Under Act Section 108, the SEC now decides what are "generally" accepted accounting principles. Registered public accounting firms are barred from providing certain non-audit services to an issuer they audit. Thus, the split, first proposed by the head of Arthur Anderson in 1974, is now the law.
Act Section 203, Audit Partner Rotation, is a gift to the accounting profession. The lead audit or coordinating partner and the reviewing partner must rotate every 5 years. That means that by law, the work will be spread around. Note that the law says "partner", not "partnership". Thus, we are likely to continue to see institutional clients serviced by "juntas" at accounting firms, not by individuals. This will likely end forever the days when a single person controlled major amounts of business at an accounting firm. US law firms would never countenance such a change, as the competition for major clients is intense.
Act Section 209, Consideration by Appropriate State Regulatory Authorities, "throws a bone" to the states. It requires state regulators to make an independent determination whether Board standards apply to small and mid-size non-registered accounting firms. No one can seriously doubt the outcome of these determinations. But we now pretend that we still have real state regulation of the accounting profession, just as we pretend that we have state regulation of the securities markets through "blue sky laws". The reality is that the states will be confined hence to the initial admission of persons to the accounting profession. Like the "blue sky laws", it will be a revenue source, but the states will be completely junior to the Board and the SEC.
Act Section 302, Corporate Responsibility For Financial Reports, mandates that the CEO and CFO of each issuer shall certify the "appropriateness of the financial statements and disclosures contained in the periodic report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer". This may prove problematic with global companies. We have already seen resistance by Daimler-Benz of Germany.
Act Section 305: Officer And Director Bars And Penalties; Equitable Relief, will be used by the SEC to counterattack arguments arising out of the Central Bank case. As I maintained in the American Journal of Trial Advocacy, the real significance of the Supreme Court decision in Central Bank was that the remedial sanctions of the federal securities laws should be narrowly construed.
Well, now the SEC has a Congressional mandate. Federal courts are authorized to "grant any equitable relief that may be appropriate or necessary for the benefit of investors". That is an incredibly broad delegation of rights, and is an end run around Central Bank. I was surprised that this received no publicity.
Lastly, Act Section 402, Prohibition on Personal Loans to Executives, shows how low this generation of US leadership has sunk. President Bush has signed a law that makes illegal the type of loans from which he and his extended family have previously benefited.
Tacitly, the Act admits that some practices of Enron were not illegal inter se. Act Section 401, Study and Report on Special Purpose Entities, provides that the SEC should study off-balance sheet disclosures to determine their extent and whether they are reported in a sufficiently transparent fashion. The answer will almost certainly be no, and the Board will change GAAP accordingly.
Q. Does the SEC collaborate with other financial regulators and law enforcement agencies internationally? Does it share information with other US law enforcement agencies? Is there interagency rivalry and does it hamper investigations? Can you give us an example? A. The SEC and other regulators - as well as two House subcommittees - have only very recently begun considering information sharing between financial regulators.
This comes too late for the victims of Martin Frankel, who, having been barred for life from the securities industry by the SEC and NASD in 1992, simply moved over to the insurance industry to perpetrate a scam where investors have lost an estimated $200 million dollars.