the SEC.