Playing by the new rules. (Inside the Books--Banking & Finance Special Report).

THE recently passed Sarbanes-Oxley Act is the most far-reaching federal crackdown on corporate fraud since the Great Depression. But CEOs, directors and shareholders beware -- a host of issues, such as whether or not to expense stock options, still remain.

Sarbanes-Oxley has set new guidelines for accounting and fraud, in addition to creating new criminal penalties for rogue executives. More than 130 pages long, the law applies to all domestic and foreign companies that have registered with the Securities and Exchange Commission. The rules are numerous and there are exceptions to most. Some are brand new, others are derived from earlier SEC mandates.

New regulations include:

* A company's chief executive and chief financial officer must sign off on financial reports. Should that company's results be restated, both executives are required to give back the year prior's bonuses and incentive-based pay in addition to all money made through stock sales.

* Companies are barred from giving favorable loans to top executives. This is an issue at Jakks, since the company's two highest-ranking officers, Jack Friedman and Stephen G. Berman, were given $1.5 million loans in 2000. Since the loans, which carry a 6.5 percent interest rate, were made before the act's passage, they may continue as long as there are no "material modifications" to the terms.

* Audit committee members cannot be affiliated with the company and are barred from getting paid anything other than director fees. Quarterly and annual reports must now give details about the audit committee's qualifications.

* Accounting firms are barred from providing certain consulting services to companies they audit; audit partners must be rotated every five years. The SEC has enhanced authority to determine what constitutes generally accepted accounting principles (GAAP).

A new five-member board, the Public Company Accounting Oversight Board, will be created. Its members will be appointed by the SEC, which oversees the PCAOB.

In addition, material off balance sheet transactions and obligations must now be disclosed, and all pro-forma numbers must be reconciled with GAAP. Transactions involving management and directors must be disclosed.

Executives and directors who break the law can expect harsher penalties. Sarbanes-Oxley creates a new federal felony for securities fraud and increases the maximum jail sentence for corporate criminals to 10 years. The sentence for other crimes, such as pension, mail and wire fraud, has also been increased. New rules to protect whistleblowers were also included.

Finally, Sarbanes-Oxley makes it easier for the SEC to bar individuals from serving as an officer or director of a company. It will have authority to freeze payments to executives under investigation.