H.R. 3763, the Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002, protects investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. The bill increases supervision of accountants that audit public companies, strengthens corporate responsibility, increases transparency of corporate financial statements, and protects employee access to retirement accounts.
Specifically, the legislation requires the creation of public regulatory organizations, comprised of persons skilled and knowledgeable in issues related to the audit of public companies, to perform quality or other reviews of the activities of certified public accountants who report on financial statements that are required to be filed with the Securities and Exchange Commission (SEC or Commission).
The legislation also ensures that the SEC has sufficient authority to bar individuals from serving as officers or directors of public companies if they demonstrate they are substantially unfit to serve and that company officials disgorge any profits they receive from selling their own shares of their company's stock prior to a restatement of the company's financial statements. The bill also prohibits any company official from fraudulently misleading an auditor and requires the SEC to conduct studies of several areas related to corporate responsibility in order to evaluate other areas of corporate conduct and disclosure which may need reform.
The measure requires the SEC to issue rules increasing the accuracy and transparency of company disclosures and strengthens the SEC's procedures for reviewing the financial statements of issuers that play a significant role in the economy. Further, the bill requires that the SEC explore the effectiveness of self regulatory organization (SRO) rules relating to analysts, and report on the role and function of credit rating agencies. Finally, the legislation protects employee access to their retirement accounts by preventing company insiders from trading their own shares in a company when their employees cannot do so because of a "blackout" in a company sponsored employee retirement account.
The Federal securities laws are designed to ensure that public companies provide investors with full and accurate disclosure of the true financial condition of the company. Following the bankruptcies of Enron Corporation and Global Crossing LLC and restatements of earnings by several prominent market participants, regulators, investors and others expressed concern about the adequacy of the current disclosure regime for public companies.
Additionally, they expressed concerns about the role of auditors in approving corporate financial statements. Questions regarding the independence of auditors of public companies lead to calls for greater supervision of the profession. The SEC raised the need for the creation of a new oversight body to review compliance of public auditors with the profession's standards of ethics and competency; this suggestion received widespread support.
The bankruptcy of Enron Corporation also raised issues relating to the security of employee retirement accounts. When allegations arose that some Enron insiders were able to sell their company stock even as Enron employees were prohibited from doing so because of an administrative lockdown in the company's retirement plan, new calls arose for protecting the access of employees to their accounts to the same degree as insiders.
The securities laws, and in particular the Securities Exchange Act of 1934, provides a host of protections for investors with regard to their access to company information. Reflecting the technology available to public companies and investors at that time, the securities laws largely reflect the paper based system of reporting information that was prevalent up until the advent of the electronic age. With the creation of the internet and continuous televised coverage of the capital markets, the regulatory regime for speeding the availability of company information has been unable to keep pace with the nearly instantaneous demand for investor access to that information. On-line trading of securities broadly expanded both the number of participants in the securities markets and the volume of trading in those markets. This development also heightened the need for more rapid disclosure of company news.
The increased public participation in the securities markets and the broader coverage of those markets also raised the profile of securities analysts that provide recommendations regarding equity securities. Responding to the concerns of some that analysts for companies that also underwrite and trade in the securities markets, the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises held a series of hearings on the role of analysts in reporting on equity securities. Following these hearings, the securities industry developed a statement of best practices guiding analysts and their employers in avoiding conflicts of interest. This statement was later followed by a proposed rule by the SROs establishing guidelines for analysts and their employers to ensure that analyst recommendations are fair and unbiased. This proposal is currently under review by the SEC.
