Major Sections of Bill
Major sections of H.R. 4173 include:
• Financial Stability Improvement Act
• Corporate and Financial Institution Compensation Fairness Act
• Over-the-Counter Derivatives Markets Act
• Consumer Financial Protection Agency Act
• Private Fund Investment Advisers Registration Act
• Accountability and Transparency in Rating Agencies Act,
• Investor Protection Act.
Additionally, H.R. 4173 creates a Federal Insurance Office.
Accounting Standards and Auditing Related Provisions
Following are highlights of provisions of the Act relating to accounting standards-setting and auditing (with respect to auditing, particularly as relates to Sarbanes-Oxley Section 404(b), the audit of internal control over financial reporting.) Related Sections of the Act are supplied in brackets.
Systemic risk council (Financial Services Oversight Council) will monitor domestic and international accounting developments, comment on proposals, and advise Congress: The Financial Services Oversight Council would advise Congress on domestic and international related accounting developments, monitor international regulatory developments, including both insurance and accounting developments, and to identify those developments that may conflict with the policies of the United States or place United States financial services firms or United States financial markets at a competitive disadvantage, and review and submit comments to the Securities and Exchange Commission and any standards setting body with respect to an existing or proposed accounting principle, standard, or procedure. Note: an earlier version of this amendment was submitted by Rep. Perlmutter/Rep. Lucas. The ultimate wording is more narrow in the sense that it does not require any formal change to the FASB oversight model; however this langauge is also broader than the original amendment in terms of language relating to international developments. [Section 1001 (c)]
Observation 1: I remind you of the disclaimer in the right margin of this blog: I wonder if the langauge in Section 1001 (c) shown above, by referencing responsibility for assessing international developments in accounting with respect to U.S. policies and competitiveness, may be one among many potential precursors to potential movement toward one global set of accounting standards, a subject under consideration as part of the SEC's proposed IFRS roadmap released last year for public comment.Banking agencies and SEC would study impact of FAS 166, 167 vis-a-vis changes in statutory credit retention risk: The Board of Governors of the Federal Reserve System, in coordination and consultation with the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission, would study the combined impact by each individual class of asset backed security of—the new credit risk retention requirements contained in the Act, together with FAS 166 and FAS 167 (which amended FAS 140 and FIN 46R regarding off-balance sheet treatment of securitizations and other asset sales) and would submit a report to Congress on the results of their study, within 90 days of enactment of the Act. [Section 1502 (b)]
Congress states findings on complexity, transparency in financial reporting; require annual testimony of SEC, FASB, PCAOB: Congress states its 'findings' on the importance of transparency in financial reporting, and its view on how complexity in financial reporting has contributed to cost. The Act calls upon the Chairmen of the SEC, FASB and PCAOB to provide annual testimony to Congress on efforts to reduce complexity and increase transparency of financial reporting. (Note: similar bills passed Congress in the past with this provision, but may not have passed the Senate in the past.) [Sec. 7407]
Financial Reporting Forum to make recommendations to Congress: A Financial Reporting Forum would be created, consisting of the Chairmen of the FASB, SEC, bank regulatory agencies, and certain others to be appointed by the SEC (including a representative of a financial institution, a non-financial institution, auditors, and investors). The Financial Reporting Forum would meet at least quarterly, to: "discuss immediate and long-term issues critical to financial reporting," and would "issue an annual report to the Congress detailing any determinations or findings made by the Forum during the previous year, including any legislative recommendations the Forum may have related to financial reporting matters." [NOTE: An earlier version of this provision was submitted by Rep. Miller.] [Sec. 7417]
Change in scope, and possibly name of PCAOB to AOB? Certain language in the Act replaces references to "public companies" or "issuers" with references to "issuers, brokers and dealers," to bring the audits of private broker-dealers (think: Madoff) under the purview of the PCAOB. There are also references in H.R. 4173 [Sections 7601 and 7610] to changing certain references in the Sarbanes-Oxley Act from "Public Company Accounting Oversight Board" to "Accounting Oversight Board." [Sec. 7601, Sec. 7610]
