Bush Signs Sarbanes-Oxley Corporate Accountability Legislation Into Law

By Paula Cruickshank, CCH Washington News Bureau.

The new law includes provisions to improve the auditing and accounting system, impose new criminal penalties, speed up the reporting of insider activity and create an independent board to oversee the accounting industry.

“This new law says to every dishonest corporate leader: you will be exposed and punished; the era of low standards and false profits is over; no boardroom in America is above or beyond the law,” Bush said. He also told his audience of high-level government officials and heads of the Business Roundtable, New York Stock Exchange and NASDAQ that the message of the new law to corporate accountants is: “the high standards of your profession will be enforced without exception; the auditors will be audited; the accountants will be held accountable.”

During his remarks, the president was flanked on his right by Attorney General John Ashcroft and the Secretaries of Treasury, Paul H. O’Neill, Commerce, Donald Evans, Labor, Elaine Chao, and on his left by Senate Leaders Trent Lott, R-Miss., Thomas A. Daschle, D-S.D., and bill co-authors, Sen. Paul S. Sarbanes, D-Md., and Rep. Michael G. Oxley, R-Ohio. Embattled Securities and Exchange Commission (SEC) Chairman Harvey L. Pitt was seated in the front row of the audience in the ornate East Room, along with the FBI director and several top advisers to the president. Notably absent at the White House event were CEOs from any major corporation and Vice President Cheney, who was attending a fundraising event in Iowa. Cheney faces an inquiry by the SEC for questionable accounting practices that occurred under his watch as chief executive of Halliburton Co.

ACCOUNTING OVERSIGHT BOARD

The president highlighted several major provisions of the new law during his signing ceremony remarks. Regarding one of the most contentious issues during deliberations over the bill—the creation of a five-member Public Company Accountability Oversight Board—Bush noted that “for the first time, the accounting profession will be regulated by an independent board, [which] will set clear standards to uphold the integrity of public audits and have the authority to investigate and discipline offenders.”

Under the Sarbanes-Oxley Act, the SEC has the flexibility to assign tasks to the board and can call on the board to perform a special inspection of an accounting firm. The new board must notify the SEC if it discovers a potential violation of the securities laws. Sarbanes-Oxley also authorizes new funding for investigators and technology at the SEC to uncover wrongdoing.

To avoid potential conflicts of interest between an accounting firm and its audit clients, auditing firms are prohibited from providing several specific types of consulting services; however, some expert services, such as tax services, can be performed if the company’s audit committee grants permission. Company audit committees, and not management, will maintain control over the hiring of auditors.

PENALTIES

The new law adds a number of criminal penalties for certain types of corporate fraud. Jail terms for mail and wire fraud are increased from the current maximum of five years to 20 years. Criminal pension fund violations are increased from the current one-year maximum to 10 years and ERISA fines are substantially higher. Current ERISA limits of $5,000 are moved up to $100,000 and ERISA limits of $100,000 are increased to $500,000.

Under Sarbanes-Oxley, there is a new criminal penalty for securities fraud with a maximum jail term of 25 years. Filing false financial statements is punishable by up to 20 years in jail, and up to a $5,000,000 fine. Penalties for obstructing justice and shredding documents are dramatically increased to a maximum jail time of 20 years, and penalties for securities laws violations are not dischargeable in bankruptcy.

BLACKOUT PERIODS

Bush noted that the new law also requires corporate officials to play by the same rules as their employees. That means that during so-called blackout periods, when workers are prevented from buying and selling stock in their pensions or 401(k) plans, company officials will be prohibited from making the same stock purchases or sales.

Other provisions of Sarbanes-Oxley require the SEC to create a fund to help defrauded investors and authorize the SEC to bar individuals from serving as directors of a company, a power that currently only courts have.

The chief executive officer and the chief financial officer of each public company must certify that their financial statements are accurate. The bill also extends this requirement to all public companies, regardless of whether they are domiciled in the U.S. This was done so that U.S. companies that have moved their headquarters overseas for tax purposes would be required to certify the accuracy of their financial statements.

The new law, for the most part, prohibits companies from making loans to directors or executive officers. It requires reports on insider activity to be filed and made available to the public electronically and in the same format; currently, this disclosure can still be done on paper. In addition to requiring electronic disclosure, the Sarbanes-Oxley law speeds up the process, requiring a two-day insider disclosure period. The new law also requires the SEC to work for “real time” disclosure of material events.

CODE OF ETHICS

Sarbenes-Oxley establishes a code of conduct for corporate attorneys, who would be required to report wrongdoing. Corporate executives also must “set an ethical tone for their companies,” Bush noted. “Tricking an investor into taking a risk is theft by another name,” the president asserted. CEOs and chief financial officers must personally vouch for the truth and accuracy of their companies’ disclosures under the new law.

FASB FEES

Following the White House ceremony, Sarbanes was asked his view of expensing stock options as one additional means of ensuring the accuracy of corporate financial accounting practices. While noting that he personally was in favor of corporations recording stock options as expenses, Sarbanes stressed that the best way for Congress to ensure the integrity of corporate financial records is to let the Financial Accounting Standards Board (FASB) do its job through an independent funding mechanism provided for in the new law. Previously, the FASB’s operating budget was dependent on fees collected from the issuers overseen by the board. The new law means that the FASB’s autonomy will no longer be “held ransom” by a fee structure that has an inherent conflict of interest built into the system, Sarbanes told reporters.