CA Rajkumar S. Adukia
After the Enron debacle (which, at the time, was the 7th largest corporation in the United States), The US government recognized that there was an immediate and greater need for independent direction in the running of a company. Also, in the public interest, some thus far self-regulating professions had to be more open to scrutiny.
Senator Paul Spyros Sarbanes in his capacity as Chairman of the Senate Banking, Housing, and Urban Affairs Committee, held a series of comprehensive hearings resulting in the passage of a bi-partisan bill designed to reform the accounting industry and restore the investor confidence. “The Public Company Accounting Reform and Investor Protection Act” was signed into law on July 30, 2002, and has been referred to as “the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt.” Congressman Michael G Oxley is the co-author of the Act. The law is now known as the “Sarbanes-Oxley Act,” named for the principal sponsors of the legislation.
The Sarbanes-Oxley Act establishes new standards for corporate accountability as well as penalties for corporate wrongdoing. The intention of Sarbanes-Oxley is to restore credibility in the accounting profession, the securities industry and the corporate boardroom.
The legislation creates a strong independent oversight board to oversee the auditors of public companies and enables the board to set accounting standards, and investigate and discipline accountants. It addresses conflicts of interest, ensures auditor independence, strengthens corporate governance, by requiring corporate leaders to be personally responsible for the accuracy of their company’s financial reports, and establishes safeguards to protect against investment analysts’ conflicts.
One of the major changes to emerge from the Act is the Public Company Accounting Oversight Board. The establishment of the oversight board shifts the accounting profession from a system of self-regulation and peer review — to one of independent review by a body with investigative and disciplinary powers.
Another requirement that stems from the Sarbanes-Oxley is for all directors on a company’s audit committee and, for a majority of directors on a board to be independent. Having independent directors does increase a company’s credibility, but it also throws up issues to be tackled, namely supply, quality, remuneration and liability of directors.
Appropriate remuneration is another factor. The directors should get fair compensation for experience and time commitment .The flip side of the remuneration coin is liability. There has to be a limited amount of liability protection for directors, with exceptions in cases of pure negligence.
Investors in the US are now less trusting of information about companies .One perception is that securities or research analysts make “buy” recommendations for companies which have investment banking relationships with their employers.
Broking houses in the US are taking the initiative to repair the credibility damage themselves. They are keeping the analysts independent by pegging compensation solely to the quality of their research and ensuring their recommendations are not subject to anyone else’s input.
Auditor’s familiarity with a company’s operations lends efficiency during an audit. It is generally accepted good practice to rotate audit partners within an audit team. Efficiency is preserved when firms bring in new people and also provides fresh perspectives to a client engagement without changing the whole team.
Audit firm rotation may not be such a good thing, though. In the initial years the team is not up to speed in really knowing the client and in the last couple of years the team does not care anymore.
The Sarbanes-Oxley requirements will be applicable to foreign companies listed on US exchanges as well as foreign auditors preparing financial statements for them. The Act also provides for its requirements to be applicable where an audit firm outside the US prepares accounts for a US multi-national corporation with significant operations overseas. However, the term “significant” has not been defined yet.
Summary of SOX
(a) SHORT TITLE.—This Act may be cited as the ‘‘Sarbanes-Oxley Act of 2002’’.
(b) TABLE OF CONTENTS.—The table of contents for this Act is as follows:
Sec. 1. Short title; table of contents.
Sec. 2. Definitions.
Sec. 3. Commission rules and enforcement.
TITLE I—PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
Sec. 101. Establishment; administrative provisions.
Sec. 102. Registration with the Board.
Sec. 103. Auditing, quality control, and independence standards and rules.
Sec. 104. Inspections of registered public accounting firms.
Sec. 105. Investigations and disciplinary proceedings.
Sec. 106. Foreign public accounting firms.
Sec. 107. Commission oversight of the Board.
Sec. 108. Accounting standards.
Sec. 109. Funding.
TITLE II—AUDITOR INDEPENDENCE
Sec. 201. Services outside the scope of practice of auditors.
Sec. 202. Pre-approval requirements.
Sec. 203. Audit partner rotation.
Sec. 204. Auditor reports to audit committees.
Sec. 205. Conforming amendments.
Sec. 206. Conflicts of interest.
Sec. 207. Study of mandatory rotation of registered public accounting firms.
Sec. 208. Commission authority.
Sec. 209. Considerations by appropriate State regulatory authorities.
TITLE III—CORPORATE RESPONSIBILITY
Sec. 301. Public company audit committees.
Sec. 302. Corporate responsibility for financial reports.
Sec. 303. Improper influence on conduct of audits.
Sec. 304. Forfeiture of certain bonuses and profits.
Sec. 305. Officer and director bars and penalties.
