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Corporate Accounting and Disclosure Reform: Comparing Senate and House Bills, And How SEC and White House Proposals Stack Up
(RIVERWOODS, ILL., July 16, 2002) – When it comes to accounting reform
and corporate responsibility, there seems to be no shortage of opinion.
Below CCH INCORPORATED (CCH), a leading provider of securities and
business law information, software and services, provides a side-by-side
comparison of the major provisions contained in the House bill passed
in April and the just-passed Senate bill.
Also, since passage of the House bill, President Bush has outlined
additional proposals for corporate governance and the Securities and
Exchange Commission (SEC) has issued a series of proposed rules over
the past few months. Any Congressional legislation would preempt conflicting
SEC regulations. Below CCH also provides an overview of the key aspects
of the SEC and White House proposals.
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Senate Bill
Public Company Accounting Reform and Investor Protection Act
of 2002 (S. 2673)
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House Bill*
Corporate and Auditing Accountability, Responsibility, and
Transparency Act of 2002 (H.R. 3763)
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Accounting Oversight Body
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- Composition: five members, of whom only two are or have
been accountants.
- Must be funded by public companies.
- Powers: sets auditing, quality control, and ethics standards
for public accounting firms; inspects/investigates accounting
firms; and imposes disciplinary and remedial sanctions.
- Auditors of public companies must register with board.
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- Composition: five members, of whom only two are currently
licensed to practice public accounting and have recent auditing
experience. Of the remaining three members, two may be licensed
to practice accounting if they have not practiced within two
years of their appointment, and one member must not be licensed
to practice accounting.
- Must be self-funded, as determined by the board, provided
that the funding does not come exclusively from the accounting
profession.
- Powers: imposes sanctions for intentional or knowing misconduct,
including a determination that an accountant is not qualified
to certify a financial statement; reviews audits; reviews
potential conflicts of interest between accountant and the
company.
- SEC cannot accept financial reports unless audited by accountant
registered and in good standing with the board.
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Auditor Independence
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- Bars a broad range of non-audit services for audit clients:
(1) bookkeeping or other services related to the accounting
records or financial statements; (2) financial information
systems design and implementation; (3) appraisal or valuation
services, fairness opinions, and contribution-in-kind reports;
(4) actuarial services; (5) internal audit outsourcing services;
(6) management functions or human resources; (7) broker-dealer,
investment advisor, or investment banking services; (8) legal
services unrelated to the audit; and (9) any other service
the board chooses to prohibit.
- Allows certain other non-audit services, e.g., tax services,
subject to pre-approval by company’s audit committee. Allows
waiver of pre-approval requirement for small (under 5% of
total compensation to auditor) non-audit services if promptly
brought to audit committee’s attention and approved before
completion.
- Prohibits officers/directors from coercing, manipulating,
or misleading an auditor in violation of rules that the SEC
deems appropriate.
- Requires rotation of auditor every five years. Directs the
Comptroller General to conduct a study of the effects of requiring
auditor rotation.
- Bars audit of firm whose senior officers had been employed
by auditor within one year before the audit commences.
- Auditor must timely report to audit committee critical accounting
policies and alternative treatments within GAAP discussed
with management, and any disagreements or material written
communications with management.
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- Bars certain non-audit services for audit clients: (1) financial
information systems design and implementation; and (2) internal
audit services. SEC must periodically review other services
to determine whether they should be prohibited too.
- Prohibits officers/directors from coercing, manipulating,
or misleading an auditor in violation of rules that the SEC
deems appropriate.
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Corporate Governance/
Responsibility*
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- Allows SEC to impose corporate bar for unfitness to serve.
- CEO and CFO must forfeit certain bonuses/compensation received
following a restatement due to securities law noncompliance.
- CEO and CFO must certify periodic reports.
- Audit committee duties/powers: (1) directly responsible
for appointment, compensation, and oversight of independent
auditor; (2) must establish procedures for addressing complaints
on accounting/auditing matters, including procedures for employees’
anonymous submission of concerns; (3) power and funding to
engage counsel and advisers; and (4) cannot accept consulting
fees or be affiliated persons of the company.
- Makes fraud a felony subject to 10-year maximum prison sentence.
