An Analysis of the Sarbanes Bill

Good points of the bill   Key amendments left out   Other concerns

Good points on the Sarbanes bill:

1. Creates full-time oversight board with broad authorities to regulate auditors of public companies, set auditing standards, and investigate violations of accounting practices. The board can enforce rules and prosecute violators without having to vet its decisions elsewhere. The new board will be funded by mandatory fees paid by all public companies
2. Restricts the non-audit services a public accounting firm may provide to its clients that are public companies
3. Requires that CEOs and CFOs forfeit bonuses, incentive-based compensation, and profits from stock sales if accounting restatements result from material noncompliance with SEC financial reporting requirements.
4. Requires the SEC to adopt rules designed to protect the independence and integrity of securities analysts.
5. Bans companies from making personal loans to top executives and requires that the SEC conduct a study of corporations' use of off-balance sheet transactions. (Schumer amendments)
6. Orders executives to vouch for company books even if they have reincorporated offshore. (Dorgan amendment)
7. Requires that chief executive officers, CEOs, and chief financial officers, CFOs, certify financial reports, outlaws fraud and deception by managers in the auditing process, prevents CEOs and CFOs from benefiting from misstatements made in their financial reports, and prohibits corporate decision makers from selling company stock at a time when their employees are prohibited from doing so.
8. Authorizes additional funding for the SEC ($776 million, up from $467 million) and would establish independent sources of funding for the new oversight board and FASB.
9. Forces Wall Street investment research analysts to disclose any conflicts of interest that they or their financial institution might have in the investment recommendations that they make.
10. Strengthens existing criminal penalties for corporate crime, creates a securities fraud felony punishable by up to 10 years in prison, and creates a new crime for schemes to defraud shareholders. The amendment also protects corporate whistleblowers. It requires audit documents to be preserved for 5 years and provides tough criminal penalties for their destruction. It protects victims the right to recoup their losses by preventing fraud artists from hiding in bankruptcy or concealing their crime and using an unfair statute of limitations to hide. (Leahy amendment)
11. Requires the General Accounting Office, GAO, to conduct a study of the factors that have led to consolidation in the accounting industry and the impact that this has had on the securities markets. (Akaka amendment)
12. Calls for an SEC study with respect to aider and abettor violations of the Federal securities law (Shelby amendment)
13. Requires lawyers to notify company directors of management misconduct that top officers refuse to rectify. (Edwards amendment)
14. When corporate insiders, such as CEOs, trade the stock of the companies they manage, they must take reasonable steps to disclose those transactions to their shareholders, including electronically disclosing those sales within 2 days. (Carnahan amendment)
15. Calls on the SEC to issue rules of professional conduct for corporate lawyers.

Key amendments left out:

1. Levin amendment (4283) The amendment says that the standard-setting body for accounting principles that is set up in this bill shall review the accounting treatment of employee stock options and shall within a year of enactment of this act adopt an appropriately generally accepted accounting principle for the treatment of employee stock options.
2. McCain amendment: Any corporation that grants a stock option to an officer or employee to purchase a publicly traded security in the United States shall record the granting of the option as an expense in that corporation's income statement for the year in which the option is granted. McCain: “We have to end the double standard for stock options. Currently corporations can hide these multimillion-dollar compensation plans from their stockholders or other investors because these plans are not counted as an expense when calculating company earnings. “ Daschle: "I think that we have to make a fundamental question about how far into the weeds we get here, how far do we want to extend current statute and current law with regard to accounting practices"
3. Dorgan amendment: “My amendment says that 1 year prior to bankruptcy, if you are getting the big bucks, big bonuses, big incentives, big stock options, and you want to take off with $50 or $100 million, and leave everybody else flat on their back, you cannot do it; you have to give it back (amendment 4214) “Obviously I am a little irritated about the process. It stinks. That is not a genteel way to say that. But post cloture, if we have germane amendments, we should be able to be here to offer those amendments. That is not now the case.” ”The thing that is missing in this bill is that disgorgement should be required in cases of bankruptcy as well. So I have an amendment that will say: Yes, disgorgement in this bill with respect to periods prior to restatement, but also disgorgement for the 12 months prior to the filing of bankruptcy by a corporation as well.”
4. Cleland amendment: (4236) “The underlying bill requires that when a corporation has to file a restated financial report because of misconduct in the original report, the CEO and CFO have to give back any profits they have made from bonuses and stock sales for a year after the original report. My amendment would expand on the bill by calling into account all officers and directors who know about the misconduct in filing the financial report and through that knowledge abuse the company's trust and the trust of their employees. It would also mandate that officers and directors who have knowledge of wrongdoing in their financial reports would not only have to give up bonuses and profits but also their severance packages.”
5. Kennedy amendment (4242): would have allowed employees to sue for breach of fiduciary duty in a 401(k) plan.
6. Clinton amendment (4258): all issuers require shareholder approval of any stock option plan, stock purchase plan, or other arrangement by which employees may acquire an equity interest in the issuer in exchange for consideration that is less than the fair market value of the equity interest at the time of the exchange.

Other concerns on the Sarbanes Bill:

The oversight board: The bill calls for a five-member board to inspect auditor firms and investigate and discipline auditors. But two of the five members will be CPAs, and there is no prohibition on the rest of the board having close ties to the accounting industry. The bill was amended so that the disciplinary actions of the oversight board are confidential and not open to the public Sen. Barbara Boxer: “I remain concerned that the public members on the board created in this bill are not chosen according to specific independence standards”

Separation of audit and non-audit services: The bill prohibits auditors from providing a wide array of non-audit services, but those services are not clearly defined and left up to the SEC. Further, auditing firms can get special permission from the oversight board to provide non-auditing services. (McCain amendment (SA 4238) would have changed it to any non-audit services)

Rotation of Auditors: The bill requires the rotation of audit partners, but does not require rotation of firms. If the idea is to get a fresh set of eyes, partners in the same firm will be more likely to cover up for each other.

Analyst conflicts: Disclosure requirements do not include the holdings of family members of influential research analysts on Wall Street.

Bush says: “I am pleased the Senate has now acted on a tough bill that shares my goals and includes all of the accounting and criminal reforms I proposed.”
Phil Gramm: “The sooner we can get to conference, the sooner we can write this bill and see the bill signed into law."