Sarbanes-Oxley Act of 2002: A Side-by-Side Comparison of House, Senate, and Conference Versions

Publication Date: July 2002

Publisher: Library of Congress. Congressional Research Service

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Research Area: Banking and finance

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Abstract:

This report compares the major provisions of three auditor and accounting reform proposals: two versions of H.R. 3763 (as passed by the House on April 24, 2002, and by the Senate on July 15, 2002), and proposed rules that the U.S. Securities and Exchange Commission (SEC) published on June 26th under its existing authority. The appendix summarizes the two ten-point plans put forward by President Bush.

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 January 2000, U.S. stocks have lost over $5 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. H.R. 3763, in its House and Senate versions, and the SEC proposal seek to restore confidence in corporate reporting by enhancing the oversight of financial accounting.

All three proposals would create 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 current practice, auditors are regulated mainly by private professional accounting groups; the new bodies would also be private, but would operate under the direct oversight of the SEC. A majority of board members would be non-accountants (or accountants a certain number of years removed from active practice). The proposals differ in the scope of authority granted to the new board; the Senate version gives the board the most sweeping powers. Among the other provisions that appear in one or more of the proposals are the following: auditors would be prohibited from providing certain non-audit consulting services to their audit clients; top corporate officials would have to personally attest to the accuracy of their firm's accounting (and face penalties if financial statements were later found to be erroneous); stock trades by corporate insiders would have to be made public within a day or two; and the oversight role of the board of directors would be strengthened.

This report compares the major features of the three proposals. It will be updated as legislative developments warrant.