Order Code RL31483
Report for Congress
Received through the CRS Web
Auditing and Accounting Reform Proposals:
A Side-by-Side Comparison
Updated July 17, 2002
Mark Jickling
Specialist in Public Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Auditing and Accounting Reform Proposals:
A Side-by-Side Comparison
Summary
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.

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Contents
Creation of a New Auditor Oversight Board . . . . . . . . . . . . . . . . . . . . . 2
Auditor Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Enhanced Accounting Disclosure Requirements . . . . . . . . . . . . . . . . . . 6
Stock Analysts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Corporate Executive Accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Corporate Boards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Increased Penalties for Securities Law Violations . . . . . . . . . . . . . . . . 11
Other Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
APPENDIX A. President Bush’s 10-Point Plans . . . . . . . . . . . . . . . . . . . . . . . . 13

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Auditing and Accounting Reform Proposals:
A Side-by-Side Comparison
The table below presents a side-by-side comparison of 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 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 Senate bill is more comprehensive than the House’s, but the House has
passed two separate bills that contain similar provisions to those contained in the
Senate legislation. H.R. 3764 would authorize appropriations for the SEC in FY
2003 of $776 million, while H.R. 5118 contains more stringent penalties for
securities fraud, particularly violations committed by corporate officers and directors.
These bills are noted in the side-by-side.
The appendix to this report summarizes the two ten-point plans put forward by
President Bush. Most of the President’s proposals are included in the legislative and
SEC initiatives.

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CRS-2
Table 1. Comparison of Provisions of H.R. 3763 (House and Senate versions) and SEC Proposed Auditor
Reform Rule
Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
SEC Proposed Rule
I. Creation of a New Auditor Oversight Board.
Name of new regulator
Public Regulatory
Public Company
Public Accountability
Organization
Accounting Oversight
Board
Board
Number of board members
Five
Five
Nine
Board composition
Two members would be
Three must never have
Three members may be
accountants with recent
been practicing
licensed CPAs, but they
experience in auditing
accountants; two may be
would not vote on
public companies; two
accountants who have not
disciplinary matters. The
could be CPAs, provided
practiced actively for five
remaining six would be
they had not worked in the
years
public members,
accounting industry for
representing public
two years; and at least one
companies and investors
member must never have
been a CPA

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CRS-3
Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
SEC Proposed Rule
Scope of board’s activity
(1) to review auditors’
(1) set auditing, quality
(1) conduct quality control
work product, (2) to
control, and independence
reviews of audit
enforce (but not set)
standards, (2) inspect the
procedures and practices of
standards of competency
auditing operations of
accounting firms (annually
and professional ethics,
public accounting firms
for firms with 70+ audit
and (3) to review conflicts
(required to register with
clients, at least triennially
of interest between
the board and file annual
for others) to ensure that
auditors and their clients.
reports if they audited
auditors have and follow
public companies), and (3)
appropriate policies re:
investigate violations of
independence, objectivity,
securities laws, standards
and integrity; personnel
of ethics, competency, and
management; acceptance
conduct set by the
and termination of audit
accounting profession, and
engagements; and audit
the board’s own rules
performance,
methodology, and disputes;
and (2) enforce ethical and
competency standards
Who must register with the
No registration
Accounting firms that
(1) Accountants who
board?
requirements
audit public companies
perform audits and (2)
publicly traded companies
(as adjunct members)
Standard-setting powers
None
Would set auditing, quality
Would set ethics, auditing,
control, and independence
and quality control
standards
standards, or could rely on
(and oversee) private
accounting groups as
source of standards

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CRS-4
Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
SEC Proposed Rule
Disciplinary powers
Could impose a variety of
Could impose a variety of
Could impose fines,
sanctions, including a
sanctions, including a
censures, and suspend
determination that a firm is
determination that a firm is
firms from auditing
not qualified to audit
not qualified to audit
publicly traded
public companies. SEC
public companies. SEC
corporations. SEC would
and state accountancy
and state accountancy
be notified of final
boards would be notified
boards would be notified
sanctions
of final sanctions
of final sanctions
SEC to review and
Yes
Yes
Yes
possibly reduce board
sanctions?
SEC oversight authority to
Yes
Yes
Yes
abrogate, add to, or modify
any of the board’s rules?
Source of funding
Specifies that the board
Funded by accountants,
Funded by accounting
will not be solely
who would pay the cost of
firms and publicly traded
dependent on the
mandatory registration
companies
accounting profession for
with the board, and by
its funding
companies that sell
securities to the public,
who would be assessed a
fee proportional to the
value of their securities in
circulation in the public
market.

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CRS-5
Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
SEC Proposed Rule
II. Auditor Independence.
Bans on provision of
Directs the SEC to revise
Amends statute to ban
No provisions. PAB
certain non-audit services
its auditor independence
financial system design
would monitor auditors’
by auditors to their clients
rules to prohibit an
and internal audit work.
internal independence rules
independent auditor from
Existing SEC regulations
designing or implementing
against provision of certain
financial information
other non-audit services
systems or from
are also incorporated into
performing internal audit
the statute. Except in
work for companies for
certain cases, the Senate
which it is the outside
bill stipulates that auditors
auditor. (Under current
may provide permitted
SEC rules, auditors are
consulting services (such
barred from supervising or
as tax preparation) to their
managing their clients’
audit clients only with the
information systems, and
approval of the audit
from performing more than
committee of the client’s
40% of their clients’
board of directors
internal audits.)
Who would set auditor
The SEC
The new board
The SEC
independence standards?
Auditor rotation
No provision
Requires the rotation of the
Would require partner
chief audit partner after
rotation after seven years
auditing a company for
(the current AICPA
five consecutive years.
standard)
Calls for a study of
mandatory rotation of audit
firms

