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Leslie Bonacum
Neil Allen

Corporate Accounting and Disclosure Reform: Comparing Senate and House Bills, And How SEC and White House Proposals Stack Up

(RIVERWOODS, ILL., July 16, 2002) – When it comes to accounting reform and corporate responsibility, there seems to be no shortage of opinion. Below CCH INCORPORATED (CCH), a leading provider of securities and business law information, software and services, provides a side-by-side comparison of the major provisions contained in the House bill passed in April and the just-passed Senate bill.

Also, since passage of the House bill, President Bush has outlined additional proposals for corporate governance and the Securities and Exchange Commission (SEC) has issued a series of proposed rules over the past few months. Any Congressional legislation would preempt conflicting SEC regulations. Below CCH also provides an overview of the key aspects of the SEC and White House proposals.


Senate Bill

Public Company Accounting Reform and Investor Protection Act of 2002 (S. 2673)

House Bill*

Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002 (H.R. 3763)

Accounting Oversight Body

  • Composition: five members, of whom only two are or have been accountants.
  • Must be funded by public companies.
  • Overseen by SEC.
  • Powers: sets auditing, quality control, and ethics standards for public accounting firms; inspects/investigates accounting firms; and imposes disciplinary and remedial sanctions.
  • Auditors of public companies must register with board.


  • Composition: five members, of whom only two are currently licensed to practice public accounting and have recent auditing experience. Of the remaining three members, two may be licensed to practice accounting if they have not practiced within two years of their appointment, and one member must not be licensed to practice accounting.
  • Must be self-funded, as determined by the board, provided that the funding does not come exclusively from the accounting profession.
  • Overseen by SEC.
  • Powers: imposes sanctions for intentional or knowing misconduct, including a determination that an accountant is not qualified to certify a financial statement; reviews audits; reviews potential conflicts of interest between accountant and the company.
  • SEC cannot accept financial reports unless audited by accountant registered and in good standing with the board.


Auditor Independence

  • Bars a broad range of non-audit services for audit clients: (1) bookkeeping or other services related to the accounting records or financial statements; (2) financial information systems design and implementation; (3) appraisal or valuation services, fairness opinions, and contribution-in-kind reports; (4) actuarial services; (5) internal audit outsourcing services; (6) management functions or human resources; (7) broker-dealer, investment advisor, or investment banking services; (8) legal services unrelated to the audit; and (9) any other service the board chooses to prohibit.
  • Allows certain other non-audit services, e.g., tax services, subject to pre-approval by company’s audit committee. Allows waiver of pre-approval requirement for small (under 5% of total compensation to auditor) non-audit services if promptly brought to audit committee’s attention and approved before completion.
  • Prohibits officers/directors from coercing, manipulating, or misleading an auditor in violation of rules that the SEC deems appropriate.
  • Requires rotation of auditor every five years. Directs the Comptroller General to conduct a study of the effects of requiring auditor rotation.
  • Bars audit of firm whose senior officers had been employed by auditor within one year before the audit commences.
  • Auditor must timely report to audit committee critical accounting policies and alternative treatments within GAAP discussed with management, and any disagreements or material written communications with management.
  • Bars certain non-audit services for audit clients: (1) financial information systems design and implementation; and (2) internal audit services. SEC must periodically review other services to determine whether they should be prohibited too.
  • Prohibits officers/directors from coercing, manipulating, or misleading an auditor in violation of rules that the SEC deems appropriate.


Corporate Governance/

  • Allows SEC to impose corporate bar for unfitness to serve.
  • CEO and CFO must forfeit certain bonuses/compensation received following a restatement due to securities law noncompliance.
  • CEO and CFO must certify periodic reports.
  • Audit committee duties/powers: (1) directly responsible for appointment, compensation, and oversight of independent auditor; (2) must establish procedures for addressing complaints on accounting/auditing matters, including procedures for employees’ anonymous submission of concerns; (3) power and funding to engage counsel and advisers; and (4) cannot accept consulting fees or be affiliated persons of the company.
  • Makes fraud a felony subject to 10-year maximum prison sentence.
  • Declares that destroying evidence to obstruct an investigation is illegal whether or not records are subject to a subpoena.
  • Requires SEC to set standards for attorneys practicing before the Commission to report securities law violations to the CEO or chief legal counsel and, if necessary, to the audit committee.
  • SEC may impose corporate bar for substantial unfitness to serve, based on specified factors.
  • SEC must determine whether/when to require disgorgement of profits made/losses avoided during 6 months preceding a restatement.
  • Requires the retention of records for no less than seven years after an audit.
  • SEC must review, report on, and make recommendations concerning certain corporate governance practices.