Sec. 306. Insider trades during pension fund blackout periods.
Sec. 307. Rules of professional responsibility for attorneys.
Sec. 308. Fair funds for investors.
TITLE IV—ENHANCED FINANCIAL DISCLOSURES
Sec. 401. Disclosures in periodic reports.
Sec. 402. Enhanced conflict of interest provisions.
Sec. 403. Disclosures of transactions involving management and principal stockholders.
Sec. 404. Management assessment of internal controls.
Sec. 405. Exemption.
Sec. 406. Code of ethics for senior financial officers.
Sec. 407. Disclosure of audit committee financial expert.
Sec. 408. Enhanced review of periodic disclosures by issuers.
Sec. 409. Real time issuer disclosures.
TITLE V—ANALYST CONFLICTS OF INTEREST
Sec. 501. Treatment of securities analysts by registered securities associations and national securities exchanges.
TITLE VI—COMMISSION RESOURCES AND AUTHORITY
Sec. 601. Authorization of appropriations.
Sec. 602. Appearance and practice before the Commission.
Sec. 603. Federal court authority to impose penny stock bars.
Sec. 604. Qualifications of associated persons of brokers and dealers.
TITLE VII—STUDIES AND REPORTS
Sec. 701. GAO study and report regarding consolidation of public accounting firms.
Sec. 702. Commission study and report regarding credit rating agencies.
Sec. 703. Study and report on violators and violations
Sec. 704. Study of enforcement actions.
Sec. 705. Study of investment banks.
TITLE VIII—CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY
Sec. 801. Short title.
Sec. 802. Criminal penalties for altering documents.
Sec. 803. Debts non dischargeable if incurred in violation of securities fraud laws.
Sec. 804. Statute of limitations for securities fraud.
Sec. 805. Review of Federal Sentencing Guidelines for obstruction of justice and extensive criminal fraud.
Sec. 806. Protection for employees of publicly traded companies who provide evidence of fraud.
Sec. 807. Criminal penalties for defrauding shareholders of publicly traded companies.
TITLE IX—WHITE-COLLAR CRIME PENALTY ENHANCEMENTS
Sec. 901. Short title.
Sec. 902. Attempts and conspiracies to commit criminal fraud offenses.
Sec. 903. Criminal penalties for mail and wire fraud.
Sec. 904. Criminal penalties for violations of the Employee Retirement Income Security Act of 1974.
Sec. 905. Amendment to sentencing guidelines relating to certain white-collar offenses.
Sec. 906. Corporate responsibility for financial reports.
TITLE X—CORPORATE TAX RETURNS
Sec. 1001. Sense of the Senate regarding the signing of corporate tax re-turns by chief executive officers.
TITLE XI—CORPORATE FRAUD AND ACCOUNTABILITY
Sec. 1101. Short title.
Sec. 1102. Tampering with a record or otherwise impeding an official proceeding.
Sec. 1103. Temporary freeze authority for the Securities and Exchange Commission.
Sec. 1104. Amendment to the Federal Sentencing Guidelines.
Sec. 1105. Authority of the Commission to prohibit persons from serving as officers or directors.
Sec. 1106. Increased criminal penalties under Securities Exchange Act of 1934.
Sec. 1107. Retaliation against informants.
Section 2: SOME DEFINITIONS
(A) a committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer; and
(B) If no such committee exists with respect to an issuer, the entire board of directors of the issuer.
BOARD. – The term ‘‘Board’’ means the Public Company Accounting Oversight Board established under section 101.
COMMISSION. – The term ‘‘Commission’’ means the Securities and Exchange Commission.
ISSUER. – The term ‘‘issuer’’ means an issuer (as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)), the securities of which are registered under section 12 of that Act (15 U.S.C. 78l), or that is required to file reports under section 15(d) (15 U.S.C. 78o(d)), or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933 (15 U.S.C. 77a et seq.), and that it has not with drawn.
PUBLIC ACCOUNTING FIRM. – The term ‘‘public accounting firm’’ means –
(A) a proprietorship, partnership, incorporated association, corporation, limited liability company, limited liability partnership, or other legal entity that is engaged in the practice of public accounting or preparing or issuing audit reports; and
(B) to the extent so designated by the rules of the Board, any associated person of any entity described in sub-paragraph (A).
There is established the Public Company Accounting Oversight Board, to oversee the audit of public companies that are subject to the securities laws, and related matters, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by and for, public investors. The Board shall be a body corporate, operate as a nonprofit corporation, and have succession until dissolved by an Act of Congress.
