Issue Brief: Corporate Governance & Accounting ReformsUpdated April 2009
Background
Legislation was enacted in the wake of several high-profile corporate bankruptcies in 2002 to address not only corporate malfeasance but also deficiencies in corporate accounting rules.
President Bush signed into law on July 30, 2002 the most significant legislation affecting the private sector accounting profession since 1933—the Sarbanes-Oxley Act of 2002 (Public Law # 107-204). The new law, which cracks down on wrongdoing in corporate America, marks nothing less than a seminal shift in government regulation of publicly traded companies. In the face of volatile stock markets and rising voter concerns, Congress and the Bush administration moved firmly away from the laissez faire, deregulatory mood that long held sway in Washington toward a more activist approach.
The Sarbanes-Oxley Act establishes an oversight board to police the accounting industry and imposes numerous new reporting and disclosure requirements on publicly traded companies, their accounting firms, and even securities lawyers. Under the law, the Public Company Accounting Oversight Board shall: (1) oversee the audit of public companies that are subject to the securities laws; (2) establish audit report standards and rules; and (3) investigate, inspect, and enforce compliance relating to registered public accounting firms, associated persons, and the obligations and liabilities of accountants. Accounting firms that audit publicly traded companies will be required to register with the board, which will be funded in the same tradition as the Financial Accounting Standards Board—through fees paid by public companies.
The creation of an accounting oversight board is a dramatic move away from the model of the last several decades, in which accounting firms essentially regulated themselves with nominal SEC supervision. The new law gives the SEC the power to pick the oversight board’s five members, two of whom must be accountants. The SEC also has the power to approve the board’s annual budget and to review all of its activities and decisions. The law specifically prohibits accounting firms from performing eight non-audit services on behalf of their audit clients, including internal auditing and financial information systems design, among others. The oversight board will have the authority to grant case-by-case exceptions. Non-audit services that are not prohibited by the law (e.g., tax services) will be allowed if pre-approved by a public company’s audit committee. Sarbanes-Oxley requires real-time disclosure of corporate financial changes. Chief executive officers and chief financial officers must certify the integrity of financial statements included in filings to the SEC. Willful violation is punishable by up to $5 million in fines and up to 20 years in prison. If a financial statement were revised because of noncompliance with securities laws, the CEO and CFO would be required to reimburse the company for bonuses or profits from stock sales occurring within 12 months after the release of the financial statement. The law also requires disclosure of insider stock sales within two business days. Finally, the new law creates a new securities fraud penalty with a maximum prison sentence of up to 25 years. Shareholder fraud and document shredding are subject to criminal penalties of up to 20 years imprisonment. The law also protects corporate whistleblowers against retaliation.
Related GFOA Public Policy Statements
Additional Resources GFOA • Federal Liaison Center • (202) 393-8020 • (202) 393-0780 FAX • Email
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