What Is Compliance in Accounting?
In terms of accounting, compliance simply means making sure that a company’s financial matters are being handled in accordance with federal laws and regulations. At any point in time, a corporation should be able to provide accurate information about its accounts to its shareholders or to regulating authorities, such as the Securities and Exchange Commission (SEC). To ensure compliance, it’s necessary to have processes in place for recording, verifying, and reporting the value of a company’s assets, liabilities, debts, and expenses.
In the wake of several corporate accounting scandals, the Sarbanes-Oxley Act was enacted in 2002. This act created a new set of standards in the accounting and internal auditing practices of publicly-traded companies. The Sarbanes-Oxley act consisted of 11 titles that specified the requirements and mandates for compliance in accounting and financial reporting.
- Title I: Public Company Accounting Oversight Board (PCAOB) – This title established the PCAOB as a public agency charged with regulating, policing, and disciplining accounting firms that provide auditing services for publicly-traded companies. Title I also established processes and procedures for compliance audits.
- Title II: Auditor Independence – Prior to Sarbanes-Oxley, the independent auditing firms that were responsible for monitoring the accounting practices of public companies were self-regulated. In fact, many of these firms were found to be performing consulting work for the companies they were supposed to be auditing. To eliminate these conflicts of interest, this title established standards for external auditor independence, including new auditor approval requirements, partner rotation, and reporting requirements.
- Title III: Corporate Responsibility – This title stated emphatically that the senior executives were individually responsible for the completeness and accuracy of their company’s financial reports. For example, the corporation’s principal officers (the CEO and/or CFO) became responsible for certifying and approving the contents of the financial reports each quarter.
- Title IV: Enhanced Financial Disclosure – This title instigated a number of reporting requirements for financial transactions, such as off-balance-sheet transactions or the stock transactions of corporate officers. Internal controls were put in place to assure the compliance of financial reports and disclosures.
- Title V: Analyst Conflicts of Interest – This title defined the codes of conduct for securities analysts, requiring them to disclose any knowable conflicts of interests. Many investors had become distrustful of securities analysts, and this title was intended to restore their confidence.
- Title VI: Commission Resources and Authority – This title clearly defined the practices of securities professionals and, like the previous title, was intended to restore investor confidence. It also defined the SEC’s authority to discipline or bar analysts from practice.
- Title VII: Studies and Reports – Under this title, the Comptroller General and the SEC were required to perform a number of studies and report their findings. These studies included the effects of consolidating public accounting firms, the impact of credit rating agencies on the securities market, and the role that investment banks had played in the accounting scandals of Enron, Global Crossing, and others.
- Title VIII: Corporate and Criminal Fraud Accountability – Also referred to as the Corporate and Criminal Fraud Act of 2002, this title set forth the specific criminal penalties for interference with compliance investigations and provided protection for “whistle-blowers.”
- Title IX: White Collar Crime Penalty Enhancement – Also known as the White Collar Crime Penalty Enhancement Act of 2002, this title made the penalties for white-collar crimes and conspiracies more severe. Under this title, corporate officers who failed to certify their company’s financial report would now find themselves facing criminal charges.
- Title X: Corporate Tax Returns – Short, sweet, and to the point, this title simply stated that the CEO was responsible for signing the company’s tax return.
- Title XI: Corporate Fraud Accountability – Also known as the Corporate Fraud Accountability Act of 2002, this title elevated corporate fraud and records tampering to criminal offenses. In addition to revising guidelines for sentencing, it also empowered the SEC to freeze questionable transactions (those deemed “large” or “unusual”) until they could be properly investigated.
These tighter regulations have proven a challenge to many companies, who find themselves scrambling to comply. Even though many of these corporations have long done business honestly and above board, the strict requirements for compliance have revealed weaknesses and inefficiencies in their accounting systems. Some companies have managed to revamp their accounting and internal auditing processes, while others have turned to outside firms to ensure proper accounting compliance.