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Sarbanes-Oxley
Public Company Accounting and Investor Protection Act
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Sarbanes-Oxley
Public Company Accounting and Investor Protection Act
Introduction
OVERVIEW OF THE
SARBANES-OXLEY ACT OF 2002
By:
Michele Bottoms
And
Janice Thieme
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Sarbanes-Oxley
Public Company Accounting and Investor Protection Act
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Corporate executives
Public accounting firms
Securities analysts
Boards of directors
Audit committees
Sarbanes-Oxley
Public Company Accounting and Investor Protection Act
Title 1: PCAOB
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Foreign public accounting firms
Securities and Exchange Commission
PCAOB funding
The collapse of corporations like Enron and
WorldCom, which caused billions of dollars of
losses to investors which led to the passage of the
Sarbanes-Oxley Act
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According to SEC Commissioner Harvey J.
Goldschmid, “The corporate and financial
scandals of the 1990’s and early 2000’s are the
most serious that have occurred in this country
since the scandal of the Great Depression”
Sarbanes-Oxley
Public Company Accounting and Investor Protection Act
Title 1: PCAOB
Who was at fault?
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5 members
Application to register
Auditing standards
Annual inspection
Penalties
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Public Company Accounting and Investor Protection Act
Title 2: Auditor Independence
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Prohibited non-audit services
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Bookkeeping or services related to accounting
records
Design/implementation of financial information
systems
Appraisal/valuation services
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Actuarial services
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Public Company Accounting and Investor Protection Act
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Title 2: Auditor Independence
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Title 2: Auditor Independence
Prohibited non-audit services (cont.)
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Internal audit outsourcing services
Management or human resources management
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Broker/dealer, investment adviser or investment
banking services
Legal/expert services unrelated to the audit
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Title 3: Corporate Responsibility
The effectiveness of the issuer’s internal controls
were evaluated at least 90 days prior to the the
issuance of the report
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The financial statements fairly present the
financial condition of the issuer
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The signing officers are responsible for
establishing and maintaining internal controls
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All significant deficiencies in internal controls
have been disclosed
Indication of changes in internal controls that
could significantly affect internal controls.
Title 3: Corporate Responsibility
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Financial report standards (cont.)
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Public Company Accounting and Investor Protection Act
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The signing officer has reviewed the report
The report does not contain any untrue statements
of material fact
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Public Company Accounting and Investor Protection Act
Title 3: Corporate Responsibility
Financial report standards
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Audit committee
Audit partner rotation
Conflicts of interest
Other services the PCAOB determines are not
appropriate
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Public Company Accounting and Investor Protection Act
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Public Company Accounting and Investor Protection Act
Re-statement of financial documents
SEC blockage
Rules of conduct for attorneys
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Public Company Accounting and Investor Protection Act
Title 4: Enhanced Corporate
Disclosure
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Sarbanes-Oxley prohibits transactions
considered to be personal loans to
executives.
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Public Company Accounting and Investor Protection Act
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Title 4: Enhanced Corporate
Disclosure
Title 4: Enhanced Corporate
Disclosure
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Reports on Public Company Internal Control:
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Statement that management is responsible for
establishing and maintaining internal control
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Conclusions about the effectiveness of the
company’s internal controls
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An opinion of internal controls provided by a
registered accounting firm.
All corrective material adjusting entries in
accordance with GAAP identified by a
registered public accounting firm shall be
reflected in the financial statements.
Disclosure will be made for any offbalance sheet transactions that have a
current or future effect on the financial
condition of company operations.
Sarbanes-Oxley
Public Company Accounting and Investor Protection Act
Sarbanes-Oxley
Public Company Accounting and Investor Protection Act
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Title 4: Enhanced Corporate Disclosure
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Public Company Accounting and Investor Protection Act
Title 4: Enhanced Corporate
Disclosure
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Internal Controls Over Financial Reporting
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Internal Controls Used to Assess
Control Risk Below Maximum
Controls that must be tested in an
audit of internal controls
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Title 4: Enhanced Corporate
Disclosure
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Controls that must be tested in an
audit of financial statements
Sarbanes-Oxley
Public Company Accounting and Investor Protection Act
A public company is required to have at least one member
on its audit committee that is considered a “financial
expert”
n Understands GAAP and financial statements
n Has the ability to assess the application of principles for
estimates, accruals, and reserves
n Experience preparing, auditing, or evaluating financial
statements similar in complexity to the company’s
financial statements
n Understands internal controls and procedures for financial
reporting
n Understands audit committee functions
Report is as of the end of the company’s fiscal year
Auditor’s report date same as date of auditor’s report
on financial statements
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Section 406 requires that a company disclose its
code of ethics for senior financial officers.
