New accounting rules floated
Enron-inspired rules proposed by industry group, legislator.
February 28, 2002: 5:47 p.m. ET
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NEW YORK (CNN/Money) - The ranking Democrat on the House Financial Services Committee introduced a bill on Thursday that would toughen the rules governing corporations, auditors and securities analysts, and provide more money for the Securities and Exchange Commission.
Also Thursday, a leading industry group of accountants, the American Institute of Certified Public Accountants (AICPA), issued expanded fraud guidance for CPAs aimed at helping auditors detect material misstatements due to fraud.
And President Bush, speaking in Washington, said that companies that contribute stock to employee 401(k) retirement plans should allow workers to diversify into other investments after three years, should provide a 30-day notice before any blackout periods preventing the sale of company stock, and should block company officers from selling stock whenever rank-and-file employees are blocked from doing so.
These moves are specifically aimed at the kinds of problems that have surfaced in the Enron scandal.
The bill, introduced Thursday by Representative John LaFalce (D-NY) with the backing of the House Democratic leadership, is called the Comprehensive Investor Protection Act, or CIPA.
The LaFalce bill would toughen the rules for corporate governance by, for example, vesting the audit committee with the power to hire and fire auditors. It also would prohibit directors from providing consulting services to the company and take several other measures aimed at improving the performance and independence of auditors and boards. He also wants auditors to file key records for seven years to prevent the destruction of records, which has been a problem in the Enron bankruptcy case.
LaFalce also wants analysts to be prohibited from owning stock in the companies they cover or receiving compensation tied to investment-banking revenue. The bill would require the stock exchanges to establish criteria for evaluating the quality of analysts' research, double the money provided to the SEC, and allow professionals such as lawyers and auditors to be sued for helping others to violate securities laws.
Finally, the LaFalce bill seeks to establish a buffer for employees' insurance money by prohibiting corporate insiders from selling company stock during any period of time when employees are prohibited from selling company stock in their 401(k) plans. At Enron, insiders sold $1 billion of company stock held outside of the pension plan at a time while Enron's employees were losing money in their 401(k) plans because they couldn't sell Enron stock due to an administrative change in the plan.
The AICPA's new fraud standard is aimed at detecting fictitious accounting entries made through the override of management controls, which it says is a major source of fraud. The new standard requires auditors to perform specific tests in an effort to detect fraud and management overrides. For example, the guidance recommends more extensive questioning not only of financial managers, but also of personnel not directly involved in the financial reporting process. 
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