DUTIES OF THE BOARD. – The Board shall, subject to action by the Commission under section 107
BOARD MEMBERSHIP. –
(1) COMPOSITION. – The Board shall have 5 members, appointed from among prominent individuals of integrity and reputation who have a demonstrated commitment to the interests of investors and the public, and an understanding of the responsibilities for and nature of the financial disclosures required of issuers under the securities laws and the obligations of accountants with respect to the preparation and issuance of audit reports with respect to such disclosures
(2) Each member of the Board shall serve on a full-time basis and will not be employed by any other person or engage in any other professional or business activity.
SEC. 102. REGISTRATION WITH THE BOARD.
A public accounting firm has to apply for registration to the PCAOB.
CONTENTS OF APPLICATIONS.-Each public accounting firm shall specify the following in its application:
(A) the names of all issuers for which the firm prepared or issued audit reports during the immediately preceding calendar year, and for which the firm expects to prepare or issue audit reports during the current calendar year;
(B) the annual fees received by the firm from each such issuer for audit services, other accounting services, and non-audit services, respectively;
(C) such other current financial information for the most recently completed fiscal year of the firm as the Board may reasonably request;
(D) a statement of the quality control policies of the firm for its accounting and auditing practices;
(E) a list of all accountants associated with the firm who participate in or contribute to the preparation of audit reports, stating the license or certification number of each such person, as well as the State license numbers of the firm itself;
(F) information relating to criminal, civil, or administrative actions or disciplinary proceedings pending against the firm or any associated person of the firm in connection with any audit report;
(G) copies of any periodic or annual disclosure filed by an issuer with the Commission during the immediately preceding calendar year which discloses accounting disagreements between such issuer and the firm in connection with an audit report furnished or prepared by the firm for such issuer; and
(H) such other information as the rules of the Board or the Commission shall specify as necessary or appropriate in the public interest or for the protection of investors.
SEC. 103. AUDITING, QUALITY CONTROL, AND INDEPENDENCE STANDARDS AND RULES.
The Board shall, by rule, establish, including, to the extent it determines appropriate, through adoption of standards proposed by the designated professional groups of accountants and amend or otherwise modify or alter, such auditing and related attestation standards, such quality control standards, and such ethics standards to be used by registered public accounting firms in the preparation and issuance of audit report.
It shall include in the auditing standards requirements that each registered public accounting firm shall:
(i) monitoring of professional ethics and independence from issuers on behalf of which the firm issues audit reports;
(ii) consultation within such firm on accounting and auditing questions;
(iii) supervision of audit work;
(iv) hiring, professional development, and advancement of personnel;
(v) the acceptance and continuation of engagements;
(vi) internal inspection; and
(vii) such other requirements as the Board may prescribe
Section 104: INSPECTIONS OF REGISTERED PUBLIC ACCOUNTING FIRMS
The Board shall conduct a continuing program of inspections to assess the degree of compliance of each registered public accounting firm and associated persons of that firm with this Act, the rules of the Board, the rules of the Commission, or professional standards, in connection with its performance of audits, issuance of audit reports, and related matters involving issuers.
INSPECTION FREQUENCY. –
Inspections shall be conducted annually for firms that audits more than 100 issuers; and not less frequently than once every 3 years for others. The SEC and/or the Board may order a special inspection of any firm at any time.
CONDUCT OF INSPECTIONS. – In conducting an inspection the Board shall –
(1) inspect and review selected audit and review engagements of the firm
(2) evaluate the sufficiency of the quality control system of the firm, and the manner of the documentation and communication of that system by the firm; and
(3) perform such other testing of the audit, supervisory, and quality control procedures of the firm as are necessary
RECORD RETENTION. – The rules of the Board may require the retention by registered public accounting firms for inspection purposes of records whose retention is not otherwise required by
SEC. 105. INVESTIGATIONS AND DISCIPLINARY PROCEEDINGS.
The Board shall establish, fair procedures for the investigation and disciplining of registered public accounting firms and associated persons of such firms.
(b) INVESTIGATIONS. –
(1) AUTHORITY. – The Board may conduct an investigation of any act or practice, or omission to act, by a registered public accounting firm, any associated person of such firm, or both, that may violate any provision of this Act, the rules of the Board, the provisions of the securities laws and the obligations and liabilities of accountants with respect thereto.
(2) TESTIMONY AND DOCUMENT PRODUCTION. – In addition to such other actions as the Board determines to be necessary or appropriate, the rules of the Board may –
(A) require the testimony of the firm or of any person associated with firm.
(B) require the production of audit work papers and any other document or information in the possession of a registered public accounting firm or any associated person thereof and may inspect the books and records of such firm or associated person.
(C) request the testimony of, and production of any document in the possession of, any other person, including any client of a registered public accounting firm that the Board considers relevant or material to an investigation
(D) provide for procedures to seek issuance by the Commission of a subpoena to require the testimony of, and production of any document in the possession of, any person, that the Board considers relevant or material to an investigation.
