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Stock Strategies

Bill Provides a New Framework for Accounting & Corporate Governance

A summary of the Public Company Accounting Reform and Investor Protection Act of 2002.

by John Markese | September 2002


On Tuesday, July 30, President Bush signed the Public Company Accounting Reform and Investor Protection Act of 2002.

At the invitation of the White House, I attended the signing ceremony, along with AAII members who were representing the Washington DC Metro chapter.

The bill is a response to the recent corporate scandals that have shaken investor confidence in corporate financial reports and raised questions about the quality and ethics of corporate leaders who are managing companies on behalf of the true owners—the shareholders.

AAII strongly supports measures that ensure shareholders are receiving a full and accurate accounting of the financial health of the corporations that they own.

The bill signed into law by President Bush provides a specific framework for corporate governance of our publicly held companies that will demand and support the highest standards of ethical and professional behavior. Truly independent directors will help ensure the integrity of the actions of corporate officers and public accountants.

However, it is still the responsibility of every individual investor to make the effort to understand their investments.

No rules or laws can substitute for knowledge and due diligence on the part of the investor.

   The Investor Protection Act of 2002: A Summary
The Public Company Accounting Reform and Investor Protection Act of 2002 affects the regulation of accountants and imposes new reporting responsibilities and liabilities on CEOs, CFOs and corporate boards of directors. The bill also toughens criminal penalties for corporate fraud, destruction of documents and impeding investigations. Here’s a summary of the bill’s provisions. The Act:
  • Creates a Public Company Accounting Oversight Board, consisting of five members appointed by the SEC, to oversee the auditing of public companies. The board will establish standards for audits of public companies, conduct inspections and investigations of public accounting firms, and have the power to impose sanctions.

  • Prohibits public accounting firms from performing certain services for their audit clients, including internal audit services and financial information systems designs. In addition, all non-auditing services must be pre-approved by the company’s audit committee, and the approval must be disclosed to investors in one of the periodic reports.

  • Requires a corporation’s audit committee to be composed solely of independent directors, and it disqualifies for audit committee membership a director who owns a controlling interest in the company. Under the Act, the audit committee is responsible for appointment, compensation and oversight of the public accounting firm, and is charged with resolving any disagreements between management and the independent accounting firm.

  • Requires each principal executive officer and principal financial officer to certify each corporate report containing financial statements that the report complies with the reporting requirements and that the information in the report fairly presents the financial condition and results of operations of the issuer.

  • Provides that if a company must restate its financial statements due to financial reporting misconduct, the chief executive officer and the chief financial officer of the company must reimburse the corporation for any bonus, incentive-based or equity-based compensation received during the 12-month period following the filing, or any profits realized from the sales of securities during that 12-month period.

  • Requires that trades by executive officers, directors and principal stockholders be reported to the SEC within two days of such transaction, beginnning August 29, 2002.

  • Requires corporate chief financial officers to be bound by a code of ethics and requires any change or waiver to the code be reported on Form 8-K.


John Markese is president of AAII.


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