This section of SOX established a quasi-governmental entity called the Public Company Accounting Oversight Board (PCAOB, but called "Peek-a-Boo") under the direction of the SEC to (1) oversee the audit of public companies covered by the federal securities laws (the 1933 and 1934 Acts); (2) establish audit report standards and rules; and (3) investigate, inspect, and enforce compliance through both the registration and regulation of public accounting firms.

Under this section of SOX, companies that conduct audits of companies covered under federal securities laws must register with PCAOB. With this registration control, PCAOB is given the power to discipline public accounting firms, including the ability to impose sanctions such as prohibitions on conducting future audits. PCAOB's powers related to intentional conduct or repeated negligent conduct by audit firms when they are doing company audits and financial certifications. PCAOB's power to regulate was upheld in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010). Under the Dodd-Frank changes, PCAOB will also have authority to regulate the auditors of broker/dealer firms.

This section of SOX is the accounting section. Congress directed the SEC to do something about accounting practices for off-balance sheet transactions, including special purpose entities and relationships that while immaterial in amount may have a material effect upon the financial status of the company. For example, a spin-off company that concealed \(\$ 2\) million in company debt is not a material amount. But if the spin-off company is involved in leveraged transactions (as was the case with Enron) and the company has agreed to serve as a guarantor to investors in the spin-off for those leveraged amounts, then the spin-off can have a material effect. The SEC changed the rules for off-balance sheet transactions quite substantially to require companies to show the economics of such offbalance sheet transactions in a transparent fashion. Lehman Brothers' bankruptcy revealed another debt spin-off strategy that company used to hide its obligations and those types of spin-offs must also be disclosed.
A second portion of Part 4 gets right to the heart of pro forma and EBITDA. Companies must use generally accepted accounting principles (GAAP) and non-GAAP, side by side.
A third segment of Part 4 deals again with officers. Corporations can no longer make personal loans to corporate executives. The only exception is when the company is in the business of making loans, that is, GE executives are permitted to use GE Capital as long as they have the same types of loans that are available to the general public. Another officer requirement shortens the time for them to disclose transactions in the company's shares. Prior to SOX, executives simply had to disclose transactions within 10 days from the end of the month in which the transactions occurred. The disclosure period now is within two business days of the transaction.
As a result of the activities that led to these statutory revisions, SOX also requires companies to develop a separate code of ethics for senior financial officers, one that applies to the principal financial officer, comptroller, and/or principal accounting officer. Interestingly, Enron had just such a separate code of ethics. However, the board waived its provisions to allow former CFO Andrew Fastow to have the off-the-book transactions..........

Discussion Questions 1. As you proceed through the cases in this Section, try to connect the provisions of SOX and Dodd-Frank that were passed as a result of the conduct of executives and companies in the case studies.