Shortly after Enron's collapse, the accounting profession's leadership realized

that the public who relies on the services of public company auditors no
longer accepted the system of self-regulation, and that CPAs had to take the
lead in pursuing significant reform.

The AICPA advocated:

• Creating a new private-sector regulatory body responsible for the
discipline and quality monitoring of firms auditing public companies.
• Moving from public oversight to public participation in these elements of
regulation of public company auditors.
• Restricting auditors of public companies from performing certain non-
audit services that the public perceived as a conflict of interest.
• Limiting the composition of audit committees to individuals independent
of management and knowledgeable and experienced in financial matters.
• Establishing penalties for executives who supply false information to or
mislead their auditors.
 Becoming Legislation
• Passing the Act Through Congress

• Signing the Act into Law

 Becoming Legislation (Continued)
High-profile business failures have called into question
the effectiveness of the CPA profession's self-regulatory
process, as well as the effectiveness of the audit to
uphold the public trust in the capital markets.

Legislation to address shortcomings in financial

reporting was already progressing in Congress when the
sudden revelation and collapse of WorldCom
guaranteed swift congressional action.
 Becoming Legislation (Continued)

"The problems originally laid bare by the collapse of

Enron are by no means unique to one company, one
industry, or even one profession. On the contrary,
they reveal a clear and, now, an all too familiar set
of shortcomings that must be addressed.“
Senator Paul S. Sarbanes (D-MD)
Chairman of the Senate Banking, Housing, and Urban
Affairs Committee
 Becoming Legislation (Continued)
• Sen. Sarbanes spearheaded legislation
through Congress to address the crisis of
confidence that has been eroding the public's
trust in our capital markets following the
collapse of Enron Corp.

• President Bush signed into law the Sarbanes-

Oxley Act of 2002, the most significant
legislation affecting the accounting profession
since 1933.
 In the Press…
• Washington, DC, April 24, 2002 - "The bill passed by the U.S.
House today includes unprecedented and rigorous reforms in
the discipline and oversight of the accounting profession. 
Self-regulation has been part of our profession for nearly 110
years, but we appreciate that the times call for special
measures to restore investor confidence.  We have heard the
bipartisan will of the Congress and are prepared to work
cooperatively in moving to the new independent regulatory
body mandated by the bill.“
• The Bill passed by the Senate Banking committee requiring
sweeping changes to the oversight of the accounting
profession is scheduled to be on the Senate Floor on July 8,
too.
 Becoming Legislation (Continued)
During the singing of the Act on Tuesday, July 30th,
2002, President Bush acknowledged that this Act is a
major reform package which mandates the most far
reaching changes congress has imposed upon the
business world since the stock market crash of 1929
was answered by Franklin Delano Roosevelt’s New
Deal, - which created the Securities and Exchange
Commission.
President George W. Bush Signs the Sarbanes-Oxley Act of 2002
July 30, 2002
President Bush Signs Corporate
Corruption Bill Video  (Click)
 The Changing Accounting Regulatory
Landscape

“All of the 350,000 CPAs across this nation who are members
of the AICPA are committed to the same goals congress
envisioned when it passed the Sarbanes-Oxley Act and that
the President articulated when he signed it. They are
committed to dramatically reducing the risk that future
investors will fall prey to the kind of financial malfeasance
that characterized Enron and Worldcom.” 09/04/02
AICPA President and CEO, Barry Melancon during a
September 4, 2002 conference at the Yale School of
Business Management
The Sarbanes-Oxley Act of 2002
The Act is organized into eleven sections:

Title I
Public Company Accounting Oversight Board
Title II
Auditor Independence
Title III
Corporate Responsibility
Title IV
Enhanced Financial Disclosures
Title V
Analyst Conflicts Of Interest
Title VI
Commission Resources And Authority
Title VII
Studies And Reports
The Sarbanes-Oxley Act of 2002 (continued)

Title VIII
Corporate And Criminal Fraud Accountability
Title IX
White-Collar Crime Penalty Enhancements
Title X
Corporate Tax Returns
Title XI
Corporate Fraud And Accountability
Appendix I
Definitions
Appendix II
Commission Rules And Enforcement
 PCAOB – “The Board”
Board Composition
• Comprised of five full-time “financially
literate” members
• Two of the five Board members must be or
must have been CPAs
• Three of the five Board members must not
and cannot have been CPAs
 Criminal Penalties
and Protection for Whistleblowers
The law creates tough penalties for those who destroy records,
commit securities fraud and fail to report fraud
• Failure to Maintain Workpapers
– It is now a felony with penalties of up to 10 years to
willfully fail to maintain "all audit or review workpapers"
for at least seven years.
– The SEC will establish a rule covering the retention of audit
records and the Board will issue standards that compel
auditors to keep other documentation for seven years.
• Document Destruction
– It is a felony with penalties of up to 20 years to destroy
documents in a federal or bankruptcy investigation.

Visit www.aicpa.org
 Criminal Penalties
and Protection for Whistleblowers
(continued)

• Securities Fraud
– Criminal penalties for securities fraud have been increased
to 25 years.
• Fraud Discovery
– The statute of limitations for the discovery of fraud is
extended to two years from the date of discovery and five
years after the act. It was previously one year from
discovery and three from the act.
• Other Provisions
– Other provisions protect corporate whistleblowers, ban
personal loans to executives, and prohibit insider trading
during blackout periods.
 How Sarbanes-Oxley Impacts the Accounting Profession:
New Roles for Audit Committees and Auditors
The relationship between accounting firms and their
publicly held audit clients is different under the new law:
• Auditors Report to Audit Committee
Now, auditors will report to and be overseen by a company's
audit committee, not management.
• Audit Committees Must Approve All Services
Audit committees must preapprove all services (both audit and
non-audit services not specifically prohibited) provided by its
auditor.
• Auditor Must Report New Information to Committee
This information includes: critical accounting policies and
practices to be used, alternative treatments of financial information
within GAAP that have been discussed with management,
accounting disagreements between the auditor and management, and
other relevant communications between the auditor and
management.
 How Sarbanes-Oxley Impacts the Accounting Profession:
New Roles for Audit Committees and Auditors

• Audit Partner Rotation

The lead audit partner and audit review partner must
be rotated every five years on public company
engagements.
• Employment Implications
An accounting firm will not be able to provide audit
services to a public company if one of that
company's top officials (CEO, Controller, CFO, Chief
Accounting Officer, etc.) was employed by the firm and
worked on the company's audit during the previous year.
How Sarbanes-Oxley Impacts the Accounting Profession:
New Roles for Audit Committees and Auditors

Offering Specified Non-Audit Services is Prohibited.

The new law statutorily prohibits auditors from offering
certain non-audit services to audit clients.

These services include:

1. Bookkeeping,
2. Information Systems Design and
Implementation,
3. Appraisals or Valuation services,
4. Actuarial services,

(continued)
 How Sarbanes-Oxley Impacts the Accounting Profession:
New Roles for Audit Committees and Auditors

5. Internal audits,
6. Management and human resources services,
7. Broker/dealer and investment banking
services,
8. Legal or expert services unrelated to audit
services and other services the board
determines by rule to be impermissible.

Other nonaudit services not banned are allowed if preapproved

by the audit committee and must be disclosed to investors
in periodic reports.