Corporate Disclosure

  • SEC must issue rules requiring: (1) disclosure of material off-balance sheet transactions/relationships; (2) reconciliation of pro forma information to GAAP; (3) inclusion of internal control assessment in company’s annual report; and (4) disclosure whether audit committee includes at least one member who is a financial expert.
  • Requires disclosure of the company’s code of ethics for senior financial officers, and if none exists, the reasons why.
  • SEC must amend rules governing corporate disclosures, requiring adequate and appropriate disclosure of off-balance sheet transactions and relationships with unconsolidated entities or other persons.
  • Companies must disclose on a real-time basis corporate information that the SEC deems, by rule, necessary in the public interest.
  • Requires prompt disclosure on Form 8-K of change in code of ethics.
  • SEC must review issuers’ disclosures more often, based on a confidential SEC-established risk rating system, but in no event less than once every 3 years.
  • SEC must conduct a study to determine whether to require additional disclosure items in a company’s financial statements and filings.


Insider Transactions

  • Amends Section 16(a) to require insiders to report by end of second business day following transaction.
  • Bans loans to company directors and officers with the exception of consumer credit loans made to executives on market terms in the ordinary course of the company’s consumer credit business.
  • Prohibits insider trades during pension fund blackout periods.


  • SEC must make rules requiring insiders to report transactions in company securities under Section 16(a) by the end of the next business day following the transaction.
  • SEC must adopt rules to ensure adequate disclosure of insider loans.
  • Prohibits insider trades during pension fund blackout periods.
  • SEC must make rules to improve the transparency and clarity of the financial reporting as to insider trading and relationships, relationships with philanthropic organizations, insider-controlled affiliates, joint ownerships, and the provision of professional services by related persons.




  • SEC must adopt rules to address analyst conflicts of interest
  • SEC must study and report to Congress on switch to principles-based accounting system.
  • Gives SEC additional appropriations and staffing.
  • SEC must conduct a comprehensive study of the accounting treatment of special purpose entities
  • SEC must review SRO rules on analyst conflicts and recommend further rules, if appropriate.


* On July 16, the House passed legislation containing new criminal penalties for corporate fraud.

White House Corporate Governance Proposals

  • Create a task force headed by the Justice Department to provide direction for investigations, prosecutions and better coordination between agencies in fighting financial crimes. Includes federal prosecutors in cities that are financial centers, Treasury Secretary Paul O'Neill, FBI Director Robert Mueller and top officials from the IRS, SEC, FERC and FCC.
  • Doubles, to 10 years, the maximum prison term for mail fraud and wire fraud. Longer prison time for corporate officers and directors convicted of criminal fraud. Tougher laws that criminalize document shredding and other forms of obstruction of justice.
  • Strengthens the SEC's ability to freeze extraordinary payments to corporate executives while a company is being investigated.
  • Urges companies to prevent officers from receiving loans from their companies and bar officers and directors who engage in serious misconduct from again serving in leadership positions.
  • Calls on CEOs to explain how their compensation packages are in the best interests of their companies' shareholders and clearly disclose the details of those packages.
  • Asks Congress to appropriate $20 million more to allow the SEC to hire 100 new enforcement officers.
  • Stock markets should require that a majority of a company's directors and all members of the audit, nominating and compensation committees be barred from having a material relationship with the company.

