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Congress Cracks Down on Corporate Wrong-Doing

The recent ups and downs of the stock market have highlighted to the American people how important integrity and accountability are to the economy. To restore investor confidence and deter future corporate scandals, it is critical that there be proper oversight of corporate accounting and that CEOs who commit crimes receive appropriate punishment. Whether a bank robber or corporate crook, those who take from the public and violate our trust must be punished by the law and pay their debts to society.

On July 25, I joined an overwhelming and bipartisan majority of my colleagues in the House and Senate in passing the Public Company Accounting Reform and Investor Protection Act (H.R. 3763). This important legislation reflects the provisions of several House bills passed in late April and July, as well as a bill passed by the Senate in mid-July.

A priority focus of H.R. 3763 is holding corporate executives accountable for their wrongful actions. This much-needed legislation enhances existing and creates new civil and criminal penalties for corporate wrong-doing. Under H.R. 3763:

  • CEOs must certify the accuracy of their companies' annual and quarterly financial reports, stating that they have reviewed the reports and the company's internal controls to ensure that the company's financial condition is fairly represented. If a company later restates its earnings because of misconduct, the CEO would be required to repay the company any bonuses or profits received from sales of company stock during the 12 months prior to the restatement.
     
  • The Securities and Exchange Commission (SEC) may freeze corporate salaries during investigations of possible corporate fraud. CEOs who knowingly sign a false company financial statement would face fines of up to $5 million and prison terms of up to 20 years.
     
  • The SEC can ban "unfit" corporate officers and directors whom the SEC finds guilty of violating securities law from serving in similar positions in other companies.
     
  • Corporate executives are prohibited from buying or selling company stock during so-called "blackout" periods when rank-and-file company employees are barred from doing so out of their 401(k) plans. Employees could sue to recover any profits made from transactions by executives in violation of this provision.
     
  • Individuals who knowingly execute a scheme to defraud another in connection with the purchase or sale of stocks will face prison terms of up to 25 years.
     
  • Maximum penalties for persons who file false statements with the SEC are increased to $5 million in fines and 20 years in prison (penalties for corporations who violate this provision would increase from $2.5 million to $25 million).
     
  • The maximum penalty for mail and wire fraud is increased from 5 to 20 years in prison.
     
  • Corporate officers are barred from using bankruptcy proceedings to discharge debts arising from securities fraud.
     
  • The U.S. Sentencing Commission is instructed to revise and provide stronger penalties for fraud committed by a corporate executive.

H.R. 3763 also seeks to address the repeated disclosure of questionable accounting practices pertaining to corporate financial records. Various provisions in H.R. 3763 strengthen the federal government's oversight of corporate accounting industry practices. Such provisions include:

  • The creation of a new Public Company Accounting Oversight Board, consisting of five members appointed by the SEC, to oversee the auditing of publicly-traded companies. The board will establish auditing standards and investigate and discipline accountants that violate those standards.
     
  • Funding the Financial Accounting Standards Board (FASB), which sets national accounting standards, through fees assessed on publicly-traded companies. The FASB is currently funded by voluntary donations from the accounting industry, which compromises its independence. H.R. 3763 also requires that a majority of FASB's board be composed of individuals who have not been affiliated with accounting firms for at least two years.
     
  • Requirements that auditors report to a company's audit committee, rather than company management, that each member of a corporation's audit committee be independent from corporate management, and that accounting firms rotate their lead audit partners at client corporations.
     
  • A prohibition on auditor conflicts-of-interest, such as providing audits to the same corporation that an auditor provides internal accounting or bookkeeping services.
     
  • A requirement that corporations disclose rapidly and in plain English any information that materially affects the company's financial condition. Corporations would also have to include in their annual and quarterly financial reports information on "off-balance-sheet" transactions (like those made famous by Enron).

The American people are rightfully outraged at the corporate scandals that have been revealed in recent months. The reforms to accounting standards and stricter penalties regarding corporate fraud contained in H.R. 3763 will hopefully not only restore confidence in the economy, but also a renewed confidence that corporate malfeasance will not be tolerated. Honesty and integrity must remain the cornerstones of our free market economy.

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