Order Code RL31483
Report for Congress
Received through the CRS Web
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.
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Table 1. Comparison of Provisions of the Sarbanes-Oxley Act of 2002: House, Senate, and Conference Versions
Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
Conference Version
I. Creation of a New Auditor Oversight Board.
Name of new regulator
Public Regulatory
Public Company
Follows Senate bill
Organization
Accounting Oversight
Board
Number of board members
Five
Five
Five
Board composition
Two members would be
Three must never have
Follows Senate bill
accountants with recent
been accountants; two may
experience in auditing
be accountants, but if an
public companies; two
accountant is to be
could be CPAs, provided
chairman, he or she must
they had not worked in the
not have been in active
accounting industry for 2
practice for 5 years
years; and at least one
member must never have
been a CPA
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Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
Conference Version
Scope of board’s activity
(1) to review auditors’
(1) set auditing, quality
Follows Senate bill
work product, (2) to
control, and independence
enforce (but not set)
standards, (2) inspect the
standards of competency
auditing operations of
and professional ethics,
public accounting firms
and (3) to review conflicts
(required to register with
of interest between
the 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
the board’s own rules
Who must register with the No registration
All accounting firms that
Follows Senate bill
board?
requirements
audit public companies
Standard-setting powers
None
Would set auditing, quality Follows Senate bill
control, and independence
standards
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 and
and state accountancy
and state accountancy
state boards of
boards would be notified
boards would be notified
accountancy would be
of final sanctions
of final sanctions
notified of final sanctions
SEC to review and
Yes
Yes
Yes
possibly reduce board
sanctions?
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Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
Conference Version
SEC oversight authority to
Yes
Yes
Yes. Further specifies that
abrogate, add to, or modify
the SEC can assign to the
any of the board’s rules?
board duties and
responsibilities not
included in the statute
Source of funding
Specifies that the board
Funded (1) by accountants, Follows Senate bill, with
will not be solely
who would pay the cost of
further provision that fines
dependent on the
mandatory registration
collected by the board are
accounting profession for
with the board, and (2) by
to fund merit scholarships
its funding
companies that sell
for accounting students.
securities to the public,
Fees that fund the board
who would be assessed a
will also fund FASB
fee proportional to the
value of their securities in
circulation in the public
market.
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Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
Conference Version
II. Auditor Independence.
Bans on provision of
Directs the SEC to revise
Amends statute to ban
Follows Senate bill, and
certain non-audit services
its auditor independence
financial system design
adds provision that an
by auditors to their clients
rules to prohibit an
and internal audit work.
audit of an insurance
independent auditor from
Existing SEC regulations
company required by state
designing or implementing
against provision of certain law meets the definition of
financial information
other non-audit services
an “audit service”
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
Follows Senate bill
independence standards?
Auditor rotation
No provision
Requires the rotation of the Follows Senate bill, and
lead audit partner after
applies rotation
auditing a company for
requirement to
five consecutive years.
“coordinating” and
Calls for a study of
“reviewing” audit partners,
mandatory rotation of
as well as the “lead”
audit firms
partner
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Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
Conference Version
Auditor/client employment
No provision
Bars an accountant from
Follows Senate bill
relationships
serving 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 in
Stock trades by corporate
Insider trades must be
Insider trades must be
corporate securities
insiders must be reported
reported to the public
reported to the SEC by the
electronically to the public
within two business days
second business day after
on the business day
of the transaction
the transaction (unless the
following the transaction.
SEC finds this is not
(Under current rules,
feasible), and the SEC
disclosure may not be
must display the filings on
required for weeks or
its web site the day after
months.)
the filing is received
Require enhanced
Yes
Yes
Yes
disclosure of off-balance
sheet transactions, and
material transactions with
unconsolidated
subsidiaries?
Require disclosure of any
Yes
Yes
Yes
change in a corporation’s
code of ethics?
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Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
Conference Version
Other disclosures required
Real-time disclosure of
Directs SEC to make rules
Adopts both House and
events that would be
to require that (1) pro-
Senate provisions
material to investors’
forma financial statements
decisions to buy or sell.
(unaudited reports that do
The SEC would determine
not follow generally
the kinds of events subject
accepted accounting
to real-time reporting
principles) 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
be disclosed
Enhance SEC review of
Requires SEC to establish
No provision
Requires SEC to inspect
corporate financial
a risk rating system to
companies’ financial
statements
determine how often a
statements at least every 3
firm’s financial statements
years (and more often for
should be reviewed
large firms)
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Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
Conference Version
Accounting standards
No provisions
Directs the SEC to ensure
Follows Senate bill
setting
that 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
IV. Stock Analysts.
New disclosure
Directs the SEC to study
Directs the SEC or the
Follows Senate bill
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
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Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
Conference Version
V.
