Regulatory Bodies, Standard

Setters, and Best Practices

Chapter VII
 Chapter Objectives:
• Understand the roles and responsibilities of regulators and standard setters.

• Provide an overview of fundamental provisions of SOX and their impacts.

• Provide an overview of the evaluation of SOX (cost and benefits).

• Understand why the SEC was established.

• Provide an overview of the primary functions of the PCAOB.

• Become familiar with the role of the FASB and its activities.

• Provide an overview of the GASB.

• Understand the challenges facing the IFAC.

• Identify the primary responsibilities of the Committee of European Securities Regulators.

• Understand the role and authority of the state attorney general.

• Be aware of how state laws affect corporate governance.

• Be aware of the role of courts in corporate governance.

• Become familiar with corporate governance listing standards and best practices.
 Key Terms
Accounting and Auditing Enforcement Releases (AAERS)
Accounting Regulatory Committee (ARC)
Administrative law judges
American Bar Association (ABA)
American Institute of Certified Public Accountants (AICPA)
Anticontractarianists
Blackout period
California Public Employees’ Retirement System (CalPERS)
Committee of European Securities Regulators (CESR)
Contractarianists
Council of Institutional Investors (CII)
European Financial Reporting Advisory Group (EFRAG)
Generally accepted accounting principles (GAAP)
generally accepted accounting standards (GAAS)
Government Accounting Standards Board (GASB)
International Accounting Standards Board (IASB)
investment protection principles (IPPs)
Investor Task Force
Office of Risk Assessment
self-regulatory organization (SRO)
U.S. Sentencing Commission (USSC)
 Regulations
Regulations are aimed at protecting the investors and creating an environment for
organizations to conduct their affairs in the utmost ethical, legal, and competent
manner.

Regulations are typically enacted in response to specific crises and concerns or

protection needed due to the failure of market based correction mechanisms.
Adequate regulation creates a balance between reducing the likelihood of recurrence
of the crisis and the imposed enforcement and compliance costs. Underregulation is
when adequate rules are not in place to ensure long-term improvements and stability.
 Regulations (Peraturan)

Peraturan ditujukan untuk melindungi investor dan menciptakan

lingkungan bagi organisasi untuk menjalankan urusan mereka dengan cara
yang paling etis, legal, dan kompeten.

Peraturan biasanya diberlakukan sebagai tanggapan atas krisis dan

kekhawatiran tertentu atau perlindungan yang diperlukan karena kegagalan
mekanisme koreksi berbasis pasar.

Regulasi yang memadai menciptakan keseimbangan antara mengurangi

kemungkinan terulangnya krisis dan biaya penegakan dan kepatuhan
yang dikenakan. Underregulation terjadi ketika tidak ada aturan yang
memadai untuk memastikan peningkatan dan stabilitas jangka panjang.
Orang-orang terpikat pada saham dan obligasi dengan iklan palsu
Signed by President Franklin Delano Rosevelt. 1934
MASALAH BERULANG
 REGULATIONS/Peraturan

SOX : Sarbanes-Oxley act of 2002

SEC : Securities and Exhange Commission
PCAOB : Public Company Accounting Oversight Board
FSGFO : Federal Sentencing Guidelines For Organization
AICPA : American Institute of Certified Public Accountants
FASB : Financial Acounting Standard Board
GASB : Government Accounting Standard Board
IFAC : International Federation of Accountant
CESR : Committee of European Securities Regulators
 Sarbanes –Oxley Act of 2002
Was enacted in July 2002 in response to the economic downturn of the early 2000s,
several years of steady decline in the capital markets and numerous high-profile
financial scandals.

The fundamental provisions of SOX can be categorized into the following five
categories:

(1) corporate governance;

(2) financial reporting;
(3) audit functions;
(4) federal securities law enforcement; and
(5) others (e.g., legal counsel, financial analysts).

Table 7.1 Sarbaney-Oxley Act of 2002 Provisions

Page 194 - 199
 SOX provisions
Influence on corporate governance:
(1) auditors, analysts, and legal counsel who were not traditionally considered as
components of corporate governance are now brought into the realm of internal
governance as the gatekeepers,

(2) the legal status and fiduciary duties of directors and officers, particularly the
audit committee and CEO, have been enhanced significantly,

(3) certain aspects of state corporate law were preempted and federalized. (e.g.
Section 404 of SOX prohibits loans to directors and officers, whereas state law
permits such loan),

(4) SOX is considered a process whose impact on improving the effectiveness of

corporate governance will continue for years to come.