- Declares that destroying evidence to obstruct an investigation
is illegal whether or not records are subject to a subpoena.
- Requires SEC to set standards for attorneys practicing before
the Commission to report securities law violations to the
CEO or chief legal counsel and, if necessary, to the audit
committee.
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- SEC may impose corporate bar for substantial unfitness
to serve, based on specified factors.
- SEC must determine whether/when to require disgorgement
of profits made/losses avoided during 6 months preceding a
restatement.
- Requires the retention of records for no less than seven
years after an audit.
- SEC must review, report on, and make recommendations concerning
certain corporate governance practices.
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Corporate Disclosure
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- SEC must issue rules requiring: (1) disclosure of material
off-balance sheet transactions/relationships; (2) reconciliation
of pro forma information to GAAP; (3) inclusion of internal
control assessment in company’s annual report; and (4) disclosure
whether audit committee includes at least one member who is
a financial expert.
- Requires disclosure of the company’s code of ethics for
senior financial officers, and if none exists, the reasons
why.
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- SEC must amend rules governing corporate disclosures, requiring
adequate and appropriate disclosure of off-balance sheet transactions
and relationships with unconsolidated entities or other persons.
- Companies must disclose on a real-time basis corporate information
that the SEC deems, by rule, necessary in the public interest.
- Requires prompt disclosure on Form 8-K of change in code
of ethics.
- SEC must review issuers’ disclosures more often, based on
a confidential SEC-established risk rating system, but in
no event less than once every 3 years.
- SEC must conduct a study to determine whether to require
additional disclosure items in a company’s financial statements
and filings.
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Insider Transactions
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- Amends Section 16(a) to require insiders to report by end
of second business day following transaction.
- Bans loans to company directors and officers with the exception
of consumer credit loans made to executives on market terms
in the ordinary course of the company’s consumer credit business.
- Prohibits insider trades during pension fund blackout periods.
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- SEC must make rules requiring insiders to report transactions
in company securities under Section 16(a) by the end of the
next business day following the transaction.
- SEC must adopt rules to ensure adequate disclosure of insider
loans.
- Prohibits insider trades during pension fund blackout periods.
- SEC must make rules to improve the transparency and clarity
of the financial reporting as to insider trading and relationships,
relationships with philanthropic organizations, insider-controlled
affiliates, joint ownerships, and the provision of professional
services by related persons.
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Other
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- SEC must adopt rules to address analyst conflicts of interest
- SEC must study and report to Congress on switch to principles-based
accounting system.
- Gives SEC additional appropriations and staffing.
- SEC must conduct a comprehensive study of the accounting
treatment of special purpose entities
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- SEC must review SRO rules on analyst conflicts and recommend
further rules, if appropriate.
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Source: CCH INCORPORATED 2002
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* On July 16, the House passed legislation containing new criminal
penalties for corporate fraud.
White House Corporate Governance Proposals
- Create a task force headed by the Justice Department to provide
direction for investigations, prosecutions and better coordination
between agencies in fighting financial crimes. Includes federal
prosecutors in cities that are financial centers, Treasury Secretary
Paul O'Neill, FBI Director Robert Mueller and top officials from
the IRS, SEC, FERC and FCC.
- Doubles, to 10 years, the maximum prison term for mail fraud and
wire fraud. Longer prison time for corporate officers and directors
convicted of criminal fraud. Tougher laws that criminalize document
shredding and other forms of obstruction of justice.
- Strengthens the SEC's ability to freeze extraordinary payments
to corporate executives while a company is being investigated.
- Urges companies to prevent officers from receiving loans from
their companies and bar officers and directors who engage in serious
misconduct from again serving in leadership positions.
- Calls on CEOs to explain how their compensation packages are in
the best interests of their companies' shareholders and clearly
disclose the details of those packages.
- Asks Congress to appropriate $20 million more to allow the SEC
to hire 100 new enforcement officers.
- Stock markets should require that a majority of a company's directors
and all members of the audit, nominating and compensation committees
be barred from having a material relationship with the company.
SEC Proposed Rules
Accounting Oversight Body
- Public company’s reports not accepted if its auditor is a member
of a Public Accountability Board (PAB), and the company is an adjunct
member of the same PAB (in case the PAB needs information from the
client to facilitate its review of the accountant).
