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Senate lawmakers Tuesday approved audit reform legislation, but only after heated partisan debate over the role Congress should play in creating a government committee to oversee the accounting industry. After 10 hearings on the bill and much back-room negotiation, the Senate Banking Committee approved the “Public Company Accounting Reform and Investor Protection Act of 2002″ by a 17-4 vote. The main dispute was over the makeup of the accounting oversight body, restrictions on the kind of non-audit consulting services accountants may provide and rules aimed at eliminating conflicts of interest among financial analysts. As expected, the bill is significantly more stringent in its proposals to police the accounting industry than similar legislation the House of Representatives adopted in April. The Senate bill likely will emerge from conference committee negotiations by July, said Gary Gensler, a consultant to Senate Banking Committee Chairman Paul Sarbanes, D-Md., who sponsored the measure. But with political leaders squaring off on audit reform, many observers are skeptical about the bill’s prospects. Sarbanes’ bill gives Congress authority to develop rules about the oversight committee’s responsibilities, raising the ire of many Republicans. Phil Gramm, R-Texas, the Senate Banking Committee’s ranking member, said he and other Republicans want the proposed committee to set its oversight responsibilities independent of Congress. “We ought to let this panel set the standards as to what represents a conflict of interest,” Gramm said. “I know in this environment it’s tempting to chisel in stone what we mean and what we want, but I don’t understand how if we want to make it an independent board how we can decide what they do.” Republicans and Democrats also diverge over the composition of the auditor oversight committee. Sarbanes’ bill proposes a five-member panel chosen by the Securities and Exchange Commission in consultation with the Treasury Department and Federal Reserve Board. The measure requires that three of the five members be outside of the accounting industry. Gramm’s substitution bill, which failed by a 12-9 vote, would have broader accounting industry representation. He pressed for a seven-member committee, with three accountants, three non-accountants and one final official chosen by the president. The SEC, Fed and Commodity Futures Trading Commission each would choose two members, including one accountant and one non-accountant. Another conflict centers on restrictions on non-audit services. To foster auditor independence, Sarbanes’ bill restricts accountants from performing strategic, organizational and information technology consulting services. He also gives a company’s audit committee, which is required to be independent under Nasdaq and New York Stock Exchange listing requirements, sole authority to appoint, compensate and watch over the work of auditors. Sarbanes did make some compromises. Under the bill approved Tuesday, accounting firms can petition the federal oversight panel on a case-by-case basis to receive permission to perform otherwise restricted non-audit services. Barbara Roper, an analyst with the Consumers Federation of America, an accounting reform advocacy group in Washington, criticized the Sarbanes bill because it allows the SEC to define what constitutes a non-audit service. For example, the legislation restricts auditors from providing non-audit “expert consulting services,” but it leaves it to the SEC to define exactly what those services are. The banking committee “has seriously weakened their prohibition on non-audit services,” she said. She warned that the Senate could water down the bill further as its sponsors seek the 60 votes needed for passage. Gramm’s bill focused mostly on the accounting oversight body and did not discuss issues related to non-audit services. It also did not address another major part of Sarbanes’ bill — analyst conflict of interest. Sarbanes’ legislation bars investment banking staff from supervising research and disseminating research reports on companies their firm underwrites. It also requires that analysts disclose if they own stocks or bonds in covered companies, among other things. Separately, Ashley Baker, a spokesman for the North American Securities Administrators Association Inc., said a proposed amendment stripping state regulators of oversight of securities violations was not brought up at the markup. NASAA President Joseph Borg said Morgan Stanley was pushing for the amendment. “We’ll be continuing to watch the situation closely,” Baker said. �Copyright 2002, The Deal, LLC. All rights reserved.

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