Page 200
 SOX provisions
Financial reporting provisions of SOX and SEC-related rules are:

1. Certification of financial statements and internal controls by CEOs and CFOs

2. Disclosure of off balance sheet transactions
3. Disclosure pertaining to the use of non-GAAP financial measures
4. Disclosure of material current events affecting companies
5. Mandatory internal control reporting by management
6. A study of principles-based accounting standards
7. Convergence of accounting standards
8. Recognition of an adequate funding for the FASB as an accounting standard-
setting body
9. Oversight function of the FASB by the SEC.

Page 200 - 201

 SOX provisions
Provisions of SOX and SEC-related rules addressing audit functions are:

1. Creation of the PCAOB to regulate public accounting firms’ practice before the
SEC
2. Adoption of new rules related to auditor independence
3. Establishment of auditing standards in guiding auditors to improve audit quality
4. Issuance of new rules related to improper influence on auditors
5. Issuance of new rules pertaining to retention of records and audit evidence
relevant to reviews and audits of financial statements
6. Establishment of quality control standards to protect investors from receiving
misleading financial information
7. Oversight function of the PCAOB by the SEC
8. Attestation of and report on ICFR

Page 201
 SOX provisions
SOX empowered the SEC to better enforce federal securities laws to improve public
trust and investor confidence in the capital markets. SOX enabled the SEC to use
various means to bring enforcement actions against corporate wrongdoers, sanction
them, obtain penalties and disgorgement, and compensate injured investors.

The following SEC-related rules address the conduct of gatekeepers other than
directors, management, and auditors:

1. Rules governing research analysts’ potential conflicts of interest

2. Rules regarding standards of conduct for attorneys practicing before the SEC
3. Rules pertaining to rating agencies
4. Rules concerning mutual and hedge funds
5. Rules pertaining to investment banks

Page 202
 SOX – Global Reach
Several provisions of SOX have been adopted in countries worldwide, which lends
credibility to SOX and its intended purpose of protecting investors.

Adopted provisions by other countries, including Australia, Canada, China, India, and
Mexico, are executive certification of financial statements, mandatory audit committees
consisting of all independent directors, creation of standard setting bodies similar to the
PCAOB in regulating the auditing profession, the rotation of audit partners and audit
firms, and executive certification of ICFR without requiring an audit opinion.
 Securities and Exchange Commission
The SEC has four divisions:

1) Division of Corporate Finance, which oversees corporate disclosure of public

information by reviewing registration statements for newly offered securities, annually
audited and quarterly reviewed filings (Forms 10-K and 10-Q)

2) Division of Market Regulations, which establishes and maintains standards for fair,
orderly, and efficient capital markets by regulating the major securities market participants,
including broker/dealer firms and self-regulatory organizations (SROs) such as stock
exchanges and the NASD

3) Division of Investment Management, which oversees and regulates the investment

management industry and administers securities laws relevant to investment companies
(e.g., mutual funds) and investment advisors

4) Division of Enforcement, which investigates possible violations of securities laws,

recommends actions either in a federal court or before an administrative law judge,
negotiates settlements on behalf of the commission, and publishes accounting and auditing
enforcement releases (AAERs).
Page 204
 Securities and Exchange Commission
The SEC is regarded as an independent agency created by Congress to
protect investor interests.
(Securities Act of 1933 and the Securities Exchange Act of 1934)
Sec Enforcement Actions
 Public Company Oversight Board
Section 101 of SOX authorizes the establishment of the PCAOB to oversee the audit
of public companies under the SEC jurisdiction.
Congress authorized the PCAOB to fund its expenses by imposing a fee on all public
companies determined in proportion to their market capitalizations and registration
fees received from public accounting firms.

PCAOB .
The PCAOB has appointed a standing advisory group (SAG) of thirty members with
expertise in accounting, auditing, corporate governance, investments, and corporate
finance to assist in carrying out its standard-setting responsibilities.
 Public Company Oversight Board (Cont)
PCAOB responsibilities:

1. Prepare its budget and manage its operation.

2. Register both U.S. and non-U.S. public accounting firms auditing U.S. public
companies.
3. Inspect registered public accounting firms.
4. Establish auditing, quality control, and ethics standards for registered public
accounting firms.
5. Enforce compliance with applicable laws and regulations.
6. Investigate registered public accounting firms.
7. Impose sanctions for violations.
8. Hold roundtables addressing emerging issues affecting the functions and
performance of registered public accounting firms to obtain the views of
interested parties, including accounting firms, public companies, investor groups,
standard setters, and academicians.
9. Take initiatives in addressing auditing in a small business environment.
10. Perform other duties or functions as deemed necessary.
Public Company Oversight Board (Cont)
PCAOB rule-making process looks like the following schema:
 Federal Sentencing Guidelines For
Organizations
In 1984, Congress created the U.S. Sentencing Commission (USSC) with the
authority to issue guidelines for punishing organizations, including companies that
have committed federal crimes.

