| |
| Section 3: Commission
Rules and Enforcement. |
| A violation of Rules
of the Public Company Accounting Oversight Board ("Board")
is treated as a violation of the '34 Act, giving rise to the same
penalties that may be imposed for violations of that Act. |
|
| Section 101: Establishment;
Board Membership. |
| The Board will have
five financially-literate members, appointed for five-year terms.
Two of the members must be or have been certified public accountants,
and the remaining three must not be and cannot have been CPAs. The
Chair may be held by one of the CPA members, provided that he or
she has not been engaged as a practicing CPA for five years. |
| |
| The Board's members
will serve on a full-time basis. |
| |
| No member may, concurrent
with service on the Board, "share in any of the profits of,
or receive payments from, a public accounting firm," other
than "fixed continuing payments," such as retirement payments. |
| |
| Members of the Board
are appointed by the Commission, "after consultation with"
the Chairman of the Federal Reserve Board and the Secretary of the
Treasury. |
| |
| Members may be removed
by the Commission "for good cause." |
|
| Section 101: Establishment;
Duties Of The Board. |
| |
| Section 103: Auditing,
Quality Control, And Independence Standards And Rules. |
| |
| The Board shall: |
| (1) register public
accounting firms; |
| (2) establish, or adopt,
by rule, "auditing, quality control, ethics, independence,
and other standards relating to the preparation of audit reports
for issuers;" |
| (3) conduct inspections
of accounting firms; |
| (4) conduct investigations
and disciplinary proceedings, and impose appropriate sanctions;
|
| (5) perform such other
duties or functions as necessary or appropriate; |
| (6) enforce compliance
with the Act, the rules of the Board, professional standards, and
the securities laws relating to the preparation and issuance of
audit reports and the obligations and liabilities of accountants
with respect thereto; |
| (7) set the budget and
manage the operations of the Board and the staff of the Board. |
| |
| Auditing standards.
The Board would be required to "cooperate on an on-going basis"
with designated professional groups of accountants and any advisory
groups convened in connection with standard-setting, and although
the Board can "to the extent that it determines appropriate"
adopt standards proposed by those groups, the Board will have authority
to amend, modify, repeal, and reject any standards suggested by
the groups. The Board must report on its standard-setting activity
to the Commission on an annual basis. |
| |
| The Board must require
registered public accounting firms to "prepare, and maintain
for a period of not less than 7 years, audit work papers, and other
information related to any audit report, in sufficient detail to
support the conclusions reached in such report." |
| |
| The Board must require
a 2nd partner review and approval of audit reports registered accounting
firms must adopt quality control standards. |
| |
| The Board must adopt
an audit standard to implement the internal control review required
by section 404(b). This standard must require the auditor evaluate
whether the internal control structure and procedures include records
that accurately and fairly reflect the transactions of the issuer,
provide reasonable assurance that the transactions are recorded
in a manner that will permit the preparation of financial statements
in accordance with GAAP, and a description of any material weaknesses
in the internal controls. |
|
| Section 102(a): Mandatory
Registration |
| |
| Section 102(f): Registration
And Annual Fees. |
| |
| Section 109(d): Funding;
Annual Accounting Support Fee For The Board. |
| |
| In order to audit a
public company, a public accounting firm must register with the
Board.The Board shall collect "a registration fee" and
"an annual fee" from each registered public accounting
firm, in amounts that are "sufficient" to recover the
costs of processing and reviewing applications and annual reports. |
| |
| The Board shall also
establish by rule a reasonable "annual accounting support fee"
as may be necessary or appropriate to maintain the Board. This fee
will be assessed on issuers only. |
| |
|
| Section 104: Inspections
of Registered Public Accounting Firms |
| |
| Annual quality reviews
(inspections) must be conducted for firms that audit more than 100
issues, all others must be conducted every 3 years. The SEC and/or
the Board may order a special inspection of any firm at any time. |
|
| Section 105(b)(5):
Investigation And Disciplinary Proceedings; Investigations; Use
Of Documents. |
| |
| Section 105(c)(2):
Investigations And Disciplinary Proceedings; Disciplinary Procedures;
Public Hearings. |
| |
| Section 105(c)(4):
Investigations And Disciplinary Proceedings; Sanctions. |
| |
| |
| Section 105(d): Investigations