SEC Proposed Rules

Accounting Oversight Body

  • Public company’s reports not accepted if its auditor is a member of a Public Accountability Board (PAB), and the company is an adjunct member of the same PAB (in case the PAB needs information from the client to facilitate its review of the accountant).
  • General aspects: (1) one or more private sector bodies directed by representatives of investors and issuers; (2) board is dominated by person who are not accountants; (3) subject to SEC oversight.
  • Powers: (1) examine accounting firms quality controls and disciplines them where appropriate; (2) set, or rely on and oversee designated private bodies to set, audit, quality control, and ethics standards.
  • Company must disclose in filings if a PAB has sanctioned an executive officer, director, or director nominee as a member accountant within the last 5 years, and that sanction has not been reversed/suspended.

Accelerated Disclosure

  • Applies to large, established companies, i.e., those that meet certain standards as to aggregate market value and reporting history with the SEC.
  • Shortens filing deadline of Form 10-K to 60 days (from 90) and Form 10-Q to 30 days (from 45).
  • Web site disclosure: Must disclose in annual report where investors can get filings and whether they’re available on company’s web site as soon as filed with SEC.

Form 8-K (Insider Transactions)

  • Amends Form 8-K (the "current" report of certain material transactions or events) to require companies to disclose: (1) transactions by directors and executive officers; (2) adoption, modification, or termination of "Rule 10b5-1" trading plans; and (3) loans to directors and officers made or guaranteed by company.
  • Applies to the company’s directors and executive officers.
  • Filing deadlines: (1) for transactions of $100,000 or more, within two business days; (2) for transactions under $100,000 and "Rule 10b5-1" trading plan events, due by close of business of second business day of the following week; and (3) for transactions not exceeding $10,000, filing can be deferred until aggregate unreported transactions for that person exceeds $10,000.
  • Exempt transactions: receipt of stock dividends; routine acquisitions through 401(k) plan, inheritances, etc.

Form 8-K (Additional Items)

  • New items include: (1) making/terminating material agreements not in ordinary course of business; (2) material changes to a customer agreement; (3) creation of a material financial obligation, including loan guarantees; (4) defaults that trigger a material financial obligation; (5) material write-offs, restructurings, or other exit activities; (6) material charges for impairments to company assets; (7) credit rating changes; (8) changes in the trading of company securities, such as exchanges, delistings, or notices of violation of listing standards; (9) withdrawal by an auditor of an audit report, or company decision that it cannot rely on a previous audit report; (10) material limitations in employee benefit or stock ownership plans, such as lock-out periods preventing trading.
  • Deadline: All disclosure items due within 2 business days after event, not the current 15 days (for most items).

MD&A Disclosure of "Critical" Accounting Estimates and Policies

  • Requires Management’s Discussion and Analysis (MD&A) section to discuss two new items: (1) critical accounting estimates made by company; and (2) the adoption of a critical accounting policy.
  • Accounting estimates:
    • Company must first identify any estimates reflected in financial statement that require assumptions about highly uncertain matters.

    • Disclosure required if different estimates the company could reasonably have used—or if changes in the estimate that are reasonably likely to occur from period to period—would materially affect financial results.

    • MD&A must discuss the nature, methodology, and effect of these estimates, and the effect of changes in these estimates.

  • Accounting policies:
    • Disclosure duty triggered when company initially adopts a material accounting policy.
    • A policy’s initial adoption occurs when events/transactions that affect the company occur for the first time, or when previously immaterial events/transactions become material.

    • MD&A must discuss the events/transactions that precipitated adoption of critical accounting policy, the principle adopted and method of applying it, the policy’s effect, and any alternatives to the policy not chosen and the effect that such alternatives would have had.

CEO, CFO Certification

  • CEO and CFO must each certify that, to best of his or her knowledge, the information in quarterly and annual reports is true in all important respects and that the reports contain all material information of which he or she is aware.
  • Company must have procedures to ensure that it collects, processes, and discloses the information required in Forms 10-K, 10-Q, and 8-K, and to periodically review these procedures so that officers can determine whether reports are complete.



CCH INCORPORATED, founded in 1913, has served four generations of business professionals and their clients. The company produces approximately 700 print and electronic products for securities, tax, legal, banking, securities, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at

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