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CRS-6
Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
SEC Proposed Rule
Auditor/client employment
No provision
Bars an accountant from
Quality control reviews
relationships
serving as the outside
would address employees
auditor for a company
of auditors joining clients
where a top officer had
been employed by the
accountant within the past
year
III.
Enhanced Accounting Disclosure Requirements.
Insider transactions in
Stock trades by corporate
Insider trades must be
No provision
corporate securities
insiders must be reported
reported to the public
electronically to the public
within two business days
on the business day
of the transaction
following the transaction.
(Under current rules,
disclosure may not be
required for weeks or
months.)
Require enhanced
Yes
Yes
No
disclosure of off-balance
sheet transactions, and
transactions with
unconsolidated
subsidiaries?
Require disclosure of any
Yes
Yes
No
change in a corporation’s
code of ethics?

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CRS-7
Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
SEC Proposed Rule
Other disclosures required
Real-time disclosure of
(1) the use of pro-forma
Disclosure of any sanctions
events that would be
financial statements
imposed on a firm’s
material to investors’
(unaudited reports that do
auditor in the past five
decisions to buy or sell.
not follow generally
years
The SEC would determine
accepted accounting
the kinds of events subject
principles) and (2)
to real-time reporting
corrections or adjustments
of past financial statements
that were made at the
insistence of a
corporation’s auditor
Accounting standards
No provisions
Directs the SEC to ensure
FASB would be funded out
setting
that the Financial
of the contributions of
Accounting Standards
accountants and public
Board, which sets
companies to the new PAB
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

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CRS-8
Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
SEC Proposed Rule
IV. Stock Analysts.
New disclosure
Directs the SEC to study
Directs the SEC or the
No provision
requirements and
conflicts of interest that
NASD (which regulates
regulation of Wall Street
may affect analysts
stockbrokers) to adopt
analysts
rules 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
V. Corporate Executive Accountability.
Requires personal
Yes
Yes. Also requires
No (but a rule proposed
certification of financial
certification of the
separately by the SEC
statements by CEOs and
adequacy of a company’s
would require this)
CFOs?
internal accounting
controls, and establishes
criminal penalties for
violations
Penalties if financial
Profits from insider
CEOs and CFOs would
No provision
statements are found to be
securities transactions
forfeit both trading profits
erroneous?
would be disgorged
and bonuses received
before a financial report
was restated
Personal loans by firms to
Must be disclosed
Prohibited, unless the loan
No
top executives and
is made in the normal
directors
course of business on the
same terms available to
public borrowers

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CRS-9
Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
SEC Proposed Rule
Authorizes SEC to bar
Yes
Yes
No. (Legislation required)
violators of securities laws
from serving as officers or
directors of any publicly
traded company?
Makes it a criminal offense
Yes
Yes
No. (Legislation required,
for an officer or director of
although misleading an
a corporation to mislead,
auditor could in many
coerce, manipulate, or
cases be construed as
fraudulently influence an
securities fraud under
independent auditor?
current law.)

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CRS-10
Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
SEC Proposed Rule
VI. Corporate Boards.
Audit committee
None
Makes the audit committee
None
provisions
of 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
receiving complaints about
accounting and auditing,
including anonymous
“whistle blower” reports.
At least one member of the
audit committee would
have to be a “financial
expert,” to be defined by
the SEC

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CRS-11
Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
SEC Proposed Rule
Auditor report to audit
No provision
Requires the independent
No provision
committee
auditor 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 for
No provision,
5118 (passed House
altering or destroying
7/16/02) contains
documents, extends statute
provisions similar to
of limitations, protects
Senate bill, except as
whistle blowers, and
regards jail terms (see
prevents bankruptcy courts
below)
from discharging debts
incurred through securities
fraud
White-collar crime
No provision, but H.R.
Raises fines and jail terms
No provision
penalties
5118 (passed House
for several offenses,
7/16/02) contains
including mail and wire
provisions similar to
fraud, certification of a
Senate bill, except as
false financial statement,
regards jail terms (see
conspiracy to defraud the
below)
United States, ERISA
violations, and impeding
an official investigation

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CRS-12
Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
SEC Proposed Rule
Prison terms
No provision, but H.R.
Increases maximum
No provision
5118 increases maximum
sentence for above
sentence for above
offenses from 5 to 10 years
offenses from 5 to 20 (or
25) years
VIII.
Other Provisions.
SEC budget
No provision, but H.R.
Authorizes appropriations
No provision, but would
3764, passed by the House
for the SEC for FY 2003 of
not oppose a budget
on 6/26/02, authorizes
$776 million, as opposed
increase
$776 million for the SEC
to $469 million in the
in FY 2003
Administration’s budget
request
SEC freeze authority
No provision, but H.R.
Allows the SEC to freeze
No provision
5118 (passed House
extraordinary payments to
7/16/02) contains similar
corporate insiders during
language
an investigation of
securities law violations
Studies required
Calls for the SEC to study
Directs the SEC to study
No provision
stock analysts, bond rating
bond rating agencies and
agencies, SEC
mandatory rotation of audit
enforcement actions, and
firms, and the GAO to
corporate governance, and
study the effects of
for the GAO to study the
mergers in the accounting
role of Wall Street
industry
investment banks in
corporate accounting
deceptions

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CRS-13
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;

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CRS-14
! 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 FY 2003.

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