And Disciplinary Proceedings; Reporting of Sanctions. |
| |
| All documents and information
prepared or received by the Board shall be "confidential and
privileged as an evidentiary matter (and shall not be subject to
civil discovery other legal process) in any proceeding in any Federal
or State court or administrative agency, . . . unless and until
presented in connection with a public proceeding or [otherwise]
released" in connection with a disciplinary action. However,
all such documents and information can be made available to the
SEC, the U.S. Attorney General, and other federal and appropriate
state agencies. |
| |
| Disciplinary hearings
will be closed unless the Board orders that they be public, for
good cause, and with the consent of the parties. |
| |
| Sanctions can be imposed
by the Board of a firm if it fails to reasonably supervise any associated
person with regard to auditing or quality control standards, or
otherwise. |
| |
| No sanctions report
will be made available to the public unless and until stays pending
appeal have been lifted. |
|
| Section 106: Foreign
Public Accounting Firms. |
| |
| The bill would subject
foreign accounting firms who audit a U.S. company to registrations
with the Board. This would include foreign firms that perform some
audit work, such as in a foreign subsidiary of a U.S. company, that
is relied on by the primary auditor. |
|
| Section 107(a): Commission
Oversight Of The Board; General Oversight Responsibility. |
| |
| Section 107(b): Rules
Of The Board. |
| |
| Section 107(d): Censure
Of The Board And Other Sanctions. |
| |
| The SEC shall have "oversight
and enforcement authority over the Board." The SEC can, by
rule or order, give the Board additional responsibilities. The SEC
may require the Board to keep certain records, and it has the power
to inspect the Board itself, in the same manner as it can with regard
to SROs such as the NASD. |
| |
| The Board, in its rulemaking
process, is to be treated "as if the Board were a 'registered
securities association'"-that is, a self-regulatory organization.
The Board is required to file proposed rules and proposed rule changes
with the SEC. The SEC may approve, reject, or amend such rules. |
| |
| The Board must notify
the SEC of pending investigations involving potential violations
of the securities laws, and coordinate its investigation with the
SEC Division of Enforcement as necessary to protect an ongoing SEC
investigation. |
| |
| The SEC may, by order,
"censure or impose limitations upon the activities, functions,
and operations of the Board" if it finds that the Board has
violated the Act or the securities laws, or if the Board has failed
to ensure the compliance of accounting firms with applicable rules
without reasonable justification. |
|
| Section 107(c): Commission
Review Of Disciplinary Action Taken By The Board. |
| |
| The Board must notify
the SEC when it imposes "any final sanction" on any accounting
firm or associated person. The Board's findings and sanctions are
subject to review by the SEC. |
| |
| The SEC may enhance,
modify, cancel, reduce, or require remission of such sanction. |
|
| Section
108: Accounting Standards. |
| |
| The SEC is authorized
to "recognize, as 'generally accepted'... any accounting principles"
that are established by a standard-setting body that meets the bill's
criteria, which include requirements that the body: |
| (1) be a private entity;
|
| (2) be governed by a
board of trustees (or equivalent body), the majority of whom are
not or have not been associated persons with a public accounting
firm for the past 2 years; |
| (3) be funded in a manner
similar to the Board; |
| (4) have adopted procedures
to ensure prompt consideration of changes to accounting principles
by a majority vote; |
| (5) consider, when adopting
standards, the need to keep them current and the extent to which
international convergence of standards is necessary or appropriate. |
|
| Section 201: Services
Outside The Scope Of Practice Of Auditors; Prohibited Activities. |
| |
| It shall be "unlawful"
for a registered public accounting firm to provide any non-audit
service to an issuer contemporaneously with the audit, including:
(1) bookkeeping or other services related to the accounting records
or financial statements of the audit client; (2) financial information
systems design and implementation; (3) appraisal or valuation services,
fairness opinions, or contribution-in-kind reports; (4) actuarial
services; (5) internal audit outsourcing services; (6) management
functions or human resources; (7) broker or dealer, investment adviser,
or investment banking services; (8) legal services and expert services
unrelated to the audit; (9) any other service that the Board determines,
by regulation, is impermissible. The Board may, on a case-by-case
basis, exempt from these prohibitions any person, issuer, public
accounting firm, or transaction, subject to review by the Commission.