If the company has not adopted a corporate code
of ethics then the company must disclose reasons
for not adopting a corporate code of ethics.
Changes in an established code of ethics or any
waiver of the code to a corporate officer must be
immediately disclosed on Form 8-K.
Sarbanes-Oxley
Public Company Accounting and Investor Protection Act
Title 4: Enhanced Corporate
Disclosure
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Increase costs due to compliance
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According to The CPA Journal, the cost of
SOX compliance personnel will increase
266.7% and accounting personnel will
increase 105.3% due to this regulation alone.
Audit fees are expected to increase from 25%
to 33% [Kroehn].
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Public Company Accounting and Investor Protection Act
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Title 5: Analyst Conflict of
Interest
Title 4: Enhanced Corporate
Disclosure
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Increase in disclosure information
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Public Company Accounting and Investor Protection Act
General Electric’s latest report is 160 pages,
double the previous year, Kodak’s annual
report is 45% larger and General Motor’s
report is 28% larger.
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Public Company Accounting and Investor Protection Act
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Title 6: Commission Resources
and Authority
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Sarbanes-Oxley
Public Company Accounting and Investor Protection Act
Title 7: Studies and Reports
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General Accounting Office
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Outlines the resources and authority of
the SEC
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Pre-publication clearance of reports by
securities analysts is disallowed
Brokers and dealers are not allowed to
retaliate against investment analysts for
adverse research reports
Brokers and dealers must disclose any
conflicts of interests in research reports
provided by analysts
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The SEC was authorized for an
appropriation of $776,000,000 for fiscal
year 2003
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Securities and Exchange Commission
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Public Company Accounting and Investor Protection Act
Title 8: Corporate and Criminal
Fraud Accountability
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Knowingly alter, destroy, or falsify records
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Fined and/or imprisoned for not more than 20
years
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Fined and/or imprisoned for not more than 10
years
Role of credit rating agencies
Number of security professionals in violation
Fraud vulnerability areas
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Public Company Accounting and Investor Protection Act
Title 8: Corporate and Criminal
Fraud Accountability
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Bankruptcy
Statute of limitations
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Destruction of audit work papers
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Consolidation of accounting firms
Impact on domestic and international capital
formation and securities structures
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2 years after discovering facts that indicate
a violation, or
5 years after the violation
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Public Company Accounting and Investor Protection Act
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Title 8: Corporate and Criminal
Fraud Accountability
Sarbanes-Oxley
Public Company Accounting and Investor Protection Act
Title 9: White Collar Crime
Penalty Enhancements
Whistleblower Protection
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Penalties for mail and wire fraud
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Violation of Employee Retirement Income
Act of 1974
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If employer is in violation of, then:
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n Re-instate
employee at same level
n Reimburse for all back pay with interest
n Pay
employee’s court costs, reasonable attorney
fees, and any other damages as a result of the
action
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Public Company Accounting and Investor Protection Act
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Title 9: White Collar Crime
Penalty Enhancements
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Imprisonment increased from 1 year to 10 years
Fines increased from $100,000 to $500,000
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Public Company Accounting and Investor Protection Act
Title 10: Corporate Tax Returns
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Statement from CEO and CFO
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Increased from 5 years to 20 years
Signed by CEO
Failure to comply
n Imprisonment
n Fines
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– not more than 10 years
– not more than $1,000,000
Willful failure to comply
n Imprisonment
n Fines
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– not more than 20 years
– not more than $5,000,000
Sarbanes-Oxley
Public Company Accounting and Investor Protection Act
Title 11: Corporate Fraud and
Accountability
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Alter, destroy, or conceal information for
an official proceeding
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Sarbanes-Oxley
Public Company Accounting and Investor Protection Act
Title 11: Corporate Fraud and
Accountability
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Violation of SEC Act of 1934
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Imprisonment – not more than 20 years
Fined
SEC exclusion
Individual
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n Fine
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– not more than 20 years
– maximum of $5,000,000
Corporate
n Imprisonment
n Fine
– not more than 20 years
– maximum of $25,000,000
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Public Company Accounting and Investor Protection Act
Conclusion
Is Sarbanes-Oxley the answer?
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