For other versions of this document, see http://wikileaks.org/wiki/CRS-RL31483 ------------------------------------------------------------------------------ Order Code RL31483 Report for Congress Received through the CRS Web The Sarbanes-Oxley Act of 2002: A Side-by-Side Comparison of House, Senate, and Conference Versions Updated July 26, 2002 Mark Jickling Specialist in Public Finance Government and Finance Division Congressional Research Service ~ The Library of Congress The Sarbanes-Oxley Act of 2002: A Side-by-Side Comparison of House, Senate, and Conference Versions Summary This report compares the major provisions of three versions of auditor and accounting reform legislation. Set out are the versions of H.R. 3763 passed by the House on April 24, 2002, passed by the Senate on July 15, 2002, and the conference version that was approved by both houses of Congress as the Sarbanes-Oxley Act of 2002 on July 26, 2002. President Bush indicated that he would sign the measure into law within a few days. The cornerstone of U.S. securities regulation is disclosure. According to this approach, the best way to protect investors from fraud, hype, and irrational exuberance is to require companies selling stocks and bonds to the public to disclose detailed information about their financial strengths and weaknesses. Without complete and accurate information, investors cannot make rational decisions, and the market cannot allocate funds to the most productive users. Ill-informed investment choices hurt individual investors, but there are also costs to the national economy in terms of wasted resources, jobs not created, and innovations forgone. If investors decide they cannot trust corporate disclosures, they will be less likely to buy stocks and bonds, raising the cost of capital for all firms, good and bad. Since the market's peak in early 2000, U.S. stocks have lost about $7 trillion in value. The share prices of firms that fail to meet their own profit projections, or Wall Street's expectations, are apt to plummet. The desire to avoid or postpone stock market losses creates a powerful incentive for corporate management to engage in accounting practices that conceal bad news. The cases of Enron, WorldCom, and a growing list of others suggest that this incentive is often strong enough to overwhelm the watchdog mechanisms in place to prevent deceptive financial reporting. The Sarbanes-Oxley Act seeks to restore confidence in corporate reporting by enhancing the oversight of financial accounting. The measure creates a new oversight body to regulate independent auditors (whose certification the law requires to be affixed to the annual reports of all publicly traded corporations). Under previous practice, auditors were regulated mainly by private professional accounting groups; the new board will also be private, but will operate under the direct oversight of the Securities and Exchange Commission. A majority of the five board members will be non-accountants. The board will have sweeping powers to inspect accounting firms, set rules and standards for auditing, and impose sanctions on violators. Auditors will be prohibited from providing certain non-audit consulting services to their audit clients, and the oversight role of the board of directors will be strengthened. Top corporate officials will have to personally attest to the accuracy of their firm's accounting (and face penalties if financial statements are later found to be erroneous). Stock trades by corporate insiders will have to be made public within two days, and most loans by companies to their executives will be prohibited. This report traces the evolution of the Sarbanes-Oxley Act by comparing the major features of the bills passed by the House, the Senate, and the conference committee. It will not be updated further. Contents Creation of a New Auditor Oversight Board . . . . . . . . . . . . . . . . . . . . . 2 Auditor Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Enhanced Accounting Disclosure Requirements . . . . . . . . . . . . . . . . . . 6 Stock Analysts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Corporate Executive Accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Corporate Boards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Increased Penalties for Securities Law Violations . . . . . . . . . . . . . . . 12 Other Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 APPENDIX A. President Bush's 10-Point Plans . . . . . . . . . . . . . . . . . . . . . . . . 15 The Sarbanes-Oxley Act of 2002: A Side-by-Side Comparison of House, Senate, and Conference Versions The table below presents a side-by-side comparison of three versions of the Sarbanes-Oxley Act of 2002: (1) H.R. 3763 as passed by the House on April 24, 2002; (2) H.R. 3763 as passed by the Senate on July 15, 2002( with the S. 2673 as an amendment in the nature of a substitute); and (3) the conference version approved by both houses of Congress on July 25, 2002. The provisions are set out in eight categories: ! creation of a new auditor oversight body; ! auditor independence; ! enhanced accounting disclosure requirements; ! stock analysts; ! corporate executive accountability; ! corporate boards; ! increased penalties for securities law violations; and ! other provisions. The appendix to this report summarizes the two ten-point plans put forward by President Bush. CRS-2 Table 1. Comparison of Provisions of the Sarbanes-Oxley Act of 2002: House, Senate, and Conference Versions Provision H.R. 3763 (House) H.R. 3763 (Senate) Conference Version I. Creation of a New Auditor Oversight Board. Name of