- General aspects: (1) one or more private sector bodies directed
by representatives of investors and issuers; (2) board is dominated
by person who are not accountants; (3) subject to SEC oversight.
- Powers: (1) examine accounting firms quality controls and disciplines
them where appropriate; (2) set, or rely on and oversee designated
private bodies to set, audit, quality control, and ethics standards.
- Company must disclose in filings if a PAB has sanctioned an executive
officer, director, or director nominee as a member accountant within
the last 5 years, and that sanction has not been reversed/suspended.
Accelerated Disclosure
- Applies to large, established companies, i.e., those that meet
certain standards as to aggregate market value and reporting history
with the SEC.
- Shortens filing deadline of Form 10-K to 60 days (from 90) and
Form 10-Q to 30 days (from 45).
- Web site disclosure: Must disclose in annual report where investors
can get filings and whether they’re available on company’s web site
as soon as filed with SEC.
Form 8-K (Insider Transactions)
- Amends Form 8-K (the "current" report of certain material
transactions or events) to require companies to disclose: (1) transactions
by directors and executive officers; (2) adoption, modification,
or termination of "Rule 10b5-1" trading plans; and (3)
loans to directors and officers made or guaranteed by company.
- Applies to the company’s directors and executive officers.
- Filing deadlines: (1) for transactions of $100,000 or more, within
two business days; (2) for transactions under $100,000 and "Rule
10b5-1" trading plan events, due by close of business of second
business day of the following week; and (3) for transactions not
exceeding $10,000, filing can be deferred until aggregate unreported
transactions for that person exceeds $10,000.
- Exempt transactions: receipt of stock dividends; routine acquisitions
through 401(k) plan, inheritances, etc.
Form 8-K (Additional Items)
- New items include: (1) making/terminating material agreements
not in ordinary course of business; (2) material changes to a customer
agreement; (3) creation of a material financial obligation, including
loan guarantees; (4) defaults that trigger a material financial
obligation; (5) material write-offs, restructurings, or other exit
activities; (6) material charges for impairments to company assets;
(7) credit rating changes; (8) changes in the trading of company
securities, such as exchanges, delistings, or notices of violation
of listing standards; (9) withdrawal by an auditor of an audit report,
or company decision that it cannot rely on a previous audit report;
(10) material limitations in employee benefit or stock ownership
plans, such as lock-out periods preventing trading.
- Deadline: All disclosure items due within 2 business days after
event, not the current 15 days (for most items).
MD&A Disclosure of "Critical" Accounting Estimates
and Policies
- Requires Management’s Discussion and Analysis (MD&A) section
to discuss two new items: (1) critical accounting estimates made
by company; and (2) the adoption of a critical accounting policy.
- Accounting estimates:
- Company must first identify any estimates reflected in financial
statement that require assumptions about highly uncertain matters.
- Disclosure required if different estimates the company could
reasonably have used—or if changes in the estimate that are
reasonably likely to occur from period to period—would materially
affect financial results.
- MD&A must discuss the nature, methodology, and effect
of these estimates, and the effect of changes in these estimates.
- Disclosure duty triggered when company
initially adopts a material accounting policy.
- A policy’s initial adoption occurs when events/transactions
that affect the company occur for the first time, or when previously
immaterial events/transactions become material.
- MD&A must discuss the events/transactions that precipitated
adoption of critical accounting policy, the principle adopted
and method of applying it, the policy’s effect, and any alternatives
to the policy not chosen and the effect that such alternatives
would have had.
CEO, CFO Certification
- CEO and CFO must each certify that, to best of his or her knowledge,
the information in quarterly and annual reports is true in all important
respects and that the reports contain all material information of
which he or she is aware.
- Company must have procedures to ensure that it collects, processes,
and discloses the information required in Forms 10-K, 10-Q, and
8-K, and to periodically review these procedures so that officers
can determine whether reports are complete.
About CCH INCORPORATED
CCH INCORPORATED, founded in 1913, has
served four generations of business professionals and their clients.
The company produces approximately 700 print and electronic products
for securities, tax, legal, banking, securities, human resources,
health care and small business markets. CCH is a wholly owned subsidiary
of Wolters Kluwer North America. The CCH web site can be accessed
at cch.com.
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