|
| |
| It will not be unlawful
to provide other non-audit services if they are pre-approved by
the audit committee in the following manner. The bill allows an
accounting firm to "engage in any non-audit service, including
tax services," that is not listed above, only if the activity
is pre-approved by the audit committee of the issuer. The audit
committee will disclose to investors in periodic reports its decision
to pre-approve non-audit services. Statutory insurance company regulatory
audits are treated as an audit service, and thus do not require
pre-approval. |
| |
| The pre-approval requirement
is waived with respect to the provision of non-audit services for
an issuer if the aggregate amount of all such non-audit services
provided to the issuer constitutes less than 5 % of the total amount
of revenues paid by the issuer to its auditor (calculated on the
basis of revenues paid by the issuer during the fiscal year when
the non-audit services are performed), such services were not recognized
by the issuer at the time of the engagement to be non-audit services;
and such services are promptly brought to the attention of the audit
committee and approved prior to completion of the audit. |
| |
| The authority to pre-approve
services can be delegated to 1 or more members of the audit committee,
but any decision by the delegate must be presented to the full audit
committee. |
|
| Section 203: Audit
Partner Rotation. |
| |
| The lead audit or coordinating
partner and the reviewing partner must rotate off of the audit every
5 years. |
|
| Section 204: Auditor
Reports to Audit Committees. |
| |
| The accounting firm
must report to the audit committee all "critical accounting
policies and practices to be used…all alternative treatments
of financial information within [GAAP] that have been discussed
with management…ramifications of the use of such alternative
disclosures and treatments, and the treatment preferred" by
the firm. |
|
| Section 206: Conflicts
of Interest. |
| |
| The CEO, Controller,
CFO, Chief Accounting Officer or person in an equivalent position
cannot have been employed by the company's audit firm during the
1-year period proceeding the audit. |
|
| Section 207: Study
of Mandatory Rotation of Registered Public Accountants. |
| |
| The GAO will do a study
on the potential effects of requiring the mandatory rotation of
audit firms. |
|
| Section 209: Consideration
by Appropriate State Regulatory Authorities. |
| |
| State regulators are
directed to make an independent determination as to whether the
Boards standards shall be applied to small and mid-size non-registered
accounting firms. |
|
| Section 301: Public
Company Audit Committees. |
| |
| Each member of the audit
committee shall be a member of the board of directors of the issuer,
and shall otherwise be independent. |
| |
| "Independent"
is defined as not receiving, other than for service on the board,
any consulting, advisory, or other compensatory fee from the issuer,
and as not being an affiliated person of the issuer, or any subsidiary
thereof. |
| |
| The SEC may make exemptions
for certain individuals on a case-by-case basis. |
| |
| The audit committee
of an issuer shall be directly responsible for the appointment,
compensation, and oversight of the work of any registered public
accounting firm employed by that issuer. |
| |
| The audit committee
shall establish procedures for the "receipt, retention, and
treatment of complaints" received by the issuer regarding accounting,
internal controls, and auditing. |
| |
| Each audit committee
shall have the authority to engage independent counsel or other
advisors, as it determines necessary to carry out its duties. |
| |
| Each issuer shall provide
appropriate funding to the audit committee. |
|
| Section 302: Corporate
Responsibility For Financial Reports. |
| |
| The CEO and CFO of each
issuer shall prepare a statement to accompany the audit report to
certify the "appropriateness of the financial statements and
disclosures contained in the periodic report, and that those financial
statements and disclosures fairly present, in all material respects,
the operations and financial condition of the issuer." A violation
of this section must be knowing and intentional to give rise to
liability. |
|
| Section 303: Improper
Influence on Conduct of Audits |
| |
| It shall be unlawful
for any officer or director of an issuer to take any action to fraudulently
influence, coerce, manipulate, or mislead any auditor engaged in
the performance of an audit for the purpose of rendering the financial
statements materially misleading. |
|
| Section 304: Forfeiture
Of Certain Bonuses And Profits. |
| |
| Section
305: Officer And Director Bars And Penalties; Equitable Relief. |
| |
| If an issuer
is required to prepare a restatement due to "material noncompliance"
with financial reporting requirements, the chief executive officer
and the chief financial officer shall "reimburse the issuer
for any bonus or other incentive-based or equity-based compensation
received" during the twelve months following the issuance or
filing of the non-compliant document and "any profits realized
from the sale of securities of the issuer" during that period. |
| |
| In any action
brought by the SEC for violation of the securities laws, federal
courts are authorized to "grant any equitable relief that may
be appropriate or necessary for the benefit of investors."