new regulator Public Regulatory Public Company Follows Senate bill Organization Accounting Oversight Board Number of board members Five Five Five Board composition Two members would be Three must never have Follows Senate bill accountants with recent been accountants; two may experience in auditing be accountants, but if an public companies; two accountant is to be could be CPAs, provided chairman, he or she must they had not worked in the not have been in active accounting industry for 2 practice for 5 years years; and at least one member must never have been a CPA CRS-3 Provision H.R. 3763 (House) H.R. 3763 (Senate) Conference Version Scope of board's activity (1) to review auditors' (1) set auditing, quality Follows Senate bill work product, (2) to control, and independence enforce (but not set) standards, (2) inspect the standards of competency auditing operations of and professional ethics, public accounting firms and (3) to review conflicts (required to register with of interest between the board and file annual auditors and their clients. reports if they audited public companies), and (3) investigate violations of securities laws, standards of ethics, competency, and conduct set by the accounting profession, and the board's own rules Who must register with the No registration All accounting firms that Follows Senate bill board? requirements audit public companies Standard-setting powers None Would set auditing, quality Follows Senate bill control, and independence standards Disciplinary powers Could impose a variety of Could impose a variety of Could impose fines, sanctions, including a sanctions, including a censures, and suspend determination that a firm is determination that a firm is firms from auditing not qualified to audit not qualified to audit publicly traded public companies. SEC public companies. SEC corporations. SEC and and state accountancy and state accountancy state boards of boards would be notified boards would be notified accountancy would be of final sanctions of final sanctions notified of final sanctions SEC to review and Yes Yes Yes possibly reduce board sanctions? CRS-4 Provision H.R. 3763 (House) H.R. 3763 (Senate) Conference Version SEC oversight authority to Yes Yes Yes. Further specifies that abrogate, add to, or modify the SEC can assign to the any of the board's rules? board duties and responsibilities not included in the statute Source of funding Specifies that the board Funded (1) by accountants, Follows Senate bill, with will not be solely who would pay the cost of further provision that fines dependent on the mandatory registration collected by the board are accounting profession for with the board, and (2) by to fund merit scholarships its funding companies that sell for accounting students. securities to the public, Fees that fund the board who would be assessed a will also fund FASB fee proportional to the value of their securities in circulation in the public market. CRS-5 Provision H.R. 3763 (House) H.R. 3763 (Senate) Conference Version II. Auditor Independence. Bans on provision of Directs the SEC to revise Amends statute to ban Follows Senate bill, and certain non-audit services its auditor independence financial system design adds provision that an by auditors to their clients rules to prohibit an and internal audit work. audit of an insurance independent auditor from Existing SEC regulations company required by state designing or implementing against provision of certain law meets the definition of financial information other non-audit services an "audit service" systems or from are also incorporated into performing internal audit the statute. Except in work for companies for certain cases, the Senate which it is the outside bill stipulates that auditors auditor. (Under current may provide permitted SEC rules, auditors are consulting services (such barred from supervising or as tax preparation) to their managing their clients' audit clients only with the information systems, and approval of the audit from performing more than committee of the client's 40% of their clients' board of directors internal audits.) Who would set auditor The SEC The new board Follows Senate bill independence standards? Auditor rotation No provision Requires the rotation of the Follows Senate bill, and lead audit partner after applies rotation auditing a company for requirement to five consecutive years. "coordinating" and Calls for a study of "reviewing" audit partners, mandatory rotation of as well as the "lead" audit firms partner CRS-6 Provision H.R. 3763 (House) H.R. 3763 (Senate) Conference Version Auditor/client employment No provision Bars an accountant from Follows Senate bill relationships serving as the outside auditor for a company where a top officer had been employed by the accountant within the past year III. Enhanced Accounting Disclosure Requirements. Insider transactions in Stock trades by corporate Insider trades must be Insider trades must be corporate securities insiders must be reported reported to the public reported to the SEC by the electronically to the public within two business days second business day after on the business day of the transaction the transaction (unless the following the transaction. SEC finds this is not (Under current rules, feasible), and the SEC disclosure may not be must display the filings on required for weeks or its web site the day after months.) the filing is received Require enhanced Yes Yes Yes disclosure of off-balance sheet transactions, and material transactions with unconsolidated subsidiaries? Require disclosure of any Yes Yes Yes change in a