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- ICI Comment Letters
Accounting and Corporate Reform Legislation Enacted
Washington, DC, August 1, 2002 - President Bush signed into law on July 30 sweeping accounting and corporate reform legislation, the Sarbanes-Oxley Act of 2002.
The Institute expressed support for enactment of this legislation, which is intended to improve quality and transparency in financial reporting, increase corporate responsibility and the usefulness of corporate financial disclosure, and enhance Securities and Exchange Commission resources and oversight.
H.R. 3763 establishes a five-member Public Company Accounting Oversight Board to oversee the conduct of auditors of public companies. The board will have the authority, subject to SEC review, to:
- set auditing, quality control, and ethics standards;
- inspect accounting firms’ audit operations;
- investigate potential violations of board rules, related provisions of the securities laws, and professional accounting standards; and
- impose sanctions for violations.
No accounting firm will be permitted to audit an SEC registered entity unless it is registered with the board. The board will be funded through an accounting support fee paid by issuers, in amounts assessed according to issuers’ relative market capitalization. The board is permitted to differentiate among various classes of issuers in allocating fees.
Retirement Plan Suspension Periods
H.R. 3763 requires defined contribution retirement plan administrators to notify employees at least 30 days in advance of a suspension period during which participants will be limited in their ability to direct their account investments. The bill prohibits directors and executive officers from trading company stock during suspension periods.
Other Significant Provisions
In addition, H.R. 3763 includes provisions that:
- restrict the nonauditing services that can be provided by auditors;
- direct the SEC to adopt rules to require companies to have audit committees comprised solely of independent directors and impose new duties on audit committees;
- require rotation of a company’s auditing firm’s lead partner and review partner every five years;
- require the Comptroller General to study the potential effects of requiring the mandatory rotation of registered public accounting firms;
- direct the SEC to adopt rules to require CEOs and CFOs to certify that their company’s annual and quarterly reports containing financial statements are appropriate and fair;
- require companies to disclose, on a rapid and current basis, material changes in their financial condition or operations;
- require stock transactions by management and principal stockholders to be disclosed to the SEC before the end of the second business day following the transaction;
- increase criminal penalties for securities fraud, document destruction, and violations of ERISA;
- lengthen the statute of limitations for private securities fraud actions to the earlier of five years after the alleged violation or two years after its discovery;
- require the SEC to adopt rules to prohibit conflicts of interest that could compromise the independence of securities analysts;
- direct the SEC to adopt rules to require public companies to disclose whether they have adopted a corporate code of ethics for senior financial officers and to disclose immediately to the public any change in, or waiver of, their code;
- authorize significant resources for the SEC to, among other things, provide enhanced oversight of auditors; and
- require the SEC to study the role of credit rating agencies in the operation of the securities markets.