Sarbanes-Oxley Act
a.k.a. “SOX”
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
Exam Questions
1.
The Sarbanes-Oxley Act was passed in:
a. 1935
b. 1974
c. 1999
d. 2002
2.
What events led to the passing of SOX?
a. Collapse of the auto industry
b. A string of accounting scandals at public
companies
c. Great Depression
d. Discrimination in the accounting profession
Exam Questions,
continued…
3. What government institution was established by SOX to oversee
auditors?
Answer
4. The Public Company Accounting and Oversight Board is under
the authority of:
a. North Atlantic Treaty Organization (NATO)
b. Food and Drug Administration (FDA)
c. Securities Exchange Commission (SEC)
d. US Treasury
5. Name 4 titles of the Sarbanes-Oxley Act.
Answer
Exam Questions,
continued…
6.
According to Title X, who should sign the company tax return?
a. Chief Executive Officer (CEO)
b. President of External Accounting Firm
c. Chief Financial Officer (CFO)
d. Company’s Head of Accounting
7.
What events involving major public companies led to the
passing of SOX?
a. Intentional misrepresentation of company financial records
b. Auditor conflicts of interest
c. Risky loans from banks based on false earnings
d. all of the above
Exam Questions,
continued…
8. What is the criminal penalty for violation of SOX?
a. life in prison
b. fines and/or maximum 20 years in prison
c. maximum 5 years in prison
d. tax increase
9. True/False: Under SOX, auditors are not allowed to
provide non-audit services (consulting) to the
companies they audit.
10. True/False: SOX does not apply to privately held
companies.