by Bill Carlino

Washington - Now comes the hard part.

With President George W. Bush’s signature on the landmark Sarbanes-Oxley Act of 2002, accountants, corporate executives, audit committees, securities analysts and attorneys are attempting to gauge just how H.R. 3763 will ultimately affect their operating landscape.

"There’s no doubt it has enormous impact across the board," said Dan Goldwasser, a partner in the New York law firm of Vedder Price Kaufman Kammholz & Day and a frequent advisor to accounting firms. "In particular it affects chief executives and audit committees in a profound way."

On July 30, President Bush signed H.R. 3763, a sweeping piece of legislation designed to curb corporate fraud and optimally stave off massive accounting scandals, such as those at Enron, WorldCom, Tyco, Qwest and Adelphia.

The bill, which breezed through the House 423-3, and the Senate 99-0, provides for the creation of an accounting oversight board, new auditor independence rules, mandatory five-year auditor partner rotation and metes out stiff prison terms for company executives who knowingly commit fraud.

Both House Republicans and the American Institute of CPAs lobbied to adopt a somewhat softer reform bill drafted by Rep. Michael Oxley, R.-Ohio, rather than the more stringent one authored by Sen. Paul Sarbanes, D.-Md., chairman of the Senate Banking Committee.

And as late as Memorial Day, the Sarbanes bill appeared to be DOA.

However, spurred by yet another colossal accounting scandal and subsequent mega-bankruptcy filing, this time at telecommunications concern WorldCom, lawmakers reached across the aisle to push forth H.R. 3763.

"This bill never would have passed had WorldCom not happened," said Lynn Turner, former chief accountant at the Securities and Exchange Commission and now an accounting professor at Colorado State University. Two years ago, Turner and then Securities and Exchange Commission chairman Arthur Levitt, had battled both the AICPA and several of the Big Five firms on the thorny issue of auditor independence before a compromise was reached in November 2000.

"Three months ago I didn’t think there was a chance of getting any legislation out," said Turner. "But the court of public opinion was what drove it home."

And while most associated with the accounting and legal professions lauded the primary components of the Sarbanes-Oxley Act of 2002, several opined that there were portions of the legislation that may prove difficult to enact, or that specific areas did not go far enough with regard to spearheading reform.

"One of the big questions is how the oversight board works and reacts with the profession," said Goldwasser.

The Public Company Accounting Oversight Board, a five-member panel (of which no more than two members can be CPAs) will be overseen by the SEC and be in operation 270 days after the bill becomes law. Each member will serve a five-year term.

An abridged list of the board’s duties include registering firms that prepare audit reports, establish auditing, ethics and independence standards and conduct disciplinary proceedings and investigations. The board also would conduct a program of annual compliance inspections for firms that perform in excess of 100 audits. The board also is imbued with the power to suspend or revoke registration, impose sanctions and levy fines of up to $2 million.

Goldwasser however, remained skeptical of the time frame. "The board has to get a plan of operation together, have it approved by the SEC and then get the funding to operate. Meanwhile there’s no plan for interim funding."

Some 180 days after the board begins operation, it would be illegal for audit firms to provide nine types of consulting services. Those include bookkeeping, financial information systems, appraisal or valua-

tion services, actuarial services, internal audit-ing, human resources, investment banking services, legal services unrelated to the audit and an open-ended prohibition, one which the board "determines is impermissable."

Goldwasser said that due to the consulting restrictions, he predicted an upsurge in strategic alliances between large and regional firms, as well as smaller firm mergers.

"There are 1,200 non-Big Four firms that do audit SEC companies and many of them have one or two partners that do audit work. Under the new rules these guys have to sit out for a year. That’s not going to happen."

In addition, each firm that performs an audit must report to the client’s audit committee all critical accounting policies that are to be used, all alternative treatments of financial information under generally accepted accounting principles and the ramifications of those alternatives, and disclosure of all management communications between the client and the auditor.

"We do view the legislation favorably but feel there are very modest provisions to the bill with regard to auditor independence," said Barbara Roper, director of investor protection at Washington D.C.-based Consumer Federation of America. "We support a broad ban on consulting services and mandatory firm rotation on an audit. You don’t want to see an auditor holding on to a client for decades."

With regard to the composition of the board, Roper said that it should be comprised of "people the accounting profession are uncomfortable with, because they have the best chance of reform."

Currently the office of the chief accountant at the SEC is accepting nominations for the board with a deadline of Sept. 2.

"Obviously a lot will depend on who is on the board and how it will be implemented. We’ll just have to see," Turner said.

The bill also contains an "alumni provision," which prevents an accounting firm from performing audit services for a client if a "C-level" executive (CEO, CFO, etc.) had previously worked for the auditor and participated in that particular audit for a one-year period preceding the audit.

After a 180-day notice by the SEC, only registered public firms would be able to perform audits, with applications requiring a series of disclosures including all audit fees received, statements of quality control policies and copies of filings that disclose disagreements between the auditor and the client.

A "trickle-down" effect could also potentially impact states’ regulations, with the respective state boards independently determining applicable standards as it relates to the firms they oversee.

One thing, however, that the new bill does not do is require corporations to expense stock options, a hotly contested issue, although many Fortune 500 companies, such as G.E. and Coca Cola have subsequently said that they would begin treating stock options as an expense.

Others opine that the new legislation could translate into a quantum jump in lawsuits.

The bill extends the period that investors have to file suits to two years from one after an instance of fraud is discovered. That potentially could mean that attorneys would now have more time in which to file claims against ancillary defendants, such as bankers and corporate lawyers.

And a key component to the bill is having chief executives and chief financial officers certify their results or face possible legal ramifications. That could trigger an upsurge in restating earnings, fertile grounds for shareholder lawsuits.

"There were pieces on the oversight board that got watered down in committee," said Turner. "Had this bill been passed even two weeks earlier it probably would have been tougher. On the other hand, there were some parts that were even stronger than the Sarbanes bill." Turner said that he preferred SEC chairman Harvey Pitt’s proposal to make public a firm that had failed an inspection report, rather than the confidentiality agreement that was adopted in the bill’s final version. Under the bill, a firm has one year to fix a deficient report.

"If you do things in the sunshine people usually make the right decision," Turner said.

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