Auditor Reform Proposals: A Side-by-Side Comparison

Report for Congress
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.

Table 1. Comparison of Provisions of the Sarbanes-Oxley Act of 2002: House, Senate, and Conference Versions
ProvisionH.R. 3763 (House)H.R. 3763 (Senate)Conference Version
I. Creation of a New Auditor Oversight Board.
Name of new regulatorPublic RegulatoryPublic CompanyFollows Senate bill
OrganizationAccounting Oversight
Board
Number of board membersFiveFiveFive
Board compositionTwo members would beThree must never haveFollows Senate bill

accountants with recentbeen accountants; two may
ⁱ^{ki/CRS-RL31483}experience in auditingpublic companies; twobe accountants, but if anaccountant is to be
^g/wcould be CPAs, providedchairman, he or she must
^s^.or
^le^akthey had not worked in thenot have been in active
accounting industry for 2practice for 5 years
^://wikiyears; and at least one
^h^ttpmember must never have
been a CPA

ProvisionH.R. 3763 (House)H.R. 3763 (Senate)Conference Version
Scope of board’s activity(1) to review auditors’(1) set auditing, qualityFollows Senate bill
work product, (2) tocontrol, and independence
enforce (but not set)standards, (2) inspect the
standards of competencyauditing operations of
and professional ethics,public accounting firms
and (3) to review conflicts(required to register with
of interest betweenthe 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
ⁱ^{ki/CRS-RL31483}the board’s own rules
^g/w
^s^.orWho must register with theNo registrationAll accounting firms thatFollows Senate bill
^le^akboard?requirementsaudit public companies
^://wikiStandard-setting powersNoneWould set auditing, qualityFollows Senate bill
^h^ttpcontrol, and independence
standards
Disciplinary powersCould impose a variety ofCould impose a variety ofCould impose fines,
sanctions, including asanctions, including acensures, and suspend
determination that a firm isdetermination that a firm isfirms from auditing
not qualified to auditnot qualified to auditpublicly traded
public companies. SECpublic companies. SECcorporations. SEC and
and state accountancyand state accountancystate boards of
boards would be notifiedboards would be notifiedaccountancy would be
of final sanctionsof final sanctionsnotified of final sanctions
SEC to review andYesYesYes

possibly reduce board
sanctions?

ProvisionH.R. 3763 (House)H.R. 3763 (Senate)Conference Version
SEC oversight authority toYesYesYes. Further specifies that
abrogate, add to, or modifythe SEC can assign to the
any of the board’s rules?board duties and
responsibilities not
included in the statute
Source of fundingSpecifies that the boardFunded (1) by accountants,Follows Senate bill, with
will not be solelywho would pay the cost offurther provision that fines
dependent on themandatory registrationcollected by the board are
accounting profession forwith the board, and (2) byto fund merit scholarships
its fundingcompanies that sellfor accounting students.
securities to the public,Fees that fund the board
who would be assessed awill also fund FASB

fee proportional to the
ⁱ^{ki/CRS-RL31483}value of their securities in
^g/wcirculation in the public
^s^.or ma r k e t .
^le^ak
^://wiki
^h^ttp

ProvisionH.R. 3763 (House)H.R. 3763 (Senate)Conference Version
II. Auditor Independence.
Bans on provision ofDirects the SEC to reviseAmends statute to banFollows Senate bill, and
certain non-audit servicesits auditor independencefinancial system designadds provision that an
by auditors to their clientsrules to prohibit anand internal audit work. audit of an insurance
independent auditor fromExisting SEC regulationscompany required by state
designing or implementingagainst provision of certainlaw meets the definition of
financial informationother non-audit servicesan “audit service”
systems or fromare also incorporated into
performing internal auditthe statute. Except in
work for companies forcertain cases, the Senate
which it is the outsidebill stipulates that auditors
auditor. (Under currentmay provide permitted
SEC rules, auditors areconsulting services (such
ⁱ^{ki/CRS-RL31483}barred from supervising oras tax preparation) to their
^g/wmanaging their clients’audit clients only with the
^s^.orinformation systems, andapproval of the audit
^le^akfrom performing more thancommittee of the client’s
^://wiki40% of their clients’board of directors
^h^ttpinternal audits.)
Who would set auditorThe SECThe new boardFollows Senate bill
independence standards?
Auditor rotationNo provisionRequires the rotation of theFollows Senate bill, and
lead audit partner afterapplies rotation
auditing a company forrequirement to
five consecutive years. “coordinating” and
Calls for a study of“reviewing” audit partners,
mandatory rotation ofas well as the “lead”
audit firmspartner

