Saturday, December 12, 2009

H.R. 4173, Wall Street Reform and Consumer Protection Act, Passes House; Summary of Accounting and Audit Related Provisions

Yesterday, the House of Representatives passed by a 223-202 vote, its version of a comprehensive financial regulatory reform bill, entitled H.R. 4173, the Wall Street Reform and Consumer Protection Act. Separately, the Senate still has to vote on its version of the bill. See the House Financial Services Committee press release issued upon passage of the bill in the House, and the response in the Minority press release.

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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Michael P Cangemi CPA said...

Great summary - thank you very much. I believ there should be relief from 404B for smaller public companies.
Michael P Cangemi CPA

Edith Orenstein said...

Michael, thanks for your comment. I thought you also made a very practical comment during the webcast portion of the FASAC meeting last week, I am hoping to post a summary of that as well.

Anonymous said...


In response to your questions, I include my analysis of the proposed changes.

Non-accelerated filers
Section 7606 (a) would PERMANENTLY exempt non-accelerated filers from compliance with section 404(b) of the Sarbanes-Oxley Act (i.e. from the requirement to have their registered public accountant audit the effectiveness of internal control over financial reporting)

Section 7415 (c) would TEMPORARILY exempt non-accelerated filers from compliance with section 404(b) of the Sarbanes-Oxley Act until June 1, 2001 or until compliance cost reduction studies for accelerated and large accelerated filers have been sumitted to Congress by the SEC and the GAO, whichever date is later.

SMALLER accelerated filers
Section 7606 (b) requires a similar cost reduction (including possible exemption) study for filers whose market cap is between USD 75 and 250 million by the SEC and the GAO.

Non-accelerated and accelerated filers
Section 7416(b) would require a study to include a revenue filter in addition to the public float filer in the definition of a smaller reporting company. If I understand the definitions of an accelerated filer and large accelerated filer correctly they excludes issuers that are eligible to file smaller reporting company reports. The study would evaluate whether to account for smaller public companies with public floats less than $700,000,000 and revenues less than $250,000,000. A public float market cap is the lower boundary for large accelerated filers. This could lead to the exemption of accelerated filers that have revenues below USD 250 million from both section 404(a) and section 404(b) of the Sarbanes-Oxley Act since they would no longer meeet the definition of an accelerated filer (which excludes smaller reporting companies).

Registration of auditors of brokers and dealers with the PCAOB
As far as I can see, the language would only capture non-public broker dealers but not non-public issuers because it leaves the definition of the term issuer in section 2(a)(7) of the Sarbanes-Oxley Act intact. This definition of issuer only covers issuers that have securities registered under section 12 of the Securities Exchange Act, that have a reporting obligation based on Section 15(d) of the Securities Exchange Act or that file or have filed a registration statement under the Securities Act (i.e. due to a public offering of securities in the US).

Name change of PCAOB to Auditing Oversight Board
This changes the name of the Public Company Accounting Oversight Board to Auditing Oversight Board. This makes sense, because the board oversees auditors and not accounting and because it no longer only oversees public companies (with securities registered with the SEC) but also brokers and dealers. The old name that included accounting was a misnomer in my humble opinion.

James Wall said...

Edith, your report of Saturday December 12 clearly represented a lot of work to analyze what Congress is up to and translate it into something we mere mortals might be able to grasp. I had just read the Saturday WSJ article on healthcare featuring Jonathan Bush who noted that dealing with Congress is like dealing with young princes from another universe who are more intent on tending their hunting falcon than understanding this "markets" thing. Your report fits well with that description.
I must admit that at the end of the blog where you said "And, There's More!" I was expecting a Congressional offer in HR 4173 of Ginsu knives if I would only vote for my Congresswoman (Nancy Pelosi) in the next election.

Edith Orenstein said...

Thanks for additional comments, Jim and 'Anonymous'.

To Anonymous, the striking of the word "public companies" with "companies" (see (b) (2) from excerpt from Sec. 7601 below). Why didn't they replace "public companies" in (b) (2) with "issuers, brokers and dealers" (as they do in (b) (1))instead of leaving a generic ref. to "companies"? Thanks for sharing your detailed analysis, albeit anonymously, appreciate the time you took to contribute your thoughts.

excerpt from HR 4173 Sec. 7601:
Section 101 of such Act is amended—
(1) by striking ‘‘issuers’’ each place it appears and inserting ‘‘issuers, brokers, and dealers’’;
(2) in subsection (a), by striking ‘‘public companies’’ and inserting ‘‘companies’’; and
(3) in subsection (a), by striking ‘‘for companies the securities of which are sold to, and held by and for, public investors’’.

Georg said...


>Why didn't they replace "public companies" in (b) (2) with "issuers, brokers and dealers" (as they do in (b) (1))instead of leaving a generic ref. to "companies"?

I do not know. Sometimes congress poorly drafts acts and sometimes it does not do conforming amendments and conform the language. Using "issuers, brokers and dealers" instead of "companies" would have made more sense.

Section 101(a) of the Sarbanes-Oxley Act is sort of a descriptive policy provision. The substantive provions that create the supervision are in the following articles. Section 102(a) basically makes audits of issuers (and in the future also of brokers or dealers) unlawful unless the audit firm is registered with the Auditing Oversight Board. By using the term "issuer" and defining the term "issuer" in the definitions section in section 2(a)the actual scope of the registration provision is established. So it primarily matters what is used in section 102(a).

The Sarbanes-Oxley Act only uses the term "public companies" in the previously mentioned descriptive policy like section 101(a)SOA that establishes the PCAOB and tries to describe what it does in one sentence. The only other place where the term "public companies" is used is in 705(a) SOA that commissions a GAO study of the role of investment banks in manipulating the earnings of issuers. Ther term "public companies" is also not used in the other federal securities laws.

In conclusion, in my opinion, I think it is not smart to use "companies" in section 101(a) SOA, but it does not really matter. They would be better of to user "issuers, brokers and dealers" instead.

I chose the anonymous option because I thought that all the other options would require the prior registration of a user-ID. I now discovered that the Name/URL option does not require this and opens a box in which a name can be entered when it is selected.

Edith Orenstein said...

Thank you Georg for your comments!

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