CONFIDENTIALITY 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.
(c) DISCIPLINARY PROCEDURES. –
In any proceeding by the Board to determine whether a registered public accounting firm, or an associated person thereof, should be disciplined, the Board shall bring specific charges, notify such firm or associated person of, and provide them an opportunity to defend against, such charges; and keep a record of the proceedings.
SANCTIONS. – If a firm or associated person thereof has engaged in any act or practice, or omitted to act, in violation of this Act, the rules of the Board, the provisions of the securities laws the Board may impose such disciplinary or remedial sanctions including:
(A) temporary suspension or permanent revocation of registration
(B) temporary or permanent suspension or bar of a person from further association with any registered public accounting firm;
(C) temporary or permanent limitation on the activities, functions, or operations of such firm
(D) a civil money penalty for each such violation,
(F) required additional professional education or training; or
(G) any other appropriate sanction
(5) INTENTIONAL OR OTHER KNOWING CONDUCT. – The sanctions and penalties shall only apply to –
(A) intentional or knowing conduct, including reckless conduct, that results in violation of the applicable statutory, regulatory, or professional standard; or
(B) repeated instances of negligent conduct, each resulting in a violation of the applicable statutory, regulatory, or professional standard.
SEC. 106. FOREIGN PUBLIC ACCOUNTING FIRMS.
(a) APPLICABILITY TO CERTAIN FOREIGN FIRMS. –
Any foreign public accounting firm that prepares or furnishes an audit report with respect to any issuer, have to get registered.
BOARD AUTHORITY. – The Board may determine that a foreign public accounting firm (or a class of such firms) that does not issue audit reports nonetheless plays such a substantial role in the preparation and furnishing of such reports for particular issuers, should be treated as a public accounting firm (or firms) for purposes of registration under, and oversight by the Board in accordance with.
PRODUCTION OF AUDIT WORKPAPERS. –
(1) CONSENT BY FOREIGN FIRMS. – If a foreign public accounting firm issues an opinion or otherwise performs material services upon which a registered public accounting firm relies in issuing all or part of any audit report or any opinion contained in an audit report, that foreign public accounting firm shall be deemed to have consented –
(A) to produce its audit work papers for the Board or the Commission in connection with any investigation
(B) to be subject to the jurisdiction of the courts of the United States for purposes of enforcement of any request for production of such work papers.
CONSENT BY DOMESTIC FIRMS. – A registered public accounting firm that relies upon the opinion of a foreign public accounting firm, shall be deemed –
(A) to have consented to supplying the audit work papers of that foreign public accounting firm in response to a request for production by the Board or the Commission; and
(B) to have secured the agreement of that foreign public accounting firm to such production, as a condition of its reliance on the opinion of that foreign public accounting firm.
SEC. 107. COMMISSION OVERSIGHT OF THE BOARD.
GENERAL OVERSIGHT RESPONSIBILITY. – The Commission shall have oversight and enforcement authority over the Board, as provided in this Act and authority to amend rules of the Board
NOTICE OF SANCTION. – The Board to notify the Commission of any final sanction on any registered public accounting firm or on any associated person thereof.
REVIEW OF SANCTIONS. – 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’ for purposes of the securities laws, 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 (and any associated person of that firm, that performs for any issuer any audit required, to provide to that issuer, contemporaneously with the audit, any non-audit service, 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; and
“(9) any other service that the Board determines, by regulation, is impermissible.
PREAPPROVAL REQUIRED FOR NON-AUDIT SERVICES. – A registered public accounting firm may engage in any non-audit service, including tax services that are not described above, for an audit client, only if the activity is approved in advance by the audit committee of the issuer, in accordance with subsection.
EXEMPTION AUTHORITY – The Board may, on a case by case basis, exempt any person, issuer, public accounting firm, or transaction from the prohibition on the provision of services
SEC. 202. PREAPPROVAL REQUIREMENTS.
AUDIT COMMITTEE ACTION. – All auditing services and non-audit services, other than those exempted, provided to an issuer by the auditor of the issuer shall be preapproved by the audit committee of the issuer.
WAIVER: 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.
SEC. 203. AUDIT PARTNER ROTATION.
AUDIT PARTNER ROTATION. – The lead (or coordinating) audit partner (having primary responsibility for the audit), or the audit partner responsible for reviewing the audit, must rotate off of the audit every 5 years.
SEC. 204. AUDITOR REPORTS TO AUDIT COMMITTEES.
REPORTS TO AUDIT COMMITTEES. – Each registered public accounting firm should report to the audit committee of the issuer –
“(1) all critical accounting policies and practices to be used;
“(2) all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management officials of the issuer, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the registered public accounting firm; and
“(3) other material written communications between the registered public accounting firm and the management of the issuer.
