SARBANES-OXLEY ACT

SOX

Presented by:
Shruti Shah(151) Shyam Sundar R(152) Siddhartha Singh(153) Simran Bagga(154) Sk. Misbahul Qadir(155) Sneha Budhwar(156)

Its The Law!

What is SOX?
The Sarbanes-Oxley Act was enacted to establish new or enhanced standards for U.S. public company boards, management, and public accounting firms. 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
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Purpose of SOX..
In response to the Arthur Anderson, Enron and WorldCom debacle, the SarbanesOxley Act seeks to:

Restore the public confidence in both public accounting and publicly traded
securities.

Assure ethical business practices through heightened levels of executive awareness

and accountability. Improve corporate governance. Increase executive accountability . Increase efforts to prevent, detect, investigate and remediate fraud and misconduct.

The Enron Case..!!

As a main model to enlighten the objectives of the SOA the short timeline of
Enrons fall and the comments about the role of participants provided. Enron when its stock price was $90 in August 2000, was Americas 7th largest company

It went to chapter 11 (bankruptcy) on December 2, 2001, promptly after restating their financial reports, as largest bankruptcy reorganization in American history, the stock price at that time was 60 cents.
The most highlighted event at the collapse of the Enron is its relations with limited partnerships (Special Purpose Entity- SPEs), Executives got personal gains being on both sides (Fastow -CFO-more than $ 30 million) Enron failed to disclose the extent of these relations (off-balance sheet and related party transaction)
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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. 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.

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 with a maximum of 2 CPAs

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
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Title II Auditor Independence

Prohibits registered public accounting firms (RPAFs) who audit an issuer from performing specific non-audit services for that issuer, including but not limited to: bookkeeping, appraisal services, management/human resource functions, broker/dealer, legal/expert services,etc.
In addition to these limitations, audit functions and all other non-audit functions provided to the audit client must be pre-approved by the Board. Audit Partner rotation Lead partner on 5 years, off 5 years; other partners on 7 years, off 2

RPAFs performing audits to issuers must report to issuers audit committees about: (1) critical accounting policies to be used in the audit, (2) any written communication with management, and (3) any deviations from GAAP in financial reporting.
Prevents conflict of interest.
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Title III Corporate Responsibility

Audit Committee (committees est. by the board of a company for the purpose of overseeing financial reporting) Independence

Establishes minimum independence standards for audit committees

Independence of the audit committee crucial in that it must (1) oversee and compensate RPAF to perform audit, and (2) establish procedures for addressing complaints by the issuer regarding accounting, internal control, etc. (this lays the foundation for anonymous whistleblowing).

CEOs and CFOs must certify in any periodic report the truthfulness and accurateness of that report .

Under certain conditions of re-statement of financials due to material noncompliance, CEOs and CFOs will be required to forfeit certain bonuses and profits paid to them as a result of material mis-information.

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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

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Title V Analyst Conflicts of Interest

National Securities Exchanges and registered securities associations must adopt

rules designed to address conflicts of interest that can arise when securities analysts recommend securities in research reports.

To improve objectivity of research and provide investors with useful and reliable
information Ex: Recommendations of analysts in research reports

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Title VI Commission Resources and Authority

Increased SEC budget to $780 million

$98 million used to hire 200 employees to oversee auditors

SEC will establish rules setting minimum standards for profession conduct for attorneys practicing before it SEC has the authority to investigate and punish violators of security law

May censure, temporarily bar or deny right to practice

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Title VII Studies and Reports

US Comptroller General to conduct a study about the consolidation of public accounting
firms

The Comptroller General and/or SEC will also explore such issues as:

the role and function of credit rating agencies in the operation of the securities market, the number of securities professionals (public accountants, investment bankers,
attorneys) who have been found to have aided and abetted a violation of securities law and who have not been disciplined, all enforcement actions by the SEC regarding re-statements, violations of reporting requirements, etc., for the five year period prior to the date the Act is passed, and whether investment banks and financial advisers assisted public companies in manipulating their earnings (specifically Enron and WorldCom)

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Title VIII Corporate and Criminal Fraud Accountability

To knowingly destroy, create, manipulate documents and/or impede or obstruct federal investigations is considered felony, and violators will be subject to fines or up to 20 years imprisonment, or both
All audit report or related workpapers must be kept by the auditor for at least 5 years Whistleblower protection employees of either public companies or public accounting firms are protected from employers taking actions against them, and are granted certain fees and awards (such as Attorney fees)

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Title IX White-collar Crime Penalty Enhancements

CEOs and CFOs must certify that financial statements are accurate representations of the companys 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

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Title X Corporate Tax Returns

Federal income tax returns must be signed by the Chief Executive Officer (CEO) of the company

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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

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Audit Committee Oversight

Increased Audit Committee Oversight Responsibilities: Directly responsible for appointment, compensation and oversight of independent Auditors (SOA);) Have sole authority to appoint, compensate and oversee outside Auditor (NASDAQ) Approve, in advance, the provision by the Auditor of all permissible non-audit services

Authority to engage and determine funding for independent counsel and other advisors; company must provide funding

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Audit Committee Oversight (contd)

At least annually, obtain and review a report by the independent Auditor describing the firms internal quality control procedures; any material issues raised by the most recent internal quality control review, peer review or any inquiry or investigation within the preceding five years and assess the Auditors independence with respect to all relationships between the independent Auditor and the company (NYSE)
Discuss annual and quarterly financial statements with management and independent Auditor, including MD&A (NYSE)

Establish complaint reporting procedures/mechanism

Audit Committee must review and approve all related-party transactions (NASDAQ) Additional NYSE requirements (e.g., discussing risk assessment and risk management) 20

Audit Committee Composition

Independence
Audit Committee member not to receive any compensation other than for board or committee service Audit Committee member may not be affiliate of the company or its subsidiary Limit time non-independent Audit Committee members can serve to 2 years; prohibited from serving as chair. Cannot be company employee/family member; affirmative board determination required that in best company interests; disclosure requirements

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Audit Committee Composition (contd)

Financial Expertise
Audit Committee must include at least one financial expert.(SOA-disclosure requirement in 10K after 1/26/03) All Audit Committee members must be able to read and understand financial statements At least one member of the Audit Committee must have accounting or related financial management expertise ; consider education and experience as public accountant or Auditor or public company CFO, Controller, and sufficient financial expertise in the accounting and auditing areas specified in SOA

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Audit Committee Reporting Mechanism

Complaint Procedures:
Must establish procedures for receipt, retention and treatment of complaints regarding accounting, internal accounting controls and auditing issues. Implies reporting mechanism, record-keeping and responsive actions Provide mechanism for employees to submit concerns on a confidential, anonymous basis regarding questionable auditing or accounting matters.

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Audit Committee Pre-approvals

Must pre-approve any non-auditing service to be performed by outside auditors.

Disclose such non-auditing approvals in periodic reports (10K, 10Q)

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