Observation 2: Once again, I remind you of the disclaimer in the right margin of this blog, I wonder if, by removing references to "public" companies or "issuers," and leaving certain references generically to "companies," (without inserting the specific new replacement language that seems to be inserted in some - but not all - instances, with the new language consisting of "issuers, brokers and dealers") if there could be unintended consequences of all private co. audits (not just private co brokers and dealers) inadvertently coming under the scope of the PCAOB? If anyone has insights on this, feel free to post a comment. Separately, I'm not sure if PCAOB would have to officially change its name to AOB, or if the change from PCAOB to AOB only has to be reflected in the legislation for some legal reason.] [Sec. 7601, Sec. 7610]
Small Co. (Nonaccelerated filers, i.e. less Than $75 million public float) Exemption From Sarbanes-Oxley Section 404(b): The Wall Street Reform Act (H.R. 4173) would amend the Sarbanes-Oxley Act to exempt nonaccelerated filers (generally defined by the SEC as public companies with less than $75 million public float) from the requirement for an external audit of internal control under Sarbanes-Oxley Section 404(b). [NOTE: The Senate has not yet acted on this provision, and may reject this provision, so companies should still rely on the SEC's Oct. 2 statement, in which the SEC said it did not intend to provide a permanent exemption for smaller companies. Note also that the proposed exemption in H.R. 4173 applies only to Section 404(b)-the external auditors report on internal control; it does not change the requirements in Section 404(a)-management's report on internal control, and it does not change the longstanding requirements for public companies of all sizes to have an external audit of their financial statements.] [Sec. 7606]
Accelerated filers (i.e. bigger than $75 million, less than $700 million) - potential exemption after study conducted? Sec. 7416, subsection (a) of H.R. 4173 would require GAO and the SEC to "each" conduct a study of the cost-benefit of Sarbox 404(b) for " issuers who are not accelerated or large accelerated filers as defined by Commission Rule 12b-2." Additionally, "On or before June 1, 2010, the [GAO] and [SEC] shall submit separate reports to Congress containing the findings and conclusions of the studies required under subsection (a), together with such recommendations for regulatory, legislative, or administrative action as may be appropriate....Requirements under section 404(b) of the Sarbanes-Oxley Act of 2002 on issuers described under subsection (a) shall not become effective until the results of the report are delivered, but in no case before June 1, 2011." [Sec. 7416]
Observation 3: Once again, I remind you of the disclaimer in the right margin of this blog - I'm not sure how to interpret the reference to Sarbox 404(b) "shall not become effective" for (by process of elimination) "accelerated" filers in particular (i..e those who are larger than nonaccelerated filers (with less than $75 million public float), and yet smaller than 'large' accelerated filers with over $700 million public float). If anyone has an interpretation of how this language would impact "accelerated" (but not "large" accelerated) filers, please inform us by posting a comment.)] [Sec. 7416]
Study to consider whether to provide new type of exemption from 404(b) based on size and revenue: Congress notes that the SEC Advisory Committee on Smaller Public Companies recommended that companies with less than $787 million public float, and less than $250 million revenue, be considered smaller public companies. Congress asks the SEC to "conduct a study of the inclusion of revenue as a criteria used in defining smaller reporting company as defined under the Commission’s Rule 12b-2 to account for smaller public companies with public floats less than $700,000,000 and revenues less than $250,000,000." The study is to be provided to Congress within 180 days of enactment of the Act.[Sec. 7416]
PCAOB Ombudsman Created: The Act would create an ombudsman at the PCAOB, available to issuers and auditors. [Sec. 7609]
And, There's More!
Further details, including excerpts from the pertinent sections cited above, can be found in the FEI summary, Accounting Standards and Audit-Related Provisions of H.R. 4173. The detailed summary can only be downloaded only by FEI members; if you are eligible for FEI membership, why don't you consider joining FEI to receive all the benefits of FEI's networking opportunities (national committees, local chapters, conferences) and educational resources (including our members-only web summaries, e-newsletter, free reports from our research affiliate, the Financial Executives Research Foundation (FERF), and more!)
Additional information on H.R. 4173 can be found in:
Bill Summary (2 pages) - House Financial Services Committee
Bill Highlights (3 pages) - House Financial Services Committee
Section-by-Section summaries - House Financial Services Committee
Some other financial blogs/publications that have provided early coverage of H.R. 4173 include the Maryland Association of CPA's blog, CPA Success, WebCPA, and the AICPA JofA.
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