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