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1
pendent oversight of public accounting
rms providing audit services (auditors). It also creates a central oversight
board tasked with registering auditors,
dening the specic processes and procedures for compliance audits, inspecting and policing conduct and quality control, and enforcing compliance with the
specic mandates of SOX.
2. Auditor Independence
Title II consists of nine sections and establishes standards for external auditor
independence, to limit conicts of interest. It also addresses new auditor approval requirements, audit partner rotation, and auditor reporting requirements.
It restricts auditing companies from providing non-audit services (e.g., consulting) for the same clients.
3. Corporate Responsibility
Title III consists of eight sections and
mandates that senior executives take individual responsibility for the accuracy
and completeness of corporate nancial
reports. It denes the interaction of external auditors and corporate audit committees, and species the responsibility
of corporate ocers for the accuracy
and validity of corporate nancial reports. It enumerates specic limits on
the behaviors of corporate ocers and
describes specic forfeitures of benets
and civil penalties for non-compliance.
For example, Section 302 requires that
the companys principal ocers (typically the Chief Executive Ocer and
Chief Financial Ocer) certify and approve the integrity of their company nancial reports quarterly.[5]
4. Enhanced Financial Disclosures
Title IV consists of nine sections. It
describes enhanced reporting requirements for nancial transactions, including o-balance-sheet transactions, proforma gures and stock transactions of
corporate ocers. It requires internal controls for assuring the accuracy
of nancial reports and disclosures, and
mandates both audits and reports on
those controls. It also requires timely reporting of material changes in nancial
condition and specic enhanced reviews
by the SEC or its agents of corporate reports.
MAJOR ELEMENTS
3
10. Corporate Tax Returns
Title X consists of one section. Section
1001 states that the Chief Executive Ofcer should sign the company tax return.
11. Corporate Fraud Accountability
Title XI consists of seven sections. Section 1101 recommends a name for this
title as Corporate Fraud Accountability Act of 2002. It identies corporate
fraud and records tampering as criminal
oenses and joins those oenses to specic penalties. It also revises sentencing
guidelines and strengthens their penalties. This enables the SEC to resort to
temporarily freezing transactions or payments that have been deemed large or
unusual.
2.1
of victory: 423 to 3 in the House and 99 to 0 in the Senate. On July 30, 2002, President George W. Bush signed
it into law, stating it included the most far-reaching reforms of American business practices since the time of
Franklin D. Roosevelt. [2]
FEI Survey (Annual): Finance Executives International (FEI) provides an annual survey on SOX Section 404 costs. These costs have continued to decline relative to revenues since 2004. The 2007
study indicated that, for 168 companies with average revenues of $4.7 billion, the average compliance
costs were $1.7 million (0.036% of revenue).[12]
The 2006 study indicated that, for 200 companies
with average revenues of $6.8 billion, the average
compliance costs were $2.9 million (0.043% of revenue), down 23% from 2005. Cost for decentralized companies (i.e., those with multiple segments
or divisions) were considerably more than centralized companies. Survey scores related to the positive eect of SOX on investor condence, reliability
of nancial statements, and fraud prevention continue to rise. However, when asked in 2006 whether
the benets of compliance with Section 404 have
exceeded costs in 2006, only 22 percent agreed.[13]
Foley & Lardner Survey (2007): This annual study
focused on changes in the total costs of being a U.S.
public company, which were signicantly aected
by SOX. Such costs include external auditor fees,
directors and ocers (D&O) insurance, board compensation, lost productivity, and legal costs. Each
of these cost categories increased signicantly between FY2001 and FY2006. Nearly 70% of survey
respondents indicated public companies with revenues under $251 million should be exempt from
SOX Section 404.[14]
Butler/Ribstein (2006): Their book proposed a
comprehensive overhaul or repeal of SOX and a
3.3
variety of other reforms. For example, they indicate that investors could diversify their stock investments, eciently managing the risk of a few
catastrophic corporate failures, whether due to fraud
or competition. However, if each company is required to spend a signicant amount of money and
resources on SOX compliance, this cost is borne
across all publicly traded companies and therefore
cannot be diversied away by the investor.[15]
The SarbanesOxley Acts eect on non-U.S. companies cross-listed in the U.S. is dierent on rms from
developed and well regulated countries than on rms from
less developed countries according to Kate Litvak.[24]
Companies from badly regulated countries see benets
that are higher than the costs from better credit ratings
by complying to regulations in a highly regulated country
(USA), but companies from developed countries only incur the costs, since transparency is adequate in their home
countries as well. On the other hand, the benet of better
credit rating also comes with listing on other stock exchanges such as the London Stock Exchange.
