Sarbanes Oxley Act
The Sarbanes Oxley Act
consists of 11 Sections
I – Public Company Accounting Oversight Board
II – Auditor independence
III – Corporate Responsibility
IV – Enhanced Financial Disclosures
V – Analyst Conflicts of Interest
VI – Commission Resources and Authority
VII – Studies and Reports
VIII – Corporate and Criminal Fraud Accountability
Act of 2002
IX – White-Collar Crime Penalty Enhancements
X – Corporate Tax Returns
General Provisions of S/Ox
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PCAOB To make rules governing audits of
public companies
PCAOB To oversee audits and audit firms
PCAOB independent of Federal
Government
PCAOB Self-funded through fees assessed
on CPA firms and publicly traded
companies
Regulations not applicable to NFP or
foreign listed companies
PCAOB Governing Members
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Five Members,
three of whom
must NOT be CPAs
If the chair is a
CPA, that person
must be out of the
business of
auditing for the
prior 5 years
PCAOB’s Duties
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Write audit standards, temporarily they have
adopted the AICPA’s
Register public CPA firms to do audits
Set Quality Control standards for audits
Do peer reviews of CPA firms – at least every
three years
Investigate and discipline
CPE
Review company disclosures and financial
statements at least every three years
Duties of the
are:
Register public accounting firms that prepare audit
reports for issuers.
Establish or adopt rules: Auditing, Quality control,
Ethics, Independence, as related to preparation
of audit reports
Conduct investigations of and disciplinary
proceedings involving registered public
accounting firms.
Establish auditing standards
Establish quality control standards. Quality control
standards could include rules to require
monitoring professional ethics and independence
Provisions for Audit firms
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Maintain audit papers for 7 years
Managing Partner rotation every 5 yrs.
Second partner rotation every 5 yrs.
Audit manager rotation every 7 years
Reports to audit committee
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All material findings
Disclose fees for all types of services in
proxy statement
Review disclosures of firm
Attest to Internal Control of firm
Auditor Independence Rules
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Can’t do other types of work for clients, de
minimus exceptions
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Bookkeeping
Systems design
Valuation services
Actuarial services
Internal audit
Management functions
Other work needs pre-approval by audit
committee
Can’t do audit if CEO, CFO from their firm,
1 year wait period
SOx requires every public
accounting firm to use quality
control policies relating to
(i) monitoring of professional ethics and
independence from entities on which the
firm issues audit reports;
(ii) consultation within the firm on accounting
and auditing questions;
(iii) supervision of audit work;
(iv) hiring, professional development, and
advancement of personnel;
(v) the acceptance and continuation of audit
engagements;
(vi) internal inspection
CPAs Report to Audit Committee
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All critical accounting
policies
Alternate treatments
Internal Control findings
Engagement letter
Independence letter
Management
representation letter
Material weaknesses
Corporate Provisions
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Corporate Officers
 Certify means they have
Reviewed the reports
 Reviewed internal control
 Certify that there are no
material weaknesses
 Certify that there is no fraud
 Report fairly presents the
financial condition of the
company
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Corporate Provisions
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Corporate Officers
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Can’t influence audit
No trading during blackout periods
In pro-formas, no material untrue statements,
reconciliation
No officer loans
File any trading information within two
business days
Code of ethics – if don’t have one – why?
Disclose off-balance sheet financing
Disclose any non-GAAP financial measures
Corporate Provisions
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Audit Committee of Board
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Responsible for oversight of external
audit
Be independent of the firm
Set up whistle-blowing provisions
One must be financial expert
Audit Committee
Independent Directors
Audit committee members should not receive fees
other than for board service and should not be an
“affiliated person” of the company.
Financial Expert
At least one member of its audit committee must
be a "financial expert" (expertise in US GAAP).
Auditor Oversight
Responsible for oversight of external reporting,
internal controls and auditing, and the
appointment and compensation of the auditor.
Whistle-Blower Communications
Confidential and anonymous submissions by
employees.
SOx Company Audit Committee
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Under SOx Sec 301 public company audit
committees are directly responsible for the
appointment, compensation, and oversight of
the work of any registered public accounting
firm employed by their company (including
resolution of disagreements between
management and the auditor regarding financial
reporting).
Audit firm reports directly to the audit
committee. Auditors may also have to discuss
accounting complaints with the Audit
Committee.
Penalties
General penalties
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If alter, destroy,
cover-up or falsify
documents with
objective to hinder
investigation – fines
and up to 20 years
Penalties – Corporate Officers
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Give back to firms any bonuses, incentive
compensation or equity based
compensation earned within 12 months
Give back profit on sales during blackout
period
False certification - $1m and up to 10 yrs.
Willful false cert. - $5 m and up to 20 yrs.
Company can hold up any payments to
officers
Penalties
Audit firms
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Temporary suspension from industry
Temporary or permanent revocation of license
Can’t go to another firm if suspended or license
revoked
Fines of up to $100,000 personal for each
violation, firm up to $2 m
If intentional up to $750,000 personal, firm up
to $15 m
Destroy working papers within 5 years – fine
and up to 10 years.
Statute of Limitations
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Two years after violation found or
Five years after violation