|
|
| Section
305: Officer And Director Bars And Penalties. |
| |
| The SEC
may issue an order to prohibit, conditionally or unconditionally,
permanently or temporarily, any person who has violated section
10(b) of the 1934 Act from acting as an officer or director of an
issuer if the SEC has found that such person's conduct "demonstrates
unfitness" to serve as an officer or director of any such issuer. |
|
| Section
306: Insider Trades During Pension Fund Black-Out Periods Prohibited. |
| |
| Prohibits
the purchase or sale of stock by officers and directors and other
insiders during blackout periods. Any profits resulting from sales
in violation of this section "shall inure to and be recoverable
by the issuer." If the issuer fails to bring suit or prosecute
diligently, a suit to recover such profit may be instituted by "the
owner of any security of the issuer." |
|
| Section
401(a): Disclosures In Periodic Reports; Disclosures Required. |
| |
| Each financial
report that is required to be prepared in accordance with GAAP shall
"reflect all material correcting adjustments . . . that have
been identified by a registered accounting firm . . . ." |
| |
| "Each
annual and quarterly financial report . . . shall disclose all material
off-balance sheet transactions" and "other relationships"
with "unconsolidated entities" that may have a material
current or future effect on the financial condition of the issuer. |
| |
| The SEC
shall issue rules providing that pro forma financial information
must be presented so as not to "contain an untrue statement"
or omit to state a material fact necessary in order to make the
pro forma financial information not misleading. |
|
| Section
401 (c): Study and Report on Special Purpose Entities. |
| |
| SEC shall
study off-balance sheet disclosures to determine a) extent of off-balance
sheet transactions (including assets, liabilities, leases, losses
and the use of special purpose entities); and b) whether generally
accepted accounting rules result in financial statements of issuers
reflecting the economics of such off-balance sheet transactions
to investors in a transparent fashion and make a report containing
recommendations to the Congress. |
|
| Section
402(a): Prohibition on Personal Loans to Executives. |
| |
| Generally,
it will be unlawful for an issuer to extend credit to any director
or executive officer. Consumer credit companies may make home improvement
and consumer credit loans and issue credit cards to its directors
and executive officers if it is done in the ordinary course of business
on the same terms and conditions made to the general public. |
|
| Section
403: Disclosures Of Transactions Involving Management And Principal
Stockholders. |
| |
| Directors,
officers, and 10% owner must report designated transactions by the
end of the second business day following the day on which the transaction
was executed. |
|
| Section
404: Management Assessment Of Internal Controls. |
| |
| Requires
each annual report of an issuer to contain an "internal control
report", which shall: |
| |
| (1) state
the responsibility of management for establishing and maintaining
an adequate internal control structure and procedures for financial
reporting; and |
| |
| (2) contain
an assessment, as of the end of the issuer's fiscal year, of the
effectiveness of the internal control structure and procedures of
the issuer for financial reporting. |
| |
| Each issuer's
auditor shall attest to, and report on, the assessment made by the
management of the issuer. An attestation made under this section
shall be in accordance with standards for attestation engagements
issued or adopted by the Board. An attestation engagement shall
not be the subject of a separate engagement. |
| |
| The language
in the report of the Committee which accompanies the bill to explain
the legislative intent states, "--- the Committee does not
intend that the auditor's evaluation be the subject of a separate
engagement or the basis for increased charges or fees." |
| |
| Directs
the SEC to require each issuer to disclose whether it has adopted
a code of ethics for its senior financial officers and the contents
of that code. |
| |
| Directs
the SEC to revise its regulations concerning prompt disclosure on
Form 8-K to require immediate disclosure "of any change in,
or waiver of," an issuer's code of ethics. |
|
| Section
407: Disclosure of Audit Committee Financial Expert. |
| |
| The SEC
shall issue rules to require issuers to disclose whether at least
1 member of its audit committee is a "financial expert." |
|
| Section
409: Real Time Disclosure. |
| |
| Issuers
must disclose information on material changes in the financial condition
or operations of the issuer on a rapid and current basis. |
|
| Section
501: Treatment of Securities Analysts by Registered securities Associations. |
| |
| National
