Georgia CTAE Resource Network Curriculum Office,
February 2009
To accompany curriculum for the Georgia Peach State
Career Pathways
February 2009, Kayla Calhoun & Dr. Frank Flanders

Enduring Understanding
 The Sarbanes-Oxley Act was enacted to establish new or enhanced standards for
U.S. public company boards, management, and public accounting firms.

Essential Questions
 Why was the Sarbanes-Oxley Act needed?
 How does the Sarbanes-Oxley Act protect stockholders and institutions?

Objectives
 Describe the events that caused the passing of the Sarbanes-Oxley Act.
 Relate the Sarbanes-Oxley Act to accounting.
 Explain the goals of the Sarbanes-Oxley
Act.
 Describe each of the 11 titles of the
Sarbanes-Oxley Act.

What is SOX?

Also known as the Public Company Accounting
Reform and Investor Protection Act of 2002

Created by US Senator Paul Sarbanes (D-Maryland) and US Congressman Michael Oxley (R-Ohio)

Signed into law July 30, 2002

Most dynamic securities legislation since the
Securities and Exchange Acts of 1933 and 1934

Purpose of SOX

Establish new or enhanced standards for U.S. public company boards, management, and public accounting firms

Relation to Accounting
 Bad accounting procedures, both intentional and non-intentional, led to the collapse and subsequent investigation of several large companies
 Public outrage led Congress to pass
SOX to regulate audits of public company accounting procedures and hopefully prevent false financial reports

Relation to Accounting, continued…
 Companies that do not follow standard accounting procedures may use methods that mislead investors about the financial health of the company.
 These practices range from just unethical to illegal.

Why was SOX passed?
 Failure of Boards of Directors and executives to double-check financial records
 Intentional misrepresentation of financial status
 Loans from major banks to risky companies hurt bank investors and encouraged others to make risky investments in those companies
 Misrepresentation of company earnings caused stockholders to make seemingly good investments that cost them large sums of money

Why was SOX passed?, continued…
 Auditor conflicts of interest
 Some auditing firms provided consulting services to the companies they audited.
 Proper auditing procedures, such as challenging a company’s accounting procedures, could damage the client relationship under the consulting agreement.
 This caused bad accounting practices and misrepresentation of financial information to go unchecked, leading to the collapse of several companies, like Enron.

Goals of SOX
 Regain public confidence in markets
 Improve corporate governance
 Increase executive accountability
 Increase efforts to prevent, detect, investigate and remediate fraud and misconduct

Title I – Public Company
Accounting Oversight Board
 Created as a non-profit organization to oversee audits of public companies
 Under the authority of the Securities Exchange
Commission (SEC)
 Comprised of 5 appointed members w/ a max of 2
CPA’s
 Duties:

Register existing public accounting firms which prepare audits for publicly traded companies

Audit the auditors

Establish and amend rules and standards (in cooperation with other standard setters)
 Try and penalize registered public accounting firms who fail to comply with the rules

Title II – Auditor
Independence
 Prohibits registered public accounting firms from performing non-audit services for companies they audit
 Prevents conflicts of interest

Title III – Corporate
Responsibility
 CEOs and CFOs must certify accuracy
 Forfeit bonuses and profits if information is misrepresented

Title IV – Enhanced
Financial Disclosures
 Forbids most personal loans to chief executives
 Disclosure of code of ethics for senior financial officers
 Disclosure of members of company audit committee
 Should include at least one financial expert

Title V – Analyst Conflicts of Interest
 Requires registered securities associations to adopt rules that prevent conflicts of interest
 Ex: Recommendations of analysts in research reports

Title VI – Commission
Resources and Authority
 Increased SEC budget to $780 million
 $98 million used to hire 200 employees to oversee auditors
 SEC has the authority to investigate and punish violators of security law

Title VII – Studies and
Reports
 US Comptroller General to conduct a study about the consolidation of public accounting firms
 Also conduct investigation of security law violations in the cases of Enron,
WorldCom, etc.

Title VIII – Corporate and
Criminal Fraud Accountability
 To knowingly create, destroy, or manipulate documents or impede federal investigations is considered a felony
 Punishment = Fines, maximum 20 years in prison, or both
 Audit reports should be kept for 5 years
 Whistleblower protection

Title IX – White-collar Crime
Penalty Enhancements
 CEOs and CFOs must certify that financial statements are accurate representations of the company’s condition
 Punishment = Max $5 million fine and/or max 20 year sentence
 SEC may ban anyone convicted of a security crime from holding an executive position at a public company

Title X – Corporate Tax
Returns
 Federal income tax returns must be signed by the Chief Executive Officer
(CEO) of the company

Title XI – Corporate Fraud
Accountability
 Destroying/altering evidence or otherwise obstructing securities fraud proceedings may be punished with a fine and/or up to
20 years in prison
 SEC may freeze payments to accused individuals
 Any retaliation to whistleblowers is subject to fines and/or 10 years imprisonment

Summary
 The Sarbanes-Oxley Act of 2002 was passed to regain public confidence in the stock market following a string of major accounting fraud cases involving public companies.
 A plan to accomplish this objective is outlined in 11 titles, which:
 Prohibit conflicts of interest
 Increase corporate accountability
 Increase accounting transparency
 Form an oversight board to enforce the new rules