SEC. 206. CONFLICTS OF INTEREST.
CONFLICTS OF INTEREST. – The chief executive officer, controller, chief financial officer, chief accounting officer, or any person serving in an equivalent position for the issuer, should not have been employed by the company’s audit firm and participated in any capacity in the audit of that issuer during the 1-year period preceding the audit.”.
SEC. 207. STUDY OF MANDATORY ROTATION OF REGISTERED PUBLIC ACCOUNTING FIRMS.
STUDY AND REVIEW REQUIRED. – The Comptroller General of the United States shall conduct a study and review of the potential effects of requiring the mandatory rotation of registered public accounting firms.
SEC. 209. CONSIDERATIONS BY APPROPRIATE STATE REGULATORY AUTHORITIES.
Appropriate State regulatory authorities should make an independent determination of the proper standards applicable, particularly taking into consideration the size and nature of the business of the accounting firms they supervise and the size and nature of the business of the clients of those firms. The standards applied by the Board under this Act should not be presumed to be applicable for purposes of this section for small and medium sized non registered public accounting firms
RESPONSIBILITIES RELATING TO REGISTERED PUBLIC ACCOUNTING FIRMS. – The audit committee of each issuer shall be responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer
Each member of the audit committee of the issuer shall be a member of the board of directors of the issuer, and shall otherwise be independent.
Independence means a member of an audit committee of an issuer may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee –
“(i) accept any consulting, advisory, or other compensatory fee from the issuer; or
“(ii) be an affiliated person of the issuer or any subsidiary thereof.
EXEMPTION AUTHORITY. 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.
COMPLAINTS :The audit committee shall establish procedures for the “receipt, retention, and treatment of complaints” received by the issuer regarding accounting, internal controls, and auditing.
AUTHORITY TO ENGAGE ADVISERS. – Each audit committee shall have the authority to engage independent counsel and other advisers,
FUNDING. Each issuer shall provide appropriate funding to the audit committee
SEC. 302. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.
The principal executive officer or officers and the principal financial officer or officers, or persons performing similar functions, certify in each annual or quarterly report filed or submitted –
(1) the signing officer has reviewed the report;
(2) the report does not contain any untrue statement of a material fact or omit to state a material fact
(3) based on such officer’s knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report;
(4) the signing officers –
are responsible for establishing and maintaining internal controls; have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to them; have evaluated the effectiveness of the issuer’s internal controls ; have presented their conclusions about the effectiveness of their internal controls
(5) the signing officers have disclosed to the issuer’s auditors and the audit committee of the board of directors
(A) all significant deficiencies in the design or operation of internal controls and
(B) any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal controls; and
(6) the signing officers have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation
SEC. 303. IMPROPER INFLUENCE ON CONDUCT OF AUDITS.
RULES TO PROHIBIT. – It shall be unlawful, for any officer or director of an issuer, or any other person acting under the direction thereof, to take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial statements of that issuer for the purpose of rendering such financial statements materially misleading.
SEC. 304. FORFEITURE OF CERTAIN BONUSES AND PROFITS.
ADDITIONAL COMPENSATION PRIOR TO NONCOMPLIANCE WITH COMMISSION FINANCIAL REPORTING REQUIREMENTS. – If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, the CEO and CFO shall reimburse the issuer for –
(1) any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Commission of the non-compliant document; and
(2) any profits realized from the sale of securities of the issuer during that 12-month period.
SEC. 305. OFFICER AND DIRECTOR BARS AND PENALTIES.
EQUITABLE RELIEF. – In any action or proceeding brought or instituted by the Commission the Commission may seek, and any Federal court may grant, any equitable relief that may be appropriate or necessary for the benefit of investors.”.
SEC. 306. INSIDER TRADES DURING PENSION FUND BLACKOUT PERIODS.
(a) PROHIBITION OF INSIDER TRADING DURING PENSION FUND BLACKOUT PERIODS. –
(1) IN GENERAL. It shall be unlawful for any director or executive officer of an issuer of any equity security (other than an exempted security), to purchase, sell, or otherwise acquire or transfer any equity security of the issuer (other than an exempted security) during any blackout period with respect to such equity security
(2) REMEDY. –
Any profit realized by a director or executive officer) from any purchase, sale, or other acquisition or transfer shall inure to and be recoverable by the issuer.
ACTIONS TO RECOVER PROFITS. – An action to recover profits may be instituted at law or in equity in any court or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer fails or refuses to bring such action within 60 days after the date of request, or fails diligently to prosecute the action thereafter, except that no such suit shall be brought more than 2 years after the date on which such profit was realized.
SEC. 307. RULES OF PROFESSIONAL RESPONSIBILITY FOR ATTORNEYS.
