After a season of accounting and financial scandals, President Bush had little political choice but to sign into law the hastily assembled Sarbanes-Oxley Act on July 30. The act, named after its primary architects, Sen. Paul Sarbanes (D-Maryland) and Rep. Michael Oxley (R-Ohio), includes significant changes in federal securities regulation. The changes could lead to the most dramatic new sweep of corporate regulation since the enactment of the Securities Exchange Act of 1934.

On the surface, which is where much of contemporary politics measures its depth, Sarbanes-Oxley bodes well for the consumer. If it performs as intended, the act will help the consumers feel more secure in their investments and return consumer confidence to the marketplace.

The new law has the potential, however, to subtract more value from the corporate marketplace than the misdeeds it was presumably designed to correct. This subtraction, and the added bureaucracy needed to calculate it, is a subject of genuine concern for Kansas City-area bankers and accountants, and especially for officers of public corporations.

Among other requirements, Sarbanes-Oxley mandates the federal oversight of public auditors through a new entity called the "Public Company Accounting Oversight Board." It requires a new set of auditor independence rules, new disclosure requirements for public companies, as well as harsh civil and criminal penalties for persons who are deemed responsible for accounting or reporting violations. The act also imposes new restrictions on loans and stock transactions involving corporate insiders.

For public companies, the law's most salient impact will be on corporate governance, an area historically left to the states. As written, Sarbanes-Oxley will compel many companies to revise their internal controls significantly and will alter the roles played by their audit committees and senior management in the financial reporting process. Most significantly, under the notorious "section 906," the act imposes new responsibilities on CEOs and CFOs and exposes them to much greater potential liability.

These new requirements have already taken effect. The penalty for certifying bad financials ranges up to $5 million in fines and 20 years in prison. An SEC official, obviously disenchanted with the law, has called the people who wrote this law "idiots" and said that "some very sleepy senators decided to add Section 906."

The full weight of the Sarbanes-Oxley has yet to be felt since there is an arbitrary quality to how much pressure will be brought to bear upon a given corporation, innocent or otherwise. In the wrong hands, the act could be used to punish public enemies and scare the uncommitted corporation into supporting a given public official.

Section 906 is particularly troublesome in this regard. In addition to its demand for instant reporting, the section leaves many questions still unanswered. There are no real objective standards for exactly what CEOs or CFOs are expected to certify. Nor is there a statutory form for the certification.

CEOs and CFOs are commanded to "certify," without any instructions on how to do it. There is no specific list of which filings have to be certified and which don't. The certification is absolute and unconditional. Section 906 offers no "to the best of my knowledge" conditions. CEOs and CFOs could be found guilty of a felony even though acting in innocence and good faith.

To make matters more challenging, the Sarbanes-Oxley Act contains a separate section--302 by designation--that instructs the SEC to devise its own procedures for CEO and CFO certification. But it is likely that SEC rules will be overruled by the statutory power of Section 906. Thus, when the SEC obeys the act and comes up with its own rules, there will then be two entirely separate certification requirements, each with different and potentially conflicting requirements.

In other words, fasten your seat belts. Sarbanes-Oxley could be a bumpy ride. caption The penalty for certifying bad financials ranges up to $5 million in fines and 20 years in prison.