Title Summaries
Title 1. Public Company Accounting Oversight Board (PCAOB or âBoardâ)
The Act establishes the board as a private, nonprofit company funded by annual accounting support fees assessed to issuers1 (as defined in Section 3 of the Securities Exchange Act of 1934 (15 U.S.C.78c)). The boardâs duties include the mandatory registering of public accounting firms that prepare audit reports; establishing auditing, quality control, ethics, and independence standards relating to the preparation of audit reports; conducting inspections of registered public accounting firms; and enforcing compliance with the Act.
Title 2. Auditor Independence
Title 2 prohibits registered public accountants conducting an issuers financial statement audit from performing nonauditing services such as bookkeeping, the design and implementation of financial information systems, appraisals, valuations, fairness opinions, internal audit outsourcing, and management functions. All audit and nonaudit services require preapproval by the audit committee of the issuer. Additionally, there are provisions for audit partner rotation, specific reporting requirements by registered public accounting firms to the issuersâ audit committee, and an absolute prohibition of an audit firm providing audit services to clients for one year if the client has hired certain employees of the registered public accounting firm in key financial positions.
Title 3. Corporate Responsibility
This provision of the Act mandates the SEC to direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with the following Act requirements:
- Existence of audit committee oversight of registered public accounting firm
- Board of directors/audit committee independence
- Procedures for receiving complaints concerning accounting or auditing matters and anonymous employee concerns relating to questionable accounting or auditing matters established by the audit committee
- Audit committee authority to engage independent counsel and other advisors
- Provision of appropriate funding, as determined by the audit committee, for payment to the registered public accounting firm and to advisors hired by the audit committee
Title 3 also requires chief executive officer (CEO) and chief financial officer (CFO) certifications of financial statements, outlines penalties for corporate officers and directors for material noncompliance, and prohibits insider trading during pension fund blackout periods.
Title 4. Enhanced Financial Disclosures
Title 4 outlines requirements to help assure the accuracy of financial statements and supporting financial disclosures. It requires reporting of material unconsolidated and off-balance sheet transactions as well as mandates that pro forma financial information is factual and complete, and reconciles with the financial condition and results of operations of the issuer. Personal loans to executives are prohibited; issuers are required to disclose whether or not they have a code of ethics for senior financial officers, and mandates that the audit committee include at least one financial expert as defined by the Act. This provision also outlines requirements regarding managementâs assessment of internal controls and the real-time disclosure of material changes to financial conditions or operations.
Title 5. Analyst Conflicts of Interest
This section of the Act requires the SEC, or national securities exchanges and national securities associations, to implement rules to improve âpublic confidence in securities research, and to protect the objectivity and independence of securities analysts âŚ.â2
Title 6. Commission Resources and Authority
Pursuant to Title 6, $98 million in funding is authorized to the SEC to hire an additional 200 professionals to provide enhanced oversight of auditors and audit services required by Federal securities laws.
Title 7. Studies and Reports
Title 7 authorizes the General Accounting Office (GAO) and the SEC to perform studies and issue reports investigating the consolidation of public accounting firms; the role of credit rating agencies in the securities market; the number of professionals found to have aided and abetted a violation of securities laws from the period January 1, 1998, to December 31, 2001; the enforcement actions taken by the Commission involving violations of reporting requirements; and whether investment banks and financial advisers assisted public companies in obfuscating their true financial condition.
Title 8. Corporate and Criminal Fraud Accountability
This provision of the Act, which is also referred to as the Corporate and Criminal Accountability Act of 2002, details the penalties for the destruction of corporate audit records and the willful destruction, alteration, or falsification of records in Federal investigations and bankruptcy proceedings. This section also establishes a five-year record retention period for audit or review workpapers and provides protection for whistleblowers.
Title 9. White-Collar Crime Penalty Enhancements
The Act in Title 9, which is also referred to as the White-Collar Crime Penalty Enhancement Act of 2002, modifies the Federal Sentencing Guidelines to increase the penalties for white-collar crimes. More importantly for issuers, it establishes a requirement for the CEO/CFO certification of periodic financial statements and specifies the penalties for the failure to certify and the willful certification of knowingly false financial reports. Penalties range from $1 million to $5 million and may include imprisonment for up to 20 years depending on the violation.
Title 10. Corporate Tax Returns
Title 10 s...