By Juliet Eilperin and Jackie Spinner
Washington Post Staff Writers
Thursday, April 25, 2002; Page A01

House lawmakers approved an overhaul of rules governing the accounting industry yesterday, arguing for stricter oversight and broader financial disclosure to help prevent the kind of auditing failures that contributed to Enron Corp.'s bankruptcy last year.

The 334 to 90 vote in favor of the measure would create a new auditor oversight board and bar accounting firms from providing certain consulting services to clients they audit. It delegates much of the responsibility for designing and implementing the new regulatory system to the Securities and Exchange Commission.

The quick passage of the bill, which was largely supported by the accounting profession but assailed by consumer groups, demonstrates how eager politicians are to respond to Enron's collapse. Less than two weeks ago, the House approved pension reform legislation aimed at shielding workers from the massive retirement-plan losses Enron employees experienced when their company's stock plummeted.

Despite the bill's wide margin of passage, it was strongly criticized by some Democrats as inadequate, and it faces an uncertain future in the Democratic-controlled Senate. Senate Banking Committee Chairman Paul S. Sarbanes (D-Md.) plans to propose far tougher restrictions on accounting firms.

Accounting firms are expected to serve as a watchdog over publicly traded companies by ensuring that corporations disclose their true financial condition to investors. Confidence in the profession was undercut by accusations that one of the nation's biggest accounting firms, Arthur Anderson LLP, helped conceal Enron's financial problems. Andersen is under federal indictment for allegedly destroying documents related to its Enron audits.

In addition to creating the new oversight body, the measure would give the SEC the authority to prohibit errant corporate officers and directors from serving in similar positions at other public companies. Currently, the agency must seek a court order to impose such a ban. But the House bill would force the SEC to meet court-established standards before imposing such a ban, which may make it harder to impose penalties on officers or directors found guilty of wrongdoing, according to some securities lawyers.

"We have taken action. We have stood up to Wall Street," declared Rep. Richard H. Baker (R-La.), who wrote the bill along with Finance Services Committee Chairman Michael G. Oxley (R-Ohio).

But Rep. John D. Dingell (D-Mich.) described it as "a sad, sorry and repugnant joke" and "a gift to the accounting industry." Rep. Paul E. Kanjorski (D-Pa.) said the legislation responds to the problems exposed by the collapse of Enron in "a largely illusory and superficial way."

Republicans, however, argued that a rush to regulate could backfire.

"In our zeal to act, we can easily do more harm than good," Oxley said. "It's easy to do something extreme. We can easily smother American businesses with red tape, we can punish those who have done nothing wrong and we can damage the capital markets and the economy in the process."

Rep. Shelley Moore Capito (R-W.Va.), a freshman member on the Financial Services Committee, said representatives from Deloitte & Touche told her Oxley's measure was a reasonable compromise. "Their main concern was that we not go overboard," she said.

For years auditors have been able to deflect new regulations by waging massive lobbying campaigns that include both major national firms and individual certified public accountants from congressional districts across the country. During the 2000 election, according to the Center for Responsive Politics, the industry spent $12.3 million on lobbying and gave $14.7 million to congressional candidates and the two national political parties.

When former SEC chairman Arthur Levitt Jr. tried to ban accountants from offering certain consulting services to their audit clients two years ago, for example, the accounting profession enlisted the aid of numerous members of Congress. Some warned Levitt that if he did not abandon the effort, he might face a cut in funding.

The accounting industry's current blitz includes a nationwide advertising campaign, a Washington firm that mobilizes individual CPAs and the lobbying services of two former House members, Vin Weber (R-Minn.) and Vic Fazio (D-Calif.).

Much of yesterday's debate focused on how to create a new audit oversight board, which would replace the largely self-regulating system that now governs the industry. Rep. Melvin Watt (D-N.C.), who supported Oxley's proposal to let the SEC establish and oversee the five-member body, described it as "a tug of war between how much you legislate and how much you regulate."

But other Democrats questioned whether the Republican-led agency will impose stringent enough rules because the current chairman is Harvey L. Pitt, a former securities lawyer who represented all five major accounting firms in private practice before assuming his post last fall.

Democrats also say House bill does not adequately address the conflicts of interest of analysts who are expected to independently research stocks and to help bring investment banking business to their firms. The bill approved yesterday would require the SEC to do a study on the practices of stock analysts rather than barring them from personally trading in companies they recommend, as the Democrats have proposed.

The House defeated a Democratic alternative by a vote of 219 to 202.

House Republicans also took a more lenient stance on the question of consulting, prohibiting accounting firms from conducting internal audits or designing financial systems for audit clients but allowing them to offer other services that some lawmakers wanted to ban.

The accounting industry has already volunteered to stop providing internal audits, as Andersen did at Enron, or designing financial computer systems for audit clients.

The GOP bill did include several provisions supported by Democrats, such as requiring companies to disclose financial transactionsnot reflected on balance sheets; making it a crime to interfere with an audit; and requiring corporate insiders to disclose within two business days when they sell company stock. Insiders now can take up to 40 days to make those reports.

Congress is also considering other proposals that deal with accounting rules. House Energy and Commerce Committee Chairman W.J. "Billy" Tauzin (R-La.) is close to reaching a deal with Dingell, the panel's top Democrat, on a bill to change the accounting treatment of certain transactions.

And Senate Judiciary Committee Chairman Patrick J. Leahy (D-Vt.) plans to bring up a bill in his committee today that would impose stricter penalties on securities fraud and the destruction of corporate audit records.

Critics of the auditing industry, moreover, said they would press their case once Sarbanes introduces his version of accounting reform. "Now the whole ballgame's in the Senate," said Frank Torres, legislative counsel for Consumers Union.