ProvisionH.R. 3763 (House)H.R. 3763 (Senate)Conference Version
Auditor/client employmentNo provisionBars an accountant fromFollows Senate bill
relationshipsserving 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 inStock trades by corporateInsider trades must beInsider trades must be
corporate securitiesinsiders must be reportedreported to the publicreported to the SEC by the
electronically to the publicwithin two business dayssecond business day after
on the business dayof the transactionthe transaction (unless the
ⁱ^{ki/CRS-RL31483}following the transaction. SEC finds this is not
^g/w(Under current rules,feasible), and the SEC
^s^.ordisclosure may not bemust display the filings on
^le^akrequired for weeks orits web site the day after
months.)the filing is received
^://wiki
^h^ttpRequire enhancedYesYesYes
disclosure of off-balance
sheet transactions, and
material transactions with
unconsolidated
subsidiaries?
Require disclosure of anyYesYesYes

change in a corporation’s
code of ethics?

ProvisionH.R. 3763 (House)H.R. 3763 (Senate)Conference Version
Other disclosures requiredReal-time disclosure ofDirects SEC to make rulesAdopts both House and
events that would beto require that (1) pro-Senate provisions
material to investors’forma financial statements
decisions to buy or sell. (unaudited reports that do
The SEC would determinenot follow generally
the kinds of events subjectaccepted accounting
to real-time reportingprinciples) 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
ⁱ^{ki/CRS-RL31483}be disclosed
^g/w
^s^.orEnhance SEC review ofRequires SEC to establishNo provisionRequires SEC to inspect
^le^akcorporate financiala risk rating system tocompanies’ financial
^://wikistatementsdetermine how often astatements at least every 3
^h^ttpfirm’s financial statementsyears (and more often for
should be reviewedlarge firms)

ProvisionH.R. 3763 (House)H.R. 3763 (Senate)Conference Version
Accounting standardsNo provisionsDirects the SEC to ensureFollows Senate bill
settingthat 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
ⁱ^{ki/CRS-RL31483}
^g/wIV. Stock Analysts.
^s^.or
^le^akNew disclosureDirects the SEC to studyDirects the SEC or theFollows Senate bill

requirements andconflicts of interest thatNASD (which regulates
^://wikiregulation of Wall Streetmay affect analystsstockbrokers) to adopt
^h^ttpanalystsrules 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

ProvisionH.R. 3763 (House)H.R. 3763 (Senate)Conference Version
V. Corporate Executive Accountability.
Requires personalNoYes. Also requiresDirects SEC to make rules
certification of financialcertification of therequiring CEO
statements by CEOs andadequacy of a company’scertification, specifies the
CFOs?internal accountingcontents of the
controls, and establishescertification, and imposes a
criminal penalties forknowledge standard.
violations for knowinglyFollows Senate bill in
or willfully certifying arequiring certification of
false or misleadingthe adequacy of a
statementcompany’s internal
accounting controls, and
establishing criminal
ⁱ^{ki/CRS-RL31483}penalties for violations
^g/w
^s^.orPenalties if financialCalls for SEC to study theCEOs and CFOs wouldFollows Senate bill
^le^akstatements are found to bepossibility of requiringforfeit both trading profits
erroneous?disgorgement of profitsand bonuses received in
^://wikifrom insider securitiesthe 12 months before a
^h^ttptransactions, and to adopt afinancial report was
rule to requirerestated as the result of
disgorgement if neededmisconduct
Directs SEC to add civilNo provisionNo provisionEstablishes FAIR funds for
fines to disgorgementdefrauded investors,
funds available toconsisting of monies
compensate victims ofdisgorged, fines collected
securities fraudthrough SEC civil or
administrative actions
against securities law
violators, and gifts or
donations