Piotroski and Srinivasan (2008) examine a comprehensive sample of international companies that list onto U.S.
and U.K. stock exchanges before and after the enactment of the Act in 2002. Using a sample of all listing
events onto U.S. and U.K. exchanges from 19952006,
they nd that the listing preferences of large foreign rms
choosing between U.S. exchanges and the LSEs Main
Market did not change following SOX. In contrast, they
nd that the likelihood of a U.S. listing among small foreign rms choosing between the Nasdaq and LSEs Alternative Investment Market decreased following SOX.
The negative eect among small rms is consistent with
these companies being less able to absorb the incremental costs associated with SOX compliance. The screening
of smaller rms with weaker governance attributes from
U.S. exchanges is consistent with the heightened governance costs imposed by the Act increasing the bondingrelated benets of a U.S. listing.[25]
1. propose the rules or regulations required by this section, not later than 90 days after the date of enactment of
Section 302 of the Act mandates a set of internal pro- this Act; and 2. issue nal rules or regulations required
cedures designed to ensure accurate nancial disclosure. by this section, not later than 270 days after that date of
The signing ocers must certify that they are respon- enactment.
sible for establishing and maintaining internal controls"
and have designed such internal controls to ensure that
4.3 SarbanesOxley Section 401: Disclomaterial information relating to the company and its
sures in periodic reports (O-balance
consolidated subsidiaries is made known to such ocers
sheet items)
by others within those entities, particularly during the period in which the periodic reports are being prepared. 15
U.S.C. 7241(a)(4). The ocers must have evaluated The bankruptcy of Enron drew attention to o-balance
the eectiveness of the company's internal controls as of sheet instruments that were used fraudulently. During
a date within 90 days prior to the report and have pre- 2010, the court examiners review of the Lehman Brothsented in the report their conclusions about the eective- ers bankruptcy also brought these instruments back into
ness of their internal controls based on their evaluation as focus, as Lehman had used an instrument called Repo
105 to allegedly move assets and debt o-balance sheet
of that date. Id..
to make its nancial position look more favorable to inThe SEC interpreted the intention of Sec. 302 in Fi- vestors. Sarbanes-Oxley required the disclosure of all
nal Rule 338124. In it, the SEC denes the new term material o-balance sheet items. It also required an SEC
"disclosure controls and procedures, which are distinct study and report to better understand the extent of usage
from "internal controls over nancial reporting.[26] Un- of such instruments and whether accounting principles
der both Section 302 and Section 404, Congress di- adequately addressed these instruments; the SEC report
rected the SEC to promulgate regulations enforcing these was issued June 15, 2005.[28][29] Interim guidance was isprovisions.[27]
sued in May 2006, which was later nalized.[30] Critics
External auditors are required to issue an opinion on argued the SEC did not take adequate steps to regulate
whether eective internal control over nancial reporting and monitor this activity.[31]
was maintained in all material respects by management.
This is in addition to the nancial statement opinion regarding the accuracy of the nancial statements. The 4.4 SarbanesOxley Section 404: Assessrequirement to issue a third opinion regarding management of internal control
ments assessment was removed in 2007.