The Commission shall issue rules, in the public interest and for the protection of investors, setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers
SEC. 308. FAIR FUNDS FOR INVESTORS.
CIVIL PENALTIES ADDED TO DISGORGEMENT FUNDS FOR THE RELIEF OF VICTIMS. – If the Commission obtains an order requiring disgorgement against any person for a violation of such laws or the rules or regulations there under, or such person agrees in settlement of any such action to such disgorgement, the amount of such civil penalty shall be added to and become part of the disgorgement fund for the benefit of the victims of such violation.
ACCURACY OF FINANCIAL REPORTS. – Each financial report that is required to be prepared in accordance with (or reconciled to) generally accepted accounting principles shall reflect all material correcting adjustments that have been identified by a registered public accounting firm in accordance with generally accepted accounting principles and the rules and regulations of the Commission.
OFF-BALANCE SHEET TRANSACTIONS. – Each annual and quarterly financial report required to be filed with the Commission shall disclose all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the issuer with unconsolidated entities or other persons, that may have a material current or future effect on financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses.”.
(b) COMMISSION RULES ON PRO FORMA FIGURES. – 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.
(c) STUDY AND REPORT ON SPECIAL PURPOSE ENTITIES. –
(1) STUDY REQUIRED. – The Commission to do a study of filings by issuers and their disclosures to determine –
(A) the 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.
(2) REPORT AND RECOMMENDATIONS. – The Commission shall submit a report to the President, the Committee on Banking, Housing, and Urban Affairs of the Senate, and the Committee on Financial Services of the House of Representatives
PROHIBITION ON PERSONAL LOANS TO EXECUTIVES.
It shall be unlawful for any issuer, to extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loan to or for any director or executive officer (or equivalent thereof) of that issuer
LIMITATION. – It not preclude any home improvement and manufactured home loans , consumer credit or any extension of credit under an open end credit plan or a charge card or any extension of credit by a broker or dealer to an employee to buy, trade, or carry securities, that is –
“(A) made or provided in the ordinary course of the consumer credit business of such issuer;
“(B) of a type that is generally made available by such issuer to the public; and
“(C) made by such issuer on market terms, or terms no more favorable than to public
SEC. 403. DISCLOSURES OF TRANSACTIONS INVOLVING MANAGEMENT AND PRINCIPAL STOCKHOLDERS.
(a) DISCLOSURES REQUIRED. –
Every person who is directly or indirectly the beneficial owner of more than 10 percent of any class of any equity security (other than an exempted security) or who is a director or an officer of the issuer of such security, shall file the statements
“(A) at the time of the registration of such security on a national securities exchange or by the effective date of a registration statement
“(B) within 10 days after he or she becomes such beneficial owner, director, or officer;
“(C) if there has been a change in such ownership, or if such person shall have purchased or sold a security-based swap agreement then before the end of the second business day after execution of transaction.
SEC. 404. MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS.
(a) RULES REQUIRED. – The Commission shall prescribe rules requiring each annual report 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 of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.
(b) INTERNAL CONTROL EVALUATION AND 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 subsection shall be made in accordance with standards for attestation engagements issued or adopted by the Board and shall not be the subject of a separate engagement.
SEC. 406. CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS.
(a) CODE OF ETHICS DISCLOSURE. – The Commission shall issue rules to require each issuer, to disclose whether or not, and if not, the reason therefore, such issuer has adopted a code of ethics for senior financial officers
(b) CHANGES IN CODES OF ETHICS. – The Commission shall revise its regulations concerning prompt disclosure on Form 8-K (or any successor thereto) to require the immediate disclosure by any issuer of any change in or waiver of the code of ethics for senior financial officers.
SEC. 407. DISCLOSURE OF AUDIT COMMITTEE FINANCIAL EXPERT.
The Commission shall issue rules to require each issuer, together with periodic reports to disclose whether or not, and if not, the reasons therefore, the audit committee of that issuer is comprised of at least 1 member who is a financial expert.
SEC. 408. ENHANCED REVIEW OF PERIODIC DISCLOSURES BY ISSUERS.
REGULAR AND SYSTEMATIC REVIEW. – The Commission shall review disclosures on a regular and systematic basis for the protection of investors. Such review shall include a review of an issuer’s financial statement.
MINIMUM REVIEW PERIOD. – In no event shall an issuer be reviewed under this section less frequently than once every 3 years.
SEC. 409. REAL TIME ISSUER DISCLOSURES.
REAL TIME ISSUER DISCLOSURES. – Each issuer reporting shall disclose to the public on a rapid and current basis such additional information concerning material changes in the financial condition or operations of the issuer, which is necessary or useful for the protection of investors and in the public interest.
National Securities Exchanges and registered securities associations must adopt conflict of interest rules for research analysts who recommend equities in research reports.
