Congress passed sweeping corporate reform in July, and President Bush signed the Sarbanes-Oxley Act, which contains a host of measures intended to prevent corporate fraud and restore investor confidence in financial reports. While politicians heralded the event as "historic," corporate executives have been more subdued in their support. "It's necessary, but we should never have come to this point," says Brian Jarzynski, CFO of software firm Comshare, in Ann Arbor, Mich. "It's reactionary instead of proactive."
The act includes some key provisions that are likely to have, if not a profound impact on accounting and auditing processes, at least a conciliatory effect. Among the measures, the act:
- creates an SEC audit oversight board that has investigative and disciplinary powers.
- prohibits auditors from offering most consulting services to audit clients, and requires them to rotate partners among clients every five years.
- prevents companies from providing loans to their executives.
- raises the maximum penalty for securities fraud to 25 years, and to 10 years for destroying key financial-audit documents and E-mails.
Another provision requires CEOs and CFOs to certify that their financial statements fairly represent the financial conditions of the issuer. John Coffee, a law professor at Columbia University, says the act contains a key distinction that creates a higher standard of certification. "The word GAAP isn't used," he says. This means that in the event of fraud, even if filings are found to be technically in compliance with GAAP they can still be found to have misrepresented results.
But some of the new rules--the stiffer sentences for white-collar crime, for example--are more bark than bite. "If [Congress] were really serious about getting tough, it would have created minimum mandatory sentences," says Steve Miller, a partner at Chicago law firm Sachnoff & Weaver.
The act will mandate practices many CFOs already have in place. "If you were doing things right in the first place, none of this is earth-shattering," says Robert Leahy, vice president of finance at Brooktrout Inc., a Needham, Mass.-based telecom equipment maker. --Joseph McCafferty