Grinding the Sarbanes-Oxley ‘Ax’

E-mail Story
Print Story
JUNE 2006 - I read with interest “The Sarbanes-Oxley ‘Ax,’” by Ron Marden and Randy Edwards (April 2005). Aside from the one individual mentioned in the article, I have had no success in finding SEC endorsement/enforcement of section 304 of the Sarbanes-Oxley Act, “Forfeiture of Certain Bonuses and Profits.”

Yes, Bernard Ebbers of WorldCom, the gang at Tyco, and others have gone to jail, but how come the SEC has not put any of these “gentlemen” under the hot lights as a test case for successful recovery of ill-gotten gains? Any opinions would be appreciated

David J. Phillips
Publisher, www.10qdetective.blogspot.com

The author replies:

I’m not a lawyer, but I contacted several lawyers who have written on the subject of section 304, and I have summarized some of their thoughts and my own opinion.

Section 304 of the Sarbanes-Oxley Act was enacted after these fraudsters committed the acts that were the subject of their prosecutions, and generally statutes are not given retroactive effect.

Very generally, the prosecutions of Jeffrey Skilling and Kenneth Lay, of Enron, and Bernard Ebbers, of WorldCom, involve violations of other federal securities laws; that is, causing their companies to give false information to investors. Tyco executives Dennis Kozlowski and Mark Swartz were prosecuted in New York State court for looting their companies. Note that these are all criminal prosecutions that carry prison sentences. Section 304 is a civil remedy that only requires the executives to give money back to the company.

For example, in the Enron case, most of the fraudsters are being prosecuted by the Department of Justice, mostly under the criminal securities fraud statute (in this case, section 32 of the Securities and Exchange Act of 1934). The act makes it a criminal offense (now punishable, post–Sarbanes-Oxley and, hence, post-Enron, by up to 25 years in prison per count) to willfully violate any provision of the securities statutes (see also the Securities Act of 1933, section 24; the Bank Holding Company Act, section 29; the Trust Indenture Act, section 325; the Investment Company Act of 1940, section 49; and the Investment Advisers Act of 1940, section 217). They are also being prosecuted for wire fraud (18 USC 1343), now punishable by up to 20 years in prison per count. The superseding indictment in the case is available online at files.findlaw.com/news.findlaw.com/cnn/

A quick recap: Sarbanes-Oxley section 304 provides for the forfeiture of bonuses and other incentive- or equity-based compensation paid to the chief executive officers and chief financial officers of public corporations when an accounting restatement must be prepared because of material noncompliance with any financial reporting requirement resulting from misconduct. Under this section, a CEO or CFO must reimburse the corporation for the bonus or incentive-based compensation received during a 12-month period following certain public securities filings, but only the corporation can take action to get the money back. No implied private right of action exists for a corporation’s shareholders to sue derivatively for the recovery of executive compensation under section 304 of the Sarbanes-Oxley Act. And according to the International Financial Law Review (“Courts deny plantiffs over Section 304 suits,” March 2006), there has not yet been a single reported decision of any disgorgement action brought by the SEC under section 304.

Ron Marden, PhD
Appalachian State University, Boone, N.C.

Specialty Designations: Missed Opportunities, or Fragmenting the Profession?

In an otherwise wonderful article, “A History of the Development of the AICPA’s Specialty Designation Program” (January 2006), the authors conclude that the AICPA must not miss the opportunity to develop more specialty consulting credentials.

The CPA became a sterling profession because it promoted the profession as a whole. Specialty designations indicating special skills, like “tax expert” or “management consultant,” were prohibited because they merely promoted individuals. Rules prohibiting specialty self-designation were withdrawn in 1981 under Justice Department pressure, as part of the campaign to strike down what it considered anticompetitive AICPA ethics rules.

