- July 30, 2012 Michael Oxley (left); June 8, 2004 Paul Sarbanes (right)
By February 2002, thirteen different Congressional committees and subcommittees were investigating Enron. Despite public furor, the deregulatory climate of the early 2000s made major reform an uphill climb, but several representatives were willing to try. House Financial Services Committee Chairman Michael Oxley (R-4th Ohio) took the lead with a bill that checked the Enron offenses without yielding to the temptation “to blanket market participants with red tape.” Representative Oxley called for a new accounting oversight board and some restrictions on the consulting services that audit firms provided for clients. (39)
Democrats considered the bill weak on corporate governance and presented alternate reforms. A House proposal demanded an overhaul of the accounting industry. Senators Christopher Dodd (D-Connecticut) and Jon Corzine (D-New Jersey) drew on governance and audit committee independence proposals made by former SEC Chairman Arthur Levitt, calling for bans on ten consulting services by audit firms and including a new accounting regulatory organization. (40) But the deregulatory tide was still in; by the middle of March, none of the bills had advanced.
In early April, the SEC announced forty-nine new accounting investigations, including disclosures from Xerox and Adelphia of problems with earnings statements. These revelations spurred the House of Representatives to take its first vote on Enron-inspired legislation, passing the Oxley bill 334 to 90.
The Oxley bill created a new body to regulate the accounting industry under SEC jurisdiction and banned some consulting services. It neither addressed the corporate governance concerns of the Democrats nor severed auditing from consulting services completely. Oxley considered it a “tough bill” but the Washington Post noted only “how easily the momentum for reform can be dissipated.” (41)
The legislative initiative shifted to the Senate, controlled by Democrats after Vermont Senator James Jeffords declared himself an Independent and began caucusing with the Democratic Party. Senator Paul Sarbanes (D-Maryland), now Chairman of the Banking Committee, drafted legislation incorporating many of the Dodd and Corzine proposals, shifting authority over the new accounting board away from the SEC, strengthening audit committees, and segregating audit firms from their clients more completely.
A blizzard of Republican amendments forced Senator Sarbanes to withdraw the bill, but he reintroduced it in early June when Goldman Sachs CEO Henry Paulson called on Wall Street to expect—and accept—changes in accounting and corporate governance. Senator Corzine speculated that the bill’s fate would be “determined by the circumstances.” (42) These circumstances eventually included accounting scandals at Tyco, Reliant, Halliburton, El Paso and CMS Energy, and then snowballed into a full-blown avalanche, thanks to the largest bankruptcy to date in American history.
(39) Hearing Before the House Financial Services Committee, “The Enron Collapse: Impact on Investors and Financial Markets,” December 12, 2001. J. Michael Anderson. “Enron: A Select Chronology of Congressional Corporate, and Government Activities,” CRS Report April 9, 2002, CRS-13. New York Times, “Never Have So Many Missed the Forest,” February 10, 2002. House Report on “Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002.”
(40) Wilmer, Cutler, & Pickering Corporate And Securities Law Developments Newsletter, “President Bush Calls for Strengthening Corporate Disclosure, Management Accountability, and Accountant Oversight,” March 22, 2002. Wall Street Journal, “Senate Panel Seeks Sweeping Change for Auditors,” March 7, 2002. Washington Post, “Democrats Propose Audit Reform,” March 8, 2002.
(41) Wall Street Journal, SEC Broadens Accounting-Practices Inquiry,” April 3, 2002. New York Times, “GOP Bill on Auditing Clears House,” April 25, 2002. Washington Post, “Mr. Oxley Punts,” April 24, 2002.
(42) New York Times, “GOP Fights Proposed Rules on Auditors,” May 18, 2002. Wall Street Journal, “Andersen: Called to Account: Sarbanes Agrees to a Delay in Accounting-Overhaul Bill,” May 21, 2002. Financial Times, “A Legal Audit,” June 25, 2002. Henry M. Paulson, Jr., June 5, 2002, available http://www.goldmansachs.com/media-relations/press-releases/archived/2002/paulson-restore-confidence-speech.pdf. New York Times, “Enthusiasm Waning in Congress for Tougher Post-Enron Controls,” June 10, 2002.