corporation's code of ethics? CRS-7 Provision H.R. 3763 (House) H.R. 3763 (Senate) Conference Version Other disclosures required Real-time disclosure of Directs SEC to make rules Adopts both House and events that would be to require that (1) pro- Senate provisions material to investors' forma financial statements decisions to buy or sell. (unaudited reports that do The SEC would determine not follow generally the kinds of events subject accepted accounting to real-time reporting principles) must be reconciled with GAAP and that (2) corrections or adjustments of past financial statements that were made at the insistence of a corporation's auditor must be disclosed Enhance SEC review of Requires SEC to establish No provision Requires SEC to inspect corporate financial a risk rating system to companies' financial statements determine how often a statements at least every 3 firm's financial statements years (and more often for should be reviewed large firms) CRS-8 Provision H.R. 3763 (House) H.R. 3763 (Senate) Conference Version Accounting standards No provisions Directs the SEC to ensure Follows Senate bill setting that the Financial Accounting Standards Board, which sets accounting standards, be funded by contributions from securities issuers (rather than by the accounting industry). Also requires FASB to adopt procedures to ensure "prompt consideration" of needed changes to accounting rules IV. Stock Analysts. New disclosure Directs the SEC to study Directs the SEC or the Follows Senate bill requirements and conflicts of interest that NASD (which regulates regulation of Wall Street may affect analysts stockbrokers) to adopt analysts rules of conduct for stock analysts. Mandates that these rules require disclosure of analysts' (and their firms') investment in, and business relationships with, the companies they cover CRS-9 Provision H.R. 3763 (House) H.R. 3763 (Senate) Conference Version V. Corporate Executive Accountability. Requires personal No Yes. Also requires Directs SEC to make rules certification of financial certification of the requiring CEO statements by CEOs and adequacy of a company's certification, specifies the CFOs? internal accounting contents of the controls, and establishes certification, and imposes a criminal penalties for knowledge standard. violations for knowingly Follows Senate bill in or willfully certifying a requiring certification of false or misleading the adequacy of a statement company's internal accounting controls, and establishing criminal penalties for violations Penalties if financial Calls for SEC to study the CEOs and CFOs would Follows Senate bill statements are found to be possibility of requiring forfeit both trading profits erroneous? disgorgement of profits and bonuses received in from insider securities the 12 months before a transactions, and to adopt a financial report was rule to require restated as the result of disgorgement if needed misconduct Directs SEC to add civil No provision No provision Establishes FAIR funds for fines to disgorgement defrauded investors, funds available to consisting of monies compensate victims of disgorged, fines collected securities fraud through SEC civil or administrative actions against securities law violators, and gifts or donations CRS-10 Provision H.R. 3763 (House) H.R. 3763 (Senate) Conference Version Personal loans by firms to Must be disclosed Prohibited, unless the loan Follows Senate bill, with top executives and is made in the normal added exemptions for directors course of business on the charge cards and margin same terms available to loans to employees of public borrowers securities firms Authorizes SEC to bar Yes Yes Yes violators of securities laws from serving as officers or directors of any publicly traded company? Makes it a criminal offense Yes Yes Yes for an officer or director of a corporation to mislead, coerce, manipulate, or fraudulently influence an independent auditor? CRS-11 Provision H.R. 3763 (House) H.R. 3763 (Senate) Conference Version VI. Corporate Boards. Audit committee None Makes the audit committee Follows Senate bill provisions of the board of directors responsible for the hiring, compensation, and oversight of the independent auditor. Audit committee members would be prohibited from accepting consulting fees from the company, and would be required to establish procedures for receiving complaints about accounting and auditing, including anonymous "whistle blower" reports. At least one member of the audit committee would have to be a "financial expert," to be defined by the SEC CRS-12 Provision H.R. 3763 (House) H.R. 3763 (Senate) Conference Version Auditor report to audit No provision Requires the independent Follows Senate bill committee auditor to report to the audit committee on critical accounting policies followed, disagreements with management over accounting principles, and other matters VII. Increased Penalties for Securities Law Violations. Securities fraud No provision, but H.R. Increases penalties for Follows Senate bill 5118 (passed House altering or destroying 7/16/02) contains documents, protects provisions similar to whistle blowers, and Senate bill, except as prevents bankruptcy courts regards jail terms (see from discharging debts below) incurred through securities fraud White-collar crime No provision, but H.R. Raises fines and jail terms Follows Senate bill, but penalties 5118 (passed House for several offenses, see below for changes 7/16/02) contains including mail and wire regarding jail terms provisions similar to fraud, certification of a Senate bill, except as false financial statement, regards