The revised guidelines are expected to have a significant impact on the effectiveness
of corporate governance by requiring:
(1) companies to establish and maintain an effective compliance program;
(2) boards of directors to accept accountability to ensure compliance throughout the
company;
(3) companies to assign high-level individuals (e.g., executives) to oversee the
company’s compliance program.
 American Institute of Certified Public
Accountants
The AICPA is a national professional association of more than 330,000 CPAs in
public practice, industry, government, and academia.
In the post-Enron and SOX era, the AICPA has introduced 6 leadership roles:
1. Standard-setting role of obtaining greater involvement of users of financial
statements in setting auditing standards
2. Fraud prevention and detection liaison role
3. Research role in promoting academic research in such areas as fraud prevention
4. Educational role of developing training programs aimed at combating fraud
5. Financial reporting role of working with other standard setters to improve quality,
reliability, and transparency of business and financial reporting
6. Corporate governance role to improve corporate governance and internal control
systems.
 Financial Accounting Standards Board
The SEC has delegated its accounting standard-setting authority to the FASB to issue
authoritative Statements of Financial Accounting Standards (SFAS) for the
measurement, recognition, and reporting of
business transactions and economic events and the preparation of their financial
statements.

Traditional Financial Statements KPI’s

Sec Rules to allow foreign companies to file their statements using IFRS without
reconciliation to U.S. GAAP.
 Government Accounting Standards Board
(GASB)
GASB, in April 2005, issued its Concept Statement No. 3, Communication Methods
in General Purpose External Financial Reports that Contain Basic Financial
Statements. Concept Statement No. 3 provides:
(1) A conceptual framework for determining communication methods for improving
the presentation of financial reports of governmental entities,
(2) criteria for each communication method,
(3) a hierarchy for their use.
 International Federation of Accountants
Challenges facing IFAC are finding ways to improve the credibility of the accounting
profession worldwide, establishing globally accepted accounting and auditing
standards, and developing global corporate governance guiding principles.
\
These challenges require IFAC to quickly move toward the global convergence of
both accounting and auditing standards issued by a variety of standard-setting bodies
such as the FASB, AICPA, PCAOB, and IASB.
 Committee of European Securities
Regulators
The EC established the Committee of European Securities Regulators (CESR) to
ensure efficient functioning of the European capital market.

In May 2004, the SEC and CESR released a joint statement that specifies the terms
of reference for future cooperation and coordination between the two bodies.
The primary objectives of such cooperation are to:
(1) identify and address emerging risks in the EU and U.S. markets at an early stage;
(2) discuss potential regulatory projects to facilitate converging ways of addressing
common issues; and

(3) set priorities for discussion and collaboration between the two bodies, including
market structure issues, the role and responsibility of credit rating agencies and
analysts, and mutual fund regulation.
 State Influence on Corporate Governance.
Corporate Governance and Courts.
State laws generally affect corporate governance by setting requirements for
companies’ directors and officers. There is no uniform body of corporate law in the
United States because each state is allowed to establish its own model.

The judicial process and court decisions in several landmark cases have affected the
structure of corporate governance in the United States. Many of the court cases have
led to increased accountability and liability for a company’s board of directors.
Corporate Governance and Self-Regulatory
Organizations
By establishing listing standards for their listed companies, SROs
including stock exchanges can also influence corporate
governance.
List of self-regulatory organizations
 Best Practices
The effectiveness of corporate governance depends on compliance with state and
federal statutes and listing standards, as well as best practices recommended by
investor activists and professional organizations.

Best practices of corporate governance are these of The Conference Board, American
Law Institute (ALI), American Bar Association (ABA), institutional investors,
Council of Institutional Investors, National Association of Corporate Directors,
Business Roundtable, Public Pension Funds and etc.

Best practices can be used as benchmarks to determine the best way to improve
business processes and corporate governance by following the means by which
leading organizations achieve excellence performance.