Demystifying SOX Title VII: Studies & Reports

Title VII of the SOX Act mandates several comprehensive studies and reports aimed at enhancing the regulation of financial practices. The Comptroller General will study the consolidation of public accounting firms since 1989, its impact on capital formation and securities markets, and solutions to increase competition.

The SEC will study the role and impact of credit rating agencies, barriers to entry, and conflicts of interest. Additionally, the SEC will analyze violations by securities professionals from 1998 to 2001 and review enforcement actions over the past five years to identify fraud-prone areas. The Comptroller General will also investigate the role of investment banks in manipulating financial statements in cases like Enron. Reports with findings and recommendations will be submitted to Congress.

Section 701: Government Accountability Office (GAO) study and report regarding consolidation of public accounting firms

• Section 701 of SOX mandated the Comptroller General to conduct a study on the consolidation of public accounting firms since 1989, examining factors leading to consolidation, its impact on capital formation and securities markets, and potential solutions to increase competition and the number of firms providing audit services to large entities.
• The study will also assess issues arising from limited competition, such as higher costs, lower service quality, impaired auditor independence, and lack of choice.
• Furthermore, the study will explore how federal or state regulations may impede competition.
• The Comptroller General will consult with relevant regulatory agencies and submit a report to Congress within one year.

Section 702: Commission study and report regarding credit rating agencies

• Section 702 of SOX requires the commission to conduct a study on the role and function of credit rating agencies in the securities market.
• This study will examine their role in evaluating issuers of securities, their importance to investors and market functioning, impediments to accurate appraisals, barriers to entry, measures to improve information dissemination, and conflicts of interest.
• The commission must report its findings to the President and relevant congressional committees within 180 days of the act's enactment.

Section 703: Study and report on violators and violations

• Section 703 of SOX mandates the commission to conduct a study covering January 1, 1998, to December 31, 2001, to identify the number of securities professionals, such as public accountants, investment bankers, and others, who have aided and abetted or been primary violators of federal securities laws.
• The study will detail the violations, specific laws broken, sanctions imposed, the occurrence of repeated offenses, and disciplinary actions taken.
• Additionally, it will report on the amounts of disgorgement, restitution, or fines collected from these violators.
• A report based on the findings must be submitted to relevant Senate and House committees within six months of the act's enactment.

Section 704: Study of enforcement actions

• Section 704 of SOX requires the commission to review and analyze all enforcement actions over the past five years related to violations of reporting requirements under securities laws and financial statement restatements.
• The study aims to identify areas prone to fraud, manipulation, or inappropriate earnings management, such as revenue recognition and off-balance sheet entities.
• The commission must report its findings within 180 days to the House and Senate committees, and use the results to revise its regulations as needed.
• The report will also discuss recommended regulatory or legislative steps to address identified concerns.

Section 705: Study of investment banks

• Section 705 of SOX mandates the Comptroller General to study whether investment banks and financial advisers helped public companies manipulate earnings and obscure their financial condition.
• The study will investigate their role in the collapses of Enron and Global Crossing, focusing on transactions and arrangements that distorted financial statements.
• It will also examine if such practices were generally used to manipulate revenue, obtain loans, or move liabilities off balance sheets.
• The findings must be reported to Congress within 180 days, including recommendations for regulatory or legislative actions to address any identified issues.