(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Senate Banking Committee Reports Out Sweeping Enron Reform Bill

A bill establishing a public accounting oversight board, promoting auditor independence, and significantly enhancing the duties of audit committees has been reported out of the Senate Banking Committee by a bi-partisan vote. The measure would require accounting firms auditing or preparing financial reports for public companies to register with the board. The bill would also dramatically advance the time period for reporting insider stock transactions, require the current reporting of loans made by a company to its executives, and limit the non-audit services an accounting firm can provide to companies it serves as auditor.

The accounting oversight board would be authorized to set auditing standards, inspect the audit operations of accounting firms, investigate potential violations, and impose a full range of disciplinary or remedial sanctions for violations. The board would be independently funded by public companies and overseen by the SEC, which would approve its budget. In addition, the board would have five members to be appointed by the SEC after consultation with Treasury and the Federal Reserve Board. While two board members must be accountants, all five members must understand the nature of financial disclosure and accountants’ duties required by the federal securities laws.

The bill bars auditors from providing public company audit clients with a number of non-audit services, including financial information systems design and implementation consulting services and internal audit services. Firms would be permitted to provide other non-audit services, such as tax services, subject to pre-approval by the company’s audit committee. Recognizing that at the time of engagement the company may not be aware that a minor service is a non-audit service requiring pre-approval, the bill provides for a waiver of the pre-approval requirement for services constituting no more than 5 percent of the total revenues paid to the auditor so long as the non-audit service is promptly brought to the attention of the audit committee and the committee approves the service before completion of the audit.

The Senate bill would also require an audit firm to timely report to the audit committee the critical accounting policies and practices to be used and all alternative treatments of financial information within GAAP that have been discussed with management. The firm must also tell the audit committee about any accounting disagreements between the auditor and management, as well as any other material written communications between the auditor and management.

The Exchange Act would be amended to make audit committees directly responsible for the appointment, compensation, and oversight of the company’s independent auditor. Audit committees would also have to set up procedures for addressing complaints on accounting, internal control, and auditing matters, including procedures for employees’ anonymous submission of concerns over accounting and auditing issues. Companies would be required to provide their audit committees with authority and funding to engage counsel and advisers. Finally, the amendments would bar audit committee members from accepting consulting fees or being affiliated persons of the company.

The bill would amend Section 16(a) of the Exchange Act to require officers, directors and 10 percent shareholders to report transactions on company stock by the end of the second business day following the transaction, or such other time as the SEC will establish in cases where the Commission determines that the two-day period is not feasible. The new reporting period would apply to both open-market transactions in company stock and transactions involving the company directly.