“In addition to any other funds authorized to be appropriated to the Commission, there are authorized to be appropriated to carry out the functions, powers, and duties of the Commission, $776,000,000 for fiscal year 2003, of which —
“(1) $102,700,000 shall be available to fund additional compensation, including salaries and benefits.
“(2) $108,400,000 shall be available for information technology, security enhancements etc.
“(3) $98,000,000 shall be available to add not fewer than an additional 200 qualified professionals to provide enhanced oversight of auditors and audit services required by the Federal securities laws, and to improve Commission investigative and disciplinary efforts.
SEC. 602. APPEARANCE AND PRACTICE BEFORE THE COMMISSION.
AUTHORITY TO CENSURE. – The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege of appearing or practicing before the Commission in any way, if that person is found by the Commission,
(1) not to possess the requisite qualifications to represent others;
“(2) to be lacking in character or integrity, or to have engaged in unethical or improper professional conduct; or
“(3) to have willfully violated, or willfully aided and abetted the violation of, any provision of the securities laws
SEC. 603. FEDERAL COURT AUTHORITY TO IMPOSE PENNY STOCK BARS.
AUTHORITY OF A COURT TO PROHIBIT PERSONS FROM PARTICIPATING IN AN OFFERING OF PENNY STOCK. –
In any proceeding against any person participating in, or, at the time of the alleged misconduct who was participating in, an offering of penny stock, the court may prohibit that person from participating in an offering of penny stock, conditionally or unconditionally, and permanently or for such period of time as the court shall determine.
(a) STUDY REQUIRED. – The Comptroller General of the United States shall conduct a study –
(1) to identify –
(A) the factors that have led to the consolidation of public accounting firms
(B) the present and future impact of this condition on capital formation and securities markets,
(C) solutions to any problems identified under subparagraph (B),
(2) of the problems, if any, faced by business organizations that have resulted from limited competition among public accounting firms, including – higher costs, lower quality of services, impairment of auditor independence, lack of choice; and
(3) whether and to what extent Federal or State regulations impede competition among public accounting firms.
SEC. 702. COMMISSION STUDY AND REPORT REGARDING CREDIT RATING AGENCIES.
The Commission shall conduct a study of the role and function of credit rating agencies in the operation of the securities market.
SEC. 703. STUDY AND REPORT ON VIOLATORS AND VIOLATIONS.
STUDY. – The Commission shall conduct a study to determine,
(1) the number of securities professionals
(A) who have been found to have aided and abetted a violation of the Federal securities laws, but who have not been sanctioned, disciplined, or otherwise penalized as a primary violator in any administrative action or civil proceeding,; and
(B) who have been found to have been primary violators of the Federal securities laws;
(2) a description of the Federal securities laws violations committed by aiders and abettors and by primary violators,
(3) the amount of disgorgement, restitution, or any other fines or payments that the Commission has assessed upon and collected from, aiders and abettors and from primary violators.
SEC. 704. STUDY OF ENFORCEMENT ACTIONS.
The Commission shall review and analyze all enforcement actions by the Commission involving violations of reporting requirements imposed under the securities laws, and restatements of financial statements, over the 5-year period preceding the date of enactment of this Act, to identify areas of reporting that are most susceptible to fraud, inappropriate manipulation, or inappropriate earnings management, such as revenue recognition and the accounting treatment of off-balance sheet special purpose entities.
SEC. 705. STUDY OF INVESTMENT BANKS.
The Comptroller General of the United States shall conduct a study on whether investment banks and financial advisers assisted public companies in manipulating their earnings and obfuscating their true financial condition.
SEC. 802. CRIMINAL PENALTIES FOR ALTERING DOCUMENTS.
Destruction, alteration, or falsification of records in Federal investigations and bankruptcy
It is a felony to “knowingly alter, destroy, mutilate, conceal, cover up, falsify, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter
SEC. 804. STATUTE OF LIMITATIONS FOR SECURITIES FRAUD.
A private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, may be brought not later than the earlier of –
“(1) 2 years after the discovery of the facts constituting the violation; or
“(2) 5 years after such violation.”
SEC. 805. REVIEW OF FEDERAL SENTENCING GUIDELINES FOR OBSTRUCTION OF JUSTICE AND EXTENSIVE CRIMINAL FRAUD.
ENHANCEMENT OF FRAUD AND OBSTRUCTION OF JUSTICE SENTENCES. – The United States Sentencing Commission shall review and amend, as appropriate, the Federal Sentencing Guidelines and related policy statements.
SEC. 806. PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES WHO PROVIDE EVIDENCE OF FRAUD.
