President Bush has signed into law the Sarbanes-Oxley Act of 2002, one of the most far-reaching bills ever to address corporate fraud and public accounting.
Support for the Bill, which many thought was too aggressive just a few weeks ago, was fueled by multiple reports in July of corporate accounting scandals, defrauding investors, and a plummeting stock market.
The Bill establishes a number of provisions, including the following which directly affect the accounting profession:
- The establishment of an independent not-for-profit Public Company Accounting Oversight Board, subject to SEC oversight, made up of five members, no more than two who may hold the credential of Certified Public Accountant. Duties of the Board will include:
- registering public accounting firms (foreign & domestic) that prepare audit reports for issuers
- establishing auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers
- conducting inspections of registered public accounting firms
- conducting investigations and disciplinary proceedings concerning, and impose appropriate sanctions where justified upon, registered public accounting firms and associated persons of such firms
The Board will set auditing standards. However, the Act directs the Financial Accounting Standards Board (FASB) to continue its role in setting accounting standards (e.g., Generally Accepted Accounting Principles, GAAP) and provides public funding for FASB to fulfill this role.
- Further defines auditor independence issues - Beginning six months after the Oversight Board commences operations, public accounting firms who provide public company audits will be prohibited from providing the following services:
- bookkeeping or other services related to the accounting records or financial statements of the audit client;
- financial information systems design and implementation;
- appraisal or valuation services, fairness opinions, or contribution-in-kind reports;
- actuarial services;
- internal audit outsourcing services;
- management functions or human resources;
- broker or dealer, investment adviser, or investment banking services;
- legal services and expert services unrelated to the audit
- Senior Management Accountability - The Act places a great deal of accountability squarely on the shoulders of senior executives at publicly held companies, containing a number of provisions designed to make senior management more accountable and to improve financial disclosures.
- Disclosure of Insider Transactions and Banning Loan Issuance - Under the Act, insider stock trades will have to be reported by the second day following any transaction.
In remarks at a White House ceremony signing the Bill, President Bush said, "the era of low standards and false profits is over; no boardroom in America is above or beyond the law. This law says to corporate accountants: the high standards of your profession will be enforced without exception; the auditors will be audited; the accountants will be held to account."
Download the full text of the law.
Read CCH's analysis of the new law.