Further information: SOX 404 top-down risk assessment
4.2
SarbanesOxley Section 303: Im- The most contentious aspect of SOX is Section 404,
proper Inuence on Conduct of Audits which requires management and the external auditor to
report on the adequacy of the companys internal control on nancial reporting (ICFR). This is the most costly
a. Rules To Prohibit. It shall be unlawful, in contraven- aspect of the legislation for companies to implement, as
tion of such rules or regulations as the Commission shall documenting and testing important nancial manual and
prescribe as necessary and appropriate in the public in- automated controls requires enormous eort.[32]
terest or for the protection of investors, for any ocer
or director of an issuer, or any other person acting under Under Section 404 of the Act, management is required
the direction thereof, to take any action to fraudulently in- to produce an internal control report as part of each
uence, coerce, manipulate, or mislead any independent annual Exchange Act report. See 15 U.S.C. 7262. The
public or certied accountant engaged in the performance report must arm the responsibility of management for
of an audit of the nancial statements of that issuer for the establishing and maintaining an adequate internal conpurpose of rendering such nancial statements materially trol structure and procedures for nancial reporting. 15
U.S.C. 7262(a). The report must also contain an asmisleading.
sessment, as of the end of the most recent scal year of
b. Enforcement. In any civil proceeding, the Commission the Company, of the eectiveness of the internal conshall have exclusive authority to enforce this section and trol structure and procedures of the issuer for nancial
any rule or regulation issued under this section.
reporting. To do this, managers are generally adopting
c. No Preemption of Other Law. The provisions of sub- an internal control framework such as that described in
section (a) shall be in addition to, and shall not supersede COSO.
or preempt, any other provision of law or any rule or reg- To help alleviate the high costs of compliance, guidance
ulation issued thereunder.
and practice have continued to evolve. The Public Comd. Deadline for Rulemaking. The Commission shall --
4.6
SarbanesOxley Section 802: Criminal penalties for inuencing US Agency investigation/proper administration7
4.5
6 CRITICISM
6 Criticism
Congressman Ron Paul and others such as former
Arkansas governor Mike Huckabee have contended that
SOX was an unnecessary and costly government intrusion
into corporate management that places U.S. corporations
at a competitive disadvantage with foreign rms, driving
businesses out of the United States. In an April 14, 2005
speech before the U.S. House of Representatives, Paul
stated, These regulations are damaging American capital
markets by providing an incentive for small US rms and
foreign rms to deregister from US stock exchanges. According to a study by a researcher at the Wharton Business
School, the number of American companies deregistering from public stock exchanges nearly tripled during the
year after SarbanesOxley became law, while the New
York Stock Exchange had only 10 new foreign listings
in all of 2004. The reluctance of small businesses and
foreign rms to register on American stock exchanges is
easily understood when one considers the costs Sarbanes
Oxley imposes on businesses. According to a survey by
Korn/Ferry International, SarbanesOxley cost Fortune
500 companies an average of $5.1 million in compliance
expenses in 2004, while a study by the law rm of Foley and Lardner found the Act increased costs associated
with being a publicly held company by 130 percent. [43]
(2) willfully certies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall
be ned not more than $5,000,000, or imprisoned not A research study published by Joseph Piotroski of Stanford University and Suraj Srinivasan of Harvard Business
more than 20 years, or both.
School titled Regulation and Bonding: Sarbanes Oxley
Act and the Flow of International Listings in the Journal
4.8 SarbanesOxley Section 1107: Crim- of Accounting Research in 2008 found that following the
inal penalties for retaliation against acts passage, smaller international companies were more
likely to list in stock exchanges in the U.K. rather than
whistleblowers
U.S. stock exchanges.[44]
Section 1107 of the SOX 18 U.S.C. 1513(e) states:[41]
One of the highlights of the law was a provision that allowed the SEC to force a companys CEO or CFO to
disgorge any executive compensation (such as bonus pay
or proceeds from stock sales) earned within a year of
misconduct that results in an earnings restatement. However, according to Gretchen Morgenson of The New York
Times, such clawbacks have actually been rare, due in
part to the requirement that the misconduct must be either deliberate or reckless. The SEC did not attempt to
claw back any executive compensation until 2007, and
as of December 2013 had only brought 31 cases, 13 of
which were begun after 2010. However, according to
Dan Whalen of the accounting research rm Audit Analytics, the threat of clawbacks, and the time-consuming
litigation associated with them, has forced companies to
tighten their nancial reporting standards.[42]
9
not creating enough employers... For the third year in a
row the worlds leading exchange for new stock oerings
was located not in New York, but in Hong Kong... Given
that the U.S. is still home to the worlds largest economy,
theres no reason it shouldn't have the most vibrant equity marketsunless regulation is holding back the creation of new public companies. On that score its getting harder for backers of the Sarbanes-Oxley accounting law to explain away each disappointing year since its
2002 enactment as some kind of temporary or unrelated
setback.[51]
Praise
10
12
subcontractors.[71]
Legislative information
REFERENCES
Basel Accord
Contract Management
Agency cost
Reg FD
10
Data governance
12 References
[1] Kimmel, PhD, CPA, Paul D.; Weygandt, PhD, CPA, Jerry
J.; Kieso, PhD, CPA, Donald E. (2011). Financial Accounting, 6th Edition. Wiley. ISBN 978-0-470-53477-9.
