Sarbanes-Oxley Act of 2002/Title II

TITLE II—AUDITOR INDEPENDENCE

SEC. 201. SERVICES OUTSIDE THE SCOPE OF PRACTICE OF AUDITORS.

(a) PROHIBITED ACTIVITIES—

Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1) is amended by adding at the end the following:

``(g) PROHIBITED ACTIVITIES— Except as provided in subsection (h), it shall be unlawful for a registered public accounting firm (and any associated person of that firm, to the extent determined appropriate by the Commission) that performs for any issuer any audit required by this title or the rules of the Commission under this title or, beginning 180 days after the date of commencement of the operations of the Public Company Accounting Oversight Board established under section 101 of the Sarbanes-Oxley Act of 2002 (in this section referred to as the ``Board´´), the rules of the Board, to provide to that issuer, contemporaneously with the audit, any non-audit service, including—

``(1) bookkeeping or other services related to the accounting records or financial statements of the audit client;

``(2) financial information systems design and implementation;

``(3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports;

``(4) actuarial services;

``(5) internal audit outsourcing services;

``(6) management functions or human resources;

``(7) broker or dealer, investment adviser, or investment banking services;

``(8) legal services and expert services unrelated to the audit; and

``(9) any other service that the Board determines, by regulation, is impermissible.

``(h) PREAPPROVAL REQUIRED FOR NON-AUDIT SERVICES— A registered public accounting firm may engage in any non-audit service, including tax services, that is not described in any of paragraphs (1) through (9) of subsection (g) for an audit client, only if the activity is approved in advance by the audit committee of the issuer, in accordance with subsection (i).´´.

(b) EXEMPTION AUTHORITY—

The Board may, on a case by case basis, exempt any person, issuer, public accounting firm, or transaction from the prohibition on the provision of services under section 10A(g) of the Securities Exchange Act of 1934 (as added by this section), to the extent that such exemption is necessary or appropriate in the public interest and is consistent with the protection of investors, and subject to review by the Commission in the same manner as for rules of the Board under section 107.

SEC. 202. PREAPPROVAL REQUIREMENTS.

Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1), as amended by this Act, is amended by adding at the end the following:

``(i) PREAPPROVAL REQUIREMENTS—

``(1) IN GENERAL—

``(A) AUDIT COMMITTEE ACTION— All auditing services (which may entail providing comfort letters in connection with securities underwritings or statutory audits required for insurance companies for purposes of State law) and non-audit services, other than as provided in subparagraph (B), provided to an issuer by the auditor of the issuer shall be preapproved by the audit committee of the issuer.

``(B) DE MINIMUS EXCEPTION— The preapproval requirement under subparagraph (A) is waived with respect to the provision of non-audit services for an issuer, if—

``(i) the aggregate amount of all such non-audit services provided to the issuer constitutes not more than 5 percent of the total amount of revenues paid by the issuer to its auditor during the fiscal year in which the nonaudit services are provided;

``(ii) such services were not recognized by the issuer at the time of the engagement to be non-audit services; and

``(iii) such services are promptly brought to the attention of the audit committee of the issuer and approved prior to the completion of the audit by the audit committee or by 1 or more members of the audit committee who are members of the board of directors to whom authority to grant such approvals has been delegated by the audit committee.

``(2) DISCLOSURE TO INVESTORS— Approval by an audit committee of an issuer under this subsection of a non-audit service to be performed by the auditor of the issuer shall be disclosed to investors in periodic reports required by section 13(a).

``(3) DELEGATION AUTHORITY— The audit committee of an issuer may delegate to 1 or more designated members of the audit committee who are independent directors of the board of directors, the authority to grant preapprovals required by this subsection. The decisions of any member to whom authority is delegated under this paragraph to preapprove an activity under this subsection shall be presented to the full audit committee at each of its scheduled meetings.

``(4) APPROVAL OF AUDIT SERVICES FOR OTHER PURPOSES— In carrying out its duties under subsection (m)(2), if the audit committee of an issuer approves an audit service within the scope of the engagement of the auditor, such audit service shall be deemed to have been preapproved for purposes of this subsection.´´.

SEC. 203. AUDIT PARTNER ROTATION.

Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1), as amended by this Act, is amended by adding at the end the following:

``(j) AUDIT PARTNER ROTATION— It shall be unlawful for a registered public accounting firm to provide audit services to an issuer if the lead (or coordinating) audit partner (having primary responsibility for the audit), or the audit partner responsible for reviewing the audit, has performed audit services for that issuer in each of the 5 previous fiscal years of that issuer.´´.

SEC. 204. AUDITOR REPORTS TO AUDIT COMMITTEES.

Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1), as amended by this Act, is amended by adding at the end the following:

``(k) REPORTS TO AUDIT COMMITTEES— Each registered public accounting firm that performs for any issuer any audit required by this title shall timely report to the audit committee of the issuer—

``(1) all critical accounting policies and practices to be used;

``(2) all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management officials of the issuer, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the registered public accounting firm; and

``(3) other material written communications between the registered public accounting firm and the management of the issuer, such as any management letter or schedule of unadjusted differences.´´.

SEC. 205. CONFORMING AMENDMENTS.

(a) DEFINITIONS—

Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is amended by adding at the end the following:

``(58) AUDIT COMMITTEE— The term ``audit committee´´ means—

``(A) a committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer; and

``(B) if no such committee exists with respect to an issuer, the entire board of directors of the issuer.

``(59) REGISTERED PUBLIC ACCOUNTING FIRM— The term ``registered public accounting firm´´ has the same meaning as in section 2 of the Sarbanes-Oxley Act of 2002.´´.

(b) AUDITOR REQUIREMENTS—

Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1) is amended—

(1) by striking ``an independent public accountant´´ each place that term appears and inserting ``a registered public accounting firm´´;

(2) by striking ``the independent public accountant´´ each place that term appears and inserting ``the registered public accounting firm´´;

(3) in subsection (c), by striking ``No independent public accountant´´ and inserting ``No registered public accounting firm´´; and

(4) in subsection (b)—

(A) by striking ``the accountant´´ each place that term appears and inserting ``the firm´´;

(B) by striking ``such accountant´´ each place that term appears and inserting ``such firm´´; and

(C) in paragraph (4), by striking ``the accountant's report´´ and inserting ``the report of the firm´´.

(c) OTHER REFERENCES—

The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended—

(1) in section 12(b)(1) (15 U.S.C. 78l(b)(1)), by striking ``independent public accountants´´ each place that term appears and inserting ``a registered public accounting firm´´; and

(2) in subsections (e) and (i) of section 17 (15 U.S.C. 78q), by striking ``an independent public accountant´´ each place that term appears and inserting ``a registered public accounting firm´´.

(d) CONFORMING AMENDMENT—

Section 10A(f) of the Securities Exchange Act of 1934 (15 U.S.C. 78k(f)) is amended—

(1) by striking ``DEFINITION´´ and inserting ``DEFINITIONS´´; and

(2) by adding at the end the following: ``As used in this section, the term ``issuer´´ means an issuer (as defined in section 3), the securities of which are registered under section 12, or that is required to file reports pursuant to section 15(d), or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933 (15 U.S.C. 77a et seq.), and that it has not withdrawn.´´.

SEC. 206. CONFLICTS OF INTEREST.

Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1), as amended by this Act, is amended by adding at the end the following:

``(l) CONFLICTS OF INTEREST— It shall be unlawful for a registered public accounting firm to perform for an issuer any audit service required by this title, if a chief executive officer, controller, chief financial officer, chief accounting officer, or any person serving in an equivalent position for the issuer, was employed by that registered independent public accounting firm and participated in any capacity in the audit of that issuer during the 1-year period preceding the date of the initiation of the audit.´´.

SEC. 207. STUDY OF MANDATORY ROTATION OF REGISTERED PUBLIC ACCOUNTING FIRMS.

(a) STUDY AND REVIEW REQUIRED—

The Comptroller General of the United States shall conduct a study and review of the potential effects of requiring the mandatory rotation of registered public accounting firms.

(b) REPORT REQUIRED—

Not later than 1 year after the date of enactment of this Act, the Comptroller General shall submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on the results of the study and review required by this section.

(c) DEFINITION—

For purposes of this section, the term ``mandatory rotation´´ refers to the imposition of a limit on the period of years in which a particular registered public accounting firm may be the auditor of record for a particular issuer.

SEC. 208. COMMISSION AUTHORITY.

(a) COMMISSION REGULATIONS—

Not later than 180 days after the date of enactment of this Act, the Commission shall issue final regulations to carry out each of subsections (g) through (l) of section 10A of the Securities Exchange Act of 1934, as added by this title.

(b) AUDITOR INDEPENDENCE—

It shall be unlawful for any registered public accounting firm (or an associated person thereof, as applicable) to prepare or issue any audit report with respect to any issuer, if the firm or associated person engages in any activity with respect to that issuer prohibited by any of subsections (g) through (l) of section 10A of the Securities Exchange Act of 1934, as added by this title, or any rule or regulation of the Commission or of the Board issued thereunder.

SEC. 209. CONSIDERATIONS BY APPROPRIATE STATE REGULATORY AUTHORITIES.

In supervising nonregistered public accounting firms and their associated persons, appropriate State regulatory authorities should make an independent determination of the proper standards applicable, particularly taking into consideration the size and nature of the business of the accounting firms they supervise and the size and nature of the business of the clients of those firms. The standards applied by the Board under this Act should not be presumed to be applicable for purposes of this section for small and medium sized nonregistered public accounting firms.