John L. Carey, an officer at AICPA from 1925 until 1969, included in his list of the requirements that make a profession: a body of specialized knowledge, a public interest in the work, and recognition of a social obligation. He worried that proliferation of consulting services might obscure the identity of CPAs as masters of a specific body of knowledge. Specialties dilute the CPA franchise when they include consulting under the CPA banner.

Auditing and accounting is a public interest because it assures users, including third-party users, about the reliability of financial information. CPAs foster an efficient and equitable tax system, which benefits tax authorities and society. No public interest is served in a consulting engagement when our obligation is to the client, not to society.

Specialty credentials may lead down a slippery slope where people who want to be consultants do not have to learn auditing to become CPAs. Former AICPA chairman Robert Elliott said, “[We must] think carefully about either the breadth of the CPA license or who will qualify as Institute members. We have to change one, or we are destined to become the Institute of People Licensed to Do Audits” (“Steering a Course for the Future,” Journal of Accountancy, November 1999).

Consulting has resulted in a profession with fractured interests. If our leadership appears lacking, it’s because one voice cannot represent the professional CPA, the product salesman, and the business consultant.
No one seems upset that the Association of Certified Fraud Examiners has snatched the oldest auditing credential—and the ACFE has gone global! About 8,000 CPAs have become CFEs, exceeding the 6,110 combined total PFS, ABV, and CITP credential holders. CPA competence in international accounting and auditing issues and standards could become a professional credential. Instead, the authors suggest the “Cognitor II” business consultant. If there are to be more specialty designations, they should promote the CPA profession, not a CPA consulting industry.

Jay Starkman, CPA
Atlanta, Ga.

The authors respond:

We appreciate the view of many CPAs that additional designations may fragment the profession. This has been a heavily debated topic over the last two decades. However, we disagree that extensive fragmenting will occur. Although many CPA firms do focus on audits, rarely does a firm concentrate on audits exclusively. Usually, other services are also provided—often a wide variety of other services.

As the reader points out, “[We must] think carefully about either the breadth of the CPA license or who will qualify as Institute members. We have to change one, or we are destined to become the Institute of People Licensed to Do Audits.” This quote seems to reiterate the concluding comments in our article. The profession needs to become more forward looking. For the AICPA to position itself as an institute of auditors is very limiting and fails to satisfy the needs of most clients. Many CPAs do not do audits and, as indicated in Elliott’s article, firms are recruiting from nontraditional sources, such as MBA, engineering, law, or CIS programs. Because these groups of individuals will not be doing auditing, most will never become CPAs. If the profession moves past the auditing mind-set of the traditional CPA, these other groups may be more likely to become CPAs and hold specialty designations that meet the diverse needs of businesses today.

As our article points out, the AICPA needs to be forward thinking. The Institute should be open to new credentials that will add value to the CPA designation. At the same time, the additional credentials will be more valuable because they are available exclusively to CPAs, who already have a favorable reputation. The reader seems to indicate that this will somehow lead to a CPA who does not have to learn auditing, or to a CPA who does not serve the public interest. We are by no means trying to suggest that the requirements to become a CPA should be altered or that we should forget the basic requirements of a profession. It is those same high standards—for entry into the profession, the public interest, and the recognition of a social obligation—that make the CPA the perfect candidate to provide other specialized services.

The results of a study by Mauldin, Wilder, and Stocks in the March 2000 Accounting Horizons indicate that the CPA designation used in conjunction with the PFS designation is generally perceived to signal a higher level of professional attributes than non-AICPA financial-planning designations. This signaling of high professional standards is likely to have a positive impact on other designations offered exclusively to CPAs. Again, as Elliott points out, “CPAs must position themselves as the professionals who enable people and organizations to achieve their objectives through strategic use of knowledge and knowledge management. If we don’t, somebody else will.”

Michael Chiasson, DBA; Catherine Gaharan, PhD, CPA (inactive); and Shawn Mauldin, PhD, CPA, CMA, CFP
Nicholls State University, Thibodaux, La.





















The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2009 The New York State Society of CPAs. Legal Notices