the Sarbanes-Oxley ‘Ax’
- 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
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
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.
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.
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.
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
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
Appalachian State University, Boone, N.C.
Designations: Missed Opportunities, or Fragmenting the Profession?
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
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.
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.
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.
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,
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.
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.
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.
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.
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.”
Chiasson, DBA; Catherine Gaharan, PhD, CPA (inactive);
and Shawn Mauldin, PhD, CPA, CMA, CFP
Nicholls State University, Thibodaux, La.