Corporate Executive Accountability.
Requires personal
No
Yes. Also requires
Directs SEC to make rules
certification of financial
certification of the
requiring CEO
statements by CEOs and
adequacy of a company’s
certification, specifies the
CFOs?
internal accounting
contents of the
controls, and establishes
certification, and imposes a
criminal penalties for
knowledge standard.
violations for knowingly
Follows Senate bill in
or willfully certifying a
requiring certification of
false or misleading
the adequacy of a
statement
company’s internal
accounting controls, and
establishing criminal
penalties for violations
Penalties if financial
Calls for SEC to study the
CEOs and CFOs would
Follows Senate bill
statements are found to be
possibility of requiring
forfeit both trading profits
erroneous?
disgorgement of profits
and bonuses received in
from insider securities
the 12 months before a
transactions, and to adopt a financial report was
rule to require
restated as the result of
disgorgement if needed
misconduct
Directs SEC to add civil
No provision
No provision
Establishes FAIR funds for
fines to disgorgement
defrauded investors,
funds available to
consisting of monies
compensate victims of
disgorged, fines collected
securities fraud
through SEC civil or
administrative actions
against securities law
violators, and gifts or
donations
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Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
Conference Version
Personal loans by firms to
Must be disclosed
Prohibited, unless the loan
Follows Senate bill, with
top executives and
is made in the normal
added exemptions for
directors
course of business on the
charge cards and margin
same terms available to
loans to employees of
public borrowers
securities firms
Authorizes SEC to bar
Yes
Yes
Yes
violators of securities laws
from serving as officers or
directors of any publicly
traded company?
Makes it a criminal offense Yes
Yes
Yes
for an officer or director of
a corporation to mislead,
coerce, manipulate, or
fraudulently influence an
independent auditor?
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Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
Conference Version
VI. Corporate Boards.
Audit committee
None
Makes the audit committee Follows Senate bill
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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Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
Conference Version
Auditor report to audit
No provision
Requires the independent
Follows Senate bill
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
Follows Senate bill
5118 (passed House
altering or destroying
7/16/02) contains
documents, protects
provisions similar to
whistle blowers, and
Senate bill, except as
prevents bankruptcy courts
regards jail terms (see
from discharging debts
below)
incurred through securities
fraud
White-collar crime
No provision, but H.R.
Raises fines and jail terms
Follows Senate bill, but
penalties
5118 (passed House
for several offenses,
see below for changes
7/16/02) contains
including mail and wire
regarding jail terms
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
Prison terms
No provision, but H.R.
Increases maximum
Adopts provisions of H.R.
5118 increases maximum
sentence for above
5118
sentence for above
offenses from 5 to 10 years
offenses from 5 to 20 (or
25) years
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Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
Conference Version
Statute of limitations in
No provision
Increases statute of
Follows Senate bill
securities fraud cases
limitations from 1 year of
discovery or 3 years of
occurrence of fraud, to 2
years or 5 years,
respectively
VIII.
Other Provisions.
SEC budget
No provision, but H.R.
Authorizes appropriations
Follows Senate bill
3764, passed by the House
for the SEC for FY2003 of
on 6/26/02, authorizes
$776 million, as opposed
$776 million for the SEC
to $469 million in the
in FY2003
Administration’s budget
request
SEC freeze authority
No provision, but H.R.
Allows the SEC to freeze
Follows Senate bill
5118 (passed House
extraordinary payments to
7/16/02) contains similar
corporate insiders during
language
an investigation of
securities law violations
Directs SEC to issue rules
Yes
Yes
Yes
of professional
responsibility for attorneys
of firms that sell securities
to the public
Prohibits corporate
Yes
Yes
Yes
insiders from trading
securities while a pension
fund is locked down (i.e.,
when employees cannot
access their accounts)
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Provision
H.R. 3763 (House)
H.R. 3763 (Senate)
Conference Version
Penny stock bar
No provision
No provision
Gives federal courts
authority to prohibit
securities law violators
from participating in
offerings of penny stocks
Studies required
Calls for the SEC to study
Directs the SEC to study
Calls for the SEC to study
stock analysts, bond rating
bond rating agencies and
special purpose entities,
agencies, SEC
mandatory rotation of
bond rating agencies,
enforcement actions, and
audit firms, and the GAO
principles-based
corporate governance, and
to study the effects of
accounting standards,
for the GAO to study the
mergers in the accounting
securities law violators and
role of Wall Street
industry
enforcement programs, and
investment banks in
mandatory auditor rotation,
corporate accounting
and for the GAO to study
deceptions
effects of mergers in the
accounting industry and
the role of Wall Street
investment banks in
corporate accounting
deceptions
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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;
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! 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.