[2] Bumiller, Elisabeth (2002-07-31). Bush Signs Bill
Aimed at Fraud in Corporations. The New York Times.
[3] Mckinsey & Company (2007). NY REPORT. Schumer
Senate website.
[4] Not Everyone Hates SarbOx.
BusinessWeek.com.
Bloomberg L.P. 28 January 2007. Retrieved 13 March
2014.
[5] Kuschnik, Bernhard; The Sarbanes Oxley Act: Big
Brother is watching you or Adequate Measures of Corporate Governance Regulation? 5 Rutgers Business Law
Journal [2008], 6495; available at http://businesslaw.
newark.rutgers.edu/RBLJ_vol5_no1_kuschnik.pdf
[6] Farrell, Greg. America Robbed Blind. Wizard Academy
Press: 2005
[7] Lucas, Nance (2004). Sarbanes Interview. Findarticles.com. Retrieved 2010-08-27.
[8] SEC Annual Budget. Sec.gov. 2009-06-23. Retrieved
2010-08-27.
11
See also
GlassSteagall Act
Information technology audit
Information technology controls
ISO/IEC 27000-series
11
[16] Study and Recommendations on Section 404(b)". Securities and Exchange Commission, April 2011
[38] SarbanesOxley: Progressive Punishment for Regressive Victimization, 44 Hous. L. Rev. 95 (2007)". Papers.ssrn.com. Retrieved 2010-08-27.
[39] SEC Press Release:Final Stage of Section 404 of
SarbanesOxley to Begin in June. Sec.gov. Retrieved
2010-08-27.
[40] Internal control over nancial reporting in exchange act
periodic reports of non-accelerated lers. SEC.gov. Retrieved 2010-09-15.
[41] Stephen M. Kohn, Michael D. Kohn, and David K. Colapinto (2004). Whistleblower Law: A Guide to Legal
Protections for Corporate Employees. Praeger Publishers. ISBN 0-275-98127-4
[42] Morgenson, Gretchen (2013-12-29).
Clawbacks?
They're Still a Rare Breed. The New York Times.
[43] Repeal Sarbanes-Oxley! Ron Paul, April 14, 2005
[44] Regulation and Bonding: The Sarbanes-Oxley Act and
the Flow of International Listings. Journal of Accounting Research. May 2008. doi:10.1111/j.1475679X.2008.00279.x.
[45] Newt Gingrich,David W. Kralik (2008-11-05).
Gingrich. Sfgate.com. Retrieved 2010-08-27.
[46] Hoovers IPO Scorecard Reveals Only Slight Growth in
2007. Hoovers.com. 2008-01-04. Retrieved 2012-0613.
[47] Hoovers IPO Analysis For 2001 Shows Resurgence Of
Not-Coms | Hoovers: The most comprehensive business info available. Hoovers.com. 2002-01-03. Retrieved 2010-08-27.
[48] Number of IPOs in 2004 Increased by 195%
[30] Policy Statement: Interagency Statement on Sound Practices Concerning Elevated Risk Complex Structured Finance Activities (PDF). Retrieved 2010-08-27.
[31] Koniak, Susan P.; Cohen, George M.; Dana, David A. &
Ross, Thomas (April 3, 2010), How Washington Abetted
the Bank Job, New York Times
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14
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