Sarbanes-Oxley Act
What Is It?
• Act passed by Congress in response to the recent and
continuing corporate scandals.
• Signed into law July 30, 2002.
• Established sweeping changes dealing with financial reporting,
conflicts of interest, corporate ethics, and oversight of the
accounting profession.
• Applies to public companies.
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Key Provisions
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Sections 101, 102 and 104 – Public
Company Accounting Oversight Board
• The act requires the establishment of a Public company
Accounting Oversight Board:
– All accounting firms that audit public companies must register
with the board.
– Board will establish rules governing substance and content of
audits.
– Inspections of auditing firms will be conducted by the Board.
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Section 204 - Communications
• Auditor Communications with Audit Committees:
– Increases communications between auditor and audit
committee on critical accounting policies and practices,
alternative accounting treatments, and other material written
communications with management.
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Section 301- Audit Committee Standards
• Makes audit committee directly responsible for the
appointment, compensation, and oversight of auditors
• Limits audit committee membership to independent
directors.
• Requires procedures for complaints from
whistleblowers and others.
• Requires company to provide audit committee with
funding for auditors and other advisors as audit
committee deems necessary.
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Section 302 Certifications
• Certifications must include:
– CEO and CFO have reviewed the periodic filing and to their
knowledge, information provided presents fairly the financial results
of the company.
– CEO and CFO have established and maintain disclosure controls and
procedures that ensure that all material information is made known
to them.
– CEO and CFO have evaluated the effectiveness of the disclosure
controls and procedures as of 90 days prior to the date of the periodic
report and presented their conclusions in the report.
– CEO and CFO have disclosed all internal control deficiencies and any
fraud, whether or not significant, that involves management or other
employees who have a significant role in the companies internal
controls.
– Statement of whether the company has established a Code of Ethics
for senior financial officers.
– Other miscellaneous items.
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Section 304 – Forfeiture of Certain
Bonuses and Profits
• Requires CEO and CFO to forfeit certain bonuses
received and profits realized on the sale of securities
following a financial report that is later restated due to
material non-compliance with securities laws, as a
result of misconduct.
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Section 402 – Executive Loans
• Prohibits personal loans to officers and directors.
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Section 403 – Accelerated Reporting
• Requires accelerated reporting of trades by insiders.
• Transactions must be reported via EDGAR by the end
of the second business day following execution of a
transaction.
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Section 404 Evaluating Internal Controls
• Requires a public company to document and evaluate
the effectiveness of internal controls and procedures for
financial reporting.
• Elements of internal control.
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Internal control environment
Risk assessment
Control activities
Information and communication
Monitoring
• Effective internal controls provide reasonable
assurance that risk is manageable.
• Effective internal controls provide clear definition of
responsibilities and accountabilities.
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(Cont’d)
• Requires external auditor to attest to
management’s assertions in the annual report.
• Annual report to include management’s
assessment of the effectiveness of internal
control over financial reporting.
• Effective for fiscal years ending after June 30,
2004.
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Section 409 – Real Time Issuer Disclosures
• “Rapid and current” disclosure of material changes in
financial condition or operations.
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Section 906 Certifications
• Requires that each periodic report filed with the SEC
(Securities and Exchange Commission) be accompanied
by the certification of the CEO and CFO that:
– The report fully complies with applicable Security Exchange
Act rules.
– The information contained in the report fairly presents, in all
material respects, the financial condition and results of
operations of the company.
• Fraudulent certifications carry penalties!
– $1 million fine
– Up to 10 years in prison
– Willful falsification carries a steeper penalty
• $5 million fine
• Up to 20 years in prison
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Sections 1102 & 802 - Penalties
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Record tampering or otherwise impeding an official
proceeding and Criminal penalties for altering
documents:
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Criminal penalties for corruptly altering or destroying
documents or otherwise impeding an official proceeding.
Expands criminal penalties for whoever alters documents,
including audit reports, to obstruct an investigation.
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