jail terms (see conspiracy to defraud the below) United States, ERISA violations, and impeding an official investigation Prison terms No provision, but H.R. Increases maximum Adopts provisions of H.R. 5118 increases maximum sentence for above 5118 sentence for above offenses from 5 to 10 years offenses from 5 to 20 (or 25) years CRS-13 Provision H.R. 3763 (House) H.R. 3763 (Senate) Conference Version Statute of limitations in No provision Increases statute of Follows Senate bill securities fraud cases limitations from 1 year of discovery or 3 years of occurrence of fraud, to 2 years or 5 years, respectively VIII. Other Provisions. SEC budget No provision, but H.R. Authorizes appropriations Follows Senate bill 3764, passed by the House for the SEC for FY2003 of on 6/26/02, authorizes $776 million, as opposed $776 million for the SEC to $469 million in the in FY2003 Administration's budget request SEC freeze authority No provision, but H.R. Allows the SEC to freeze Follows Senate bill 5118 (passed House extraordinary payments to 7/16/02) contains similar corporate insiders during language an investigation of securities law violations Directs SEC to issue rules Yes Yes Yes of professional responsibility for attorneys of firms that sell securities to the public Prohibits corporate Yes Yes Yes insiders from trading securities while a pension fund is locked down (i.e., when employees cannot access their accounts) CRS-14 Provision H.R. 3763 (House) H.R. 3763 (Senate) Conference Version Penny stock bar No provision No provision Gives federal courts authority to prohibit securities law violators from participating in offerings of penny stocks Studies required Calls for the SEC to study Directs the SEC to study Calls for the SEC to study stock analysts, bond rating bond rating agencies and special purpose entities, agencies, SEC mandatory rotation of bond rating agencies, enforcement actions, and audit firms, and the GAO principles-based corporate governance, and to study the effects of accounting standards, for the GAO to study the mergers in the accounting securities law violators and role of Wall Street industry enforcement programs, and investment banks in mandatory auditor rotation, corporate accounting and for the GAO to study deceptions effects of mergers in the accounting industry and the role of Wall Street investment banks in corporate accounting deceptions CRS-15 APPENDIX A. President Bush's 10-Point Plans In speeches on March 7, 2002, and July 9, 2002, President Bush set out a ten- point program on accounting and auditing reform (in March) followed by ten enforcement initiatives (in July). There is considerable overlap between the President's proposals and the legislative and regulatory initiatives compared above. Major elements of the President's speech in March included: ! the establishment of an Independent Regulatory Board to develop standards of auditing ethics and competence, under SEC oversight; ! a call for the SEC to improve corporate disclosure and to increase the number of events and kinds of news that must be disclosed immediately; ! a requirement that CEOs personally vouch for the accuracy of their firms' financial statements, and face disgorgement of bonuses if those statements were later found to be erroneous; ! authority for the SEC to bar corporate officers and directors who abuse their power from serving at other publicly traded firms; ! prompt disclosure of corporate insiders' stock transactions; ! more effective oversight of the Financial Accounting Standards Board by the SEC, to ensure that accounting rules respond to the needs of public investors; and ! a requirement that auditors compare a firm's accounting systems to a best practice standard, rather than to minimum requirements. In July 2002, the President's speech included these elements: ! creation by Executive Order of a financial crimes "swat team" in the Department of Justice to coordinate the investigation and prosecution of securities fraud; ! proposes to increase penalties for wire and mail fraud and crimes committed by corporate officers, and calls on the Federal Sentencing Commission to ensure that corporate insiders convicted of fraud serve longer terms in prison; ! a proposal to allow the SEC to freeze payments to corporate insiders while the company is under investigation; ! proposes to prevent corporate insiders from profiting from erroneous financial statements; ! proposes to allow the SEC to bar corporate officers and directors who abuse their power from serving at other publicly traded firms; CRS-16 ! prompt disclosure of corporate insiders' stock transactions; ! proposes to strengthen laws that criminalize document shredding and other forms of obstruction of justice; ! calls on public companies' compensation committees to prevent corporate officers from receiving loans from their companies; ! challenges CEOs to comply with the spirit of existing disclosure rules by explaining how their compensation packages are in the best interests of their companies' shareholders, and describing in plain English in their companies' annual reports every detail of their compensation packages; ! calls on the nation's stock markets to require that a majority of a company's directors be truly independent so that they have no material relationship with the company; ! calls on the nation's stock markets to require listed companies to receive shareholder approval for all stock option plans; and ! calls for an additional $100 million (above the $469 million budget request) for the SEC in FY2003. ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RL31483