WHISTLEBLOWER PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES. – No company with a class of securities registered under the Securities Exchange Act or that is required to file reports under the Securities Exchange Act or any employee, contractor, subcontractor, or agent of such company, may discharge, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee –
“(1) to provide information or otherwise assist in an investigation which the employee reasonably believes constitutes violation of any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by –
“(A) a Federal regulatory or law enforcement agency;
“(B) any Member of Congress or any committee of Congress; or
“(C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct); or
“(2) to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.
An employee prevailing in any action under subsection (b)(1) shall be entitled to all relief necessary to make the employee whole including:
“(A) reinstatement with the same seniority status that the employee would have had, but for the discrimination;
“(B) the amount of back pay, with interest; and
“(C) compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney fees.
SEC. 807. CRIMINAL PENALTIES FOR DEFRAUDING SHAREHOLDERS OF PUBLICLY TRADED COMPANIES.
Whoever knowingly executes, or attempts to execute, a scheme or artifice –
“(1) to defraud any person in connection with any publicly traded security or
“(2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any publicly traded security shall be fined under this title, or imprisoned not more than 25 years, or both.”.
SEC. 903. CRIMINAL PENALTIES FOR MAIL AND WIRE FRAUD.
Maximum penalty for mail and wire fraud increased from 5 to 10 years.
SEC. 905. AMENDMENT TO SENTENCING GUIDELINES RELATING TO CERTAIN WHITE-COLLAR OFFENSES.
DIRECTIVE TO THE UNITED STATES SENTENCING COMMISSION. – The United States Sentencing Commission shall review and, as appropriate, amend the Federal Sentencing Guidelines and related policy statements related to securities and accounting fraud.
SEC. 906. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.
CERTIFICATION OF PERIODIC FINANCIAL REPORTS. – Each periodic report containing financial statements filed by an issuer with the Securities Exchange Commission shall be accompanied by a written statement by the CEO and CFO of the issuer certifying that that the periodic report containing the financial statements fully complies with the requirements of Securities Exchange Act and that information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer.
Maximum penalties for willful and knowing violations of this section are a fine of not more than $500,000 and/or imprisonment of up to 20 years.
It is the sense of the Senate that the Federal income tax return of a corporation should be signed by the chief executive officer of such corporation.
SEC. 1102. TAMPERING WITH A RECORD OR OTHERWISE IMPEDING AN OFFICIAL PROCEEDING.
Whoever corruptly —
“(1) alters, destroys, mutilates, or conceals a record, document, or other object, or attempts to do so, with the intent to impair the object’s integrity or availability for use in an official proceeding; or
“(2) otherwise obstructs, influences, or impedes any official proceeding, or attempts to do so, shall be fined under this title or imprisoned not more than 20 years, or both.”.
SEC. 1103. TEMPORARY FREEZE AUTHORITY FOR THE SECURITIES AND EXCHANGE COMMISSION.
TEMPORARY FREEZE. –
ISSUANCE OF TEMPORARY ORDER. – Whenever, during the course of a lawful investigation involving possible violations of the Federal securities laws by an issuer of publicly traded securities it appears to the Commission that it is likely that the issuer will make extraordinary payments (whether compensation or otherwise) to any director, officer, partner, controlling person, agent, or employee of a company the Commission may petition for a temporary order requiring the issuer to escrow, those payments in an interest-bearing account for 45 days.
SEC. 1104. AMENDMENT TO THE FEDERAL SENTENCING GUIDELINES.
REQUEST FOR IMMEDIATE CONSIDERATION BY THE UNITED STATES SENTENCING COMMISSION. The United States Sentencing Commission is requested to –
(1) promptly review the sentencing guidelines applicable to securities and accounting fraud and related offenses;
(2) expeditiously consider the promulgation of new sentencing guidelines or amendments to existing guidelines to provide an enhancement for officers or directors of publicly traded corporations who commit fraud and related offenses; and
(3) submit to Congress an explanation of actions taken by the Sentencing Commission and any additional policy recommendations the Sentencing Commission may have for combating offenses described in paragraph (1).
SEC. 1105. AUTHORITY OF THE COMMISSION TO PROHIBIT PERSONS FROM SERVING AS OFFICERS OR DIRECTORS.
AUTHORITY OF THE COMMISSION TO PROHIBIT PERSONS FROM SERVING AS OFFICERS OR DIRECTORS. —The Commission may issue an order to prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who has violated section 10(b) and/or section 17(a) (1) or the rules or regulations thereunder, from acting as an officer or director of any public company if the conduct of that person demonstrates unfitness to serve as an officer or director of any such issuer.”
SEC. 1106. INCREASED CRIMINAL PENALTIES UNDER SECURITIES EXCHANGE ACT OF 1934.
SEC. 1107. RETALIATION AGAINST INFORMANTS.
Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.”.