With a name like the "Sarbanes-Oxley Act of 2002," you wouldn't expect it to hold your interest from cover to cover. Let me tell you, I couldn't put it down. It reads as a searing indictment of auditors, corporate executives, audit committees, analysts, investment bankers, and standard setters and regulatory bodies like the SEC.

My first impression was the scope, depth, and breadth of the legislation. It provides for an accounting oversight board, auditor independence rules, corporate accounting reform, additional investor protection, and increased criminal and civil penalties for securities violations.

The changes are substantial and will force public companies to dramatically modify how they operate. It will also have a similar impact for every accounting firm that is auditing a public company. The SEC really has its work cut out for itself for it must set up the new Public Company Accounting Oversight Board, quickly develop numerous new regulations that are statutorily required in a number of months, review the additional financial information that will be disclosed, and ferret out the securities law violators and have them punished.

Here a few tidbits of why the "Sarbanes-Oxley Act of 2002," is so interesting

  • The new Public Company Accounting Oversight Board will conduct a continuing program of compliance inspections annually for firms that regularly provide more than 100 audits, but not less frequently than once every three years for others. Special inspections may also be carried out.
  • The SEC will review on a regular basis the disclosures made by public companies. In scheduling, the SEC shall consider if the companies have issued material restatements of financial results; experienced significant volatility in their stock price; have large market capitalization; are emerging companies with disparities in price to earning ratios; and those operations that significantly affect any material sector of the economy.
  • There will be required audit partner rotation and a study will be conducted on the mandatory rotation of auditing firms.

To give you the real flavor, here is an actual excerpt from the legislation:"In supervising nonregistered public accounting firms and their associated persons, appropriate State regulatory authorities should make an independent determination of the proper standards applicable, particularly taking into consideration the size and nature of the business of the accounting firms they supervise and the size and nature of the business of the clients of those firms. The standards applied by the Board under this Act should not be presumed to be applicable for purposes of this section for small and medium sized nonregistered public accounting firms."
Hemingway it is not. But reading between the lines, it is a flat out prediction that many state public accounting regulatory boards will be using this legislation as a template to govern the public accountants under their jurisdiction. That provision in particular indicates to me that my reading is not yet finished. And now I know why I don't need to watch those so-called reality-based television shows.

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