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Leslie Bonacum
Neil Allen

CCH Overview Of New Corporate and Accounting Reform LAW

(RIVERWOODS, ILL., July 30, 2002) – The new corporate and accounting reform law signed by President Bush on July 30 fundamentally changes the way public companies do business and how the accounting profession performs statutorily required audits, according to CCH INCORPORATED (CCH), a leading provider of securities law information and software. The Sarbanes-Oxley Act of 2002 is intended to address systemic and structural weaknesses that have been revealed in recent months and that show failures of audit effectiveness and a breakdown in corporate financial and broker-dealer responsibility.

"The new law establishes a comprehensive framework to modernize and reform the oversight of public company auditing, improve quality and transparency in financial reporting by those companies and strengthen the independence of auditors," noted James Hamilton, JD, senior securities law analyst for CCH. "It promotes competition among service providers, enhances accurate investor decision-making throughout the capital markets and seeks to correct shortcomings that have threatened the reputation of those markets for integrity."

Following, is an overview of the new law, which promises sweeping change. A more detailed explanation of the new law will soon be available from CCH in its new book Sarbanes-Oxley Act of 2002: Law and Explanation. ($39. To order, or for more information, call 1-800-248-3248, or visit

  • New Oversight Board

Title I creates a public company accounting oversight board. The board is empowered to set auditing, quality control and ethics standards, to inspect registered accounting firms, to conduct investigations and to take disciplinary actions. As a check on the board's power, its decisions are subject to oversight and review by the SEC. This will be a strong, independent and full-time oversight board with broad authority to regulate auditors of public companies, set auditing standards and investigate violations of accounting practices.

Up until now, there has been reliance on self-policing of the audit process, private auditing and accounting standards setting and, for the most part, private disciplinary measures. But, questionable accounting practices and corporate failures have raised serious questions about this private oversight system.

For the first time, the Act creates a truly independent accounting oversight board, staffed with objective, unbiased overseers, who can enforce rules and prosecute violators without having to vet their decisions elsewhere. Unlike the Public Oversight Board, which depended on fees from the very auditors it was meant to regulate, this new board will be funded by mandatory fees paid by all public companies. The Act also provides for a new, improved FASB, giving it for the first time, full financial independence from the accounting industry.

  • Auditor Independence, Director Responsibility

Title II strengthens auditor independence from corporate management by limiting the scope of consulting services that auditors can offer their public company audit clients. This works to prevent auditors from controlling the entire financial reporting system at an individual company by both designing the internal audit system, and then purporting to offer an unbiased external audit.

The Act applies only to public companies that are required to report to the SEC. It says plainly that state regulatory authorities should make independent determinations of the proper standards and should not presume that the Act's standards apply to small- and medium-sized accounting firms that do not audit public companies.

Titles III and IV of the bill enhance the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies. Title V seeks to limit and expose to public view possible conflicts of interest affecting securities analysts. Title VI increases the SEC's annual authorization from $481 million to $776 million and extends the SEC's enforcement authority. Title VII of the bill mandates studies of accounting firm concentration, the role of credit rating agencies, investment banks and aiding and abetting.

  • Audit Committees

The Act provides for a strong public company audit committee to be directly responsible for the appointment, compensation and oversight of the work of the public company auditors, which makes it clear that the primary duty of the auditors is to the public company's board of directors and the investing public, and not to the managers. Committee members must be independent from company management.

The Act will stiffen the resolve and oversight of audit committees by requiring, among other provisions, that all committee members be independent and that they be given funds to hire independent counsel and other advisers. The Act requires that the audit committee develop procedures for addressing complaints concerning auditing issues and also that they put in place procedures for employee whistleblowers to submit their concerns regarding accounting.

  • Trading, Disclosure and Conflicts of Interest

Sarbanes-Oxley prohibits insider trades during pension fund blackout periods. Thus, you cannot have officers and directors free to sell their shares while the majority of the employees of the company are required to hold theirs.

On enhanced financial disclosures, the measure requires that public companies must disclose all off-balance-sheet transactions and conflicts. Also, pro forma disclosures must be done in a way that is not misleading and be reconciled with a presentation based on generally accepted accounting principles. More companies are doing these pro forma disclosures, and Congress feels they are not accurately reflecting the financial conditions of the company.

The Act requires very prompt disclosure of insider trades, which are to be reported by the second day following any transaction. The SEC is authorized to establish a different reporting timetable when the two-day period is not feasible.

The Act deals with analyst conflicts of interest. It prevents investment banking staff from supervising research analysts or clearing their reports and prohibits analysts from distributing research reports about a company they are underwriting.

There is also a provision to protect analysts from retaliation for making unfavorable stock recommendations.

  • Corporate Misconduct and Crime

On corporate misconduct, the Act presents a number of new provisions to deter wrongdoing. For the first time, CEOs and CFOs would have to certify that company financial statements fairly present the company's financial condition. If a misleading financial statement later resulted in a restatement, the CEO and CFO would have to forfeit and return to the company any bonus, stock or stock option compensation received in the twelve months following the misleading financial report. It would be unlawful for any company officer or director to attempt to mislead or coerce an auditor.

The Act would also require auditors to discuss specific accounting issues with the company's audit committee, which will not only increase the understanding of the company's board of directors, but also prevent directors from later claiming they were not informed about the company's accounting practices. The Act would enable the SEC to remove unfit officers and directors from office and bar them from holding any future position at a public company.

The new law establishes a new crime of securities fraud, with a tough 25-year jail sentence. It breaks the corporate code of silence by providing, for the first time, federal protection for corporate whistleblowers who report fraud to the authorities or testify at trial. It closes loopholes and toughens penalties for shredding documents. It requires audit documents to be preserved for five years and provides tough criminal penalties for their destruction. It protects victims' right to recoup their losses by preventing fraud artists from hiding in bankruptcy or concealing their crime and using unfair statutes of limitations to hide.


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 The CCH Business and Finance Securities Group web site can be accessed at

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Editor’s Note: Additional information on the securities reform is at

For members of the press, complimentary copies of CCH’s Sarbanes-Oxley Act of 2002: Law and Explanation book will be available soon. Contact Leslie Bonacum at 847-267-7153 or at or Neil Allen at 847-267-2179 or


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