Securities Exchanges and registered securities associations must
adopt conflict of interest rules for research analysts who recommend
equities in research reports. |
|
| Section 601: SEC
Resources and Authority. |
| |
| SEC appropriations for
2003 are increased to $776,000,000. $98 million of the funds shall
be used to hire an additional 200 employees to provide enhanced
oversight of auditors and audit services required by the Federal
securities laws. |
|
| Section 602(a): Appearance
and Practice Before the Commission. |
| |
| The SEC may censure
any person, or temporarily bar or deny any person the right to appear
or practice before the SEC if the person does not possess the requisite
qualifications to represent others, lacks character or integrity,
or has willfully violated Federal securities laws. |
|
| Section 602(c): Study
and Report. |
| |
| SEC is to conduct a
study of "securities professionals" (public accountants,
public accounting firms, investment bankers, investment advisors,
brokers, dealers, attorneys) who have been found to have aided and
abetted a violation of Federal securities laws. |
|
| Section 602(d): Rules
of Professional Responsibility for Attorneys. |
| |
| The SEC shall establish
rules setting minimum standards for professional conduct for attorneys
practicing before it. |
|
| Section 701: GAO
Study and Report Regarding Consolidation of Public Accounting Firms. |
| |
| The GAO shall conduct
a study regarding the consolidation of public accounting firms since
1989, including the present and future impact of the consolidation,
and the solutions to any problems discovered. |
|
| Title VIII: Corporate
and Criminal Fraud Accountability Act of 2002. |
| |
| It is a felony to "knowingly"
destroy or create documents to "impede, obstruct or influence"
any existing or contemplated federal investigation. |
| |
| Auditors are required
to maintain "all audit or review work papers" for five
years. |
| |
| The statute of limitations
on securities fraud claims is extended to the earlier of five years
from the fraud, or two years after the fraud was discovered, from
three years and one year, respectively. |
| |
| Employees of issuers
and accounting firms are extended "whistleblower protection"
that would prohibit the employer from taking certain actions against
employees who lawfully disclose private employer information to,
among others, parties in a judicial proceeding involving a fraud
claim. Whistle blowers are also granted a remedy of special damages
and attorney's fees. |
| |
| A new crime for securities
fraud that has penalties of fines and up to 10 years imprisonment. |
|
| Title IX: White Collar
Crime Penalty Enhancements |
| |
| Maximum penalty for
mail and wire fraud increased from 5 to 10 years. |
| |
| Creates a crime for
tampering with a record or otherwise impeding any official proceeding. |
| |
| SEC given authority
to seek court freeze of extraordinary payments to directors, offices,
partners, controlling persons, agents of employees. |
| |
| US Sentencing Commission
to review sentencing guidelines for securities and accounting fraud. |
| |
| SEC may prohibit anyone
convicted of securities fraud from being an officer or director
of any publicly traded company. |
| |
| Financial Statements
filed with the SEC must be certified by the CEO and CFO. The certification
must state that the financial statements and disclosures fully comply
with provisions of the Securities Exchange Act and that they fairly
present, in all material respects, the operations and financial
condition of the issuer. Maximum penalties for willful and knowing
violations of this section are a fine of not more than $5,000,000
and/or imprisonment of up to 20 years. |
|
| Section 1001: Sense
of Congress Regarding Corporate Tax Returns |
| |
| It is the sense of Congress
that the Federal income tax return of a corporation should be signed
by the chief executive officer of such corporation. |
|
| Section 1102: Tampering
With a Record or Otherwise Impeding an Official Proceeding |
| |
| Makes it a crime for
any person to corruptly alter, destroy, mutilate, or conceal any
document with the intent to impair the object's integrity or availability
for use in an official proceeding or to otherwise obstruct, influence
or impede any official proceeding is liable for up to 20 years in
prison and a fine. |
|
| Section 1103: Temporary
Freeze Authority |
| |
| The SEC is authorized
to freeze the payment of an extraordinary payment to any director,
officer, partner, controlling person, agent, or employee of a company
during an investigation of possible violations of securities laws. |
|
| Section 1105: SEC
Authority to Prohibit Persons from Serving as Officers or Directors |
| |
| The SEC may prohibit
a person from serving as an officer or director of a public company
if the person has committed securities fraud. |
|