ProvisionH.R. 3763 (House)H.R. 3763 (Senate)Conference Version
Personal loans by firms toMust be disclosedProhibited, unless the loanFollows Senate bill, with
top executives andis made in the normaladded exemptions for
directorscourse of business on thecharge cards and margin
same terms available toloans to employees of
public borrowerssecurities firms
Authorizes SEC to barYesYesYes
violators of securities laws
from serving as officers or
directors of any publicly
traded company?
Makes it a criminal offenseYesYesYes

for an officer or director of
ⁱ^{ki/CRS-RL31483}a corporation to mislead,
^g/wcoerce, manipulate, or
^s^.orfraudulently influence an
^le^akindependent auditor?
^://wiki
^h^ttp

ProvisionH.R. 3763 (House)H.R. 3763 (Senate)Conference Version
VI. Corporate Boards.
Audit committeeNoneMakes the audit committeeFollows Senate bill

provisionsof 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
ⁱ^{ki/CRS-RL31483}receiving complaints about
^g/waccounting and auditing,
^s^.orincluding anonymous
^le^ak“whistle blower” reports.
^://wikiAt least one member of the
^h^ttpaudit committee would
have to be a “financial
expert,” to be defined by
the SEC

ProvisionH.R. 3763 (House)H.R. 3763 (Senate)Conference Version
Auditor report to auditNo provisionRequires the independentFollows Senate bill
committeeauditor 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 forFollows Senate bill
5118 (passed Housealtering or destroying
7/16/02) containsdocuments, protects
ⁱ^{ki/CRS-RL31483}provisions similar towhistle blowers, and
^g/wSenate bill, except asprevents bankruptcy courts
^s^.orregards jail terms (seefrom discharging debts
^le^akbelow)incurred through securities
fraud
^://wiki
^h^ttpWhite-collar crimeNo provision, but H.R.Raises fines and jail termsFollows Senate bill, but
penalties5118 (passed Housefor several offenses,see below for changes
7/16/02) containsincluding mail and wireregarding jail terms
provisions similar tofraud, certification of a
Senate bill, except asfalse financial statement,
regards jail terms (seeconspiracy to defraud the
below)United States, ERISA
violations, and impeding
an official investigation
Prison termsNo provision, but H.R.Increases maximumAdopts provisions of H.R.

5118 increases maximumsentence for above5118

sentence for aboveoffenses from 5 to 10 years
offenses from 5 to 20 (or
25) years

ProvisionH.R. 3763 (House)H.R. 3763 (Senate)Conference Version
Statute of limitations inNo provisionIncreases statute ofFollows Senate bill
securities fraud caseslimitations from 1 year of
discovery or 3 years of
occurrence of fraud, to 2
years or 5 years,
respectively
VIII. Other Provisions.
SEC budgetNo provision, but H.R.Authorizes appropriationsFollows Senate bill
3764, passed by the Housefor the SEC for FY2003 of
on 6/26/02, authorizes$776 million, as opposed
$776 million for the SECto $469 million in the
in FY2003Administration’s budget
ⁱ^{ki/CRS-RL31483} request
^g/wSEC freeze authorityNo provision, but H.R.Allows the SEC to freezeFollows Senate bill
^s^.or
^le^ak5118 (passed Houseextraordinary payments to
7/16/02) contains similarcorporate insiders during
^://wikilanguagean investigation of
^h^ttpsecurities law violations
Directs SEC to issue rulesYesYesYes
of professional
responsibility for attorneys
of firms that sell securities
to the public
Prohibits corporateYesYesYes

insiders from trading
securities while a pension
fund is locked down (i.e.,
when employees cannot
access their accounts)

ProvisionH.R. 3763 (House)H.R. 3763 (Senate)Conference Version
Penny stock barNo provisionNo provisionGives federal courts
authority to prohibit
securities law violators
from participating in
offerings of penny stocks
Studies requiredCalls for the SEC to studyDirects the SEC to studyCalls for the SEC to study
stock analysts, bond ratingbond rating agencies and special purpose entities,
agencies, SECmandatory rotation ofbond rating agencies,
enforcement actions, andaudit firms, and the GAOprinciples-based
corporate governance, andto study the effects ofaccounting standards,
for the GAO to study themergers in the accountingsecurities law violators and
role of Wall Streetindustryenforcement programs, and
investment banks inmandatory auditor rotation,
ⁱ^{ki/CRS-RL31483}corporate accountingand for the GAO to study
^g/wdeceptionseffects of mergers in the
^s^.oraccounting industry and
^le^akthe role of Wall Street
^://wikiinvestment banks in
^h^ttpcorporate accounting
deceptions

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;

^!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.