Team1 so xpresentation
- 1. 1SARBANES-OXLEY ACT OVERVIEWAugust 23, 2010Team One I2MBA11Jeanetta Brown, Chris Caro, Brian Ignatowski, Matt Johnson, Bobby Reeder
- 2. 2Sarbanes-Oxley ActPassed in July 2002 by a House vote of 423-3 and a Senate vote of 99-0Also known as the “Public Company Accounting Reform and Investor Protection Act of 2002”Frequently called SOX or Sarbox
- 3. 3Why Sarbanes-Oxley Act?Federal law passed in response to a number of major corporate and accounting scandals (Enron, Tyco International, WorldCom).Ex: WorldCom overstated its earnings by $72 billion dollars over 5 quarters; Enron execs receiving large bonuses based on company performance while draining the pension funds.
- 4. 4Sarbanes-Oxley ActThe scandals resulted in a decline in the public’s trust in accounting and corporate reporting practices.Congress decided to “be the hero” by stepping in and passing new law F-A-S-T.The Corporate and Auditing Accountability, Responsibility, and Transparency Act was ‘in the works’ when Sen. Sarbanes and Rep. Oxley stepped in with a more comprehensive, tougher law for accounting and reporting oversight.
- 5. 5Who enforces SOX?Public Company Accounting Oversight Board (PCAOB)Securities and Exchange CommissionIntended to be somewhat Self-Regulating
- 6. 6SOX The Act contains 11 Titles (sections) and is very wide reaching.Imposed on Accounting Firms, Audit Firms, Public Company Board of Directors, and Public Company Management Addresses oversight, auditor independence, corporate governance, enhanced financial disclosure, enhanced ‘insider’ disclosure, professional conduct for attorneys, accountants, and executive management, etc.
- 7. 7Definitions / Key ComponentsPublic Company - Traded on a stock exchange, has a board of directors, investors and management, required to file periodic financial statements (10-K, 10-Q) with the SECAudit Committee – sub-committee of a public company’s board of directors Auditors – Accounting firm/company who audits public company’s financial records for SEC filings and attests to their accuracy
- 8. 8Definitions / Key ComponentsInternal vs. Independent AuditorInsider – Director, officer, >10% shareholder, or other person with access to material, non-public information about a CompanyIndependent Board Member – member not receiving any consulting, advisory, or other compensatory fee from the company, other than for service on the board, and not being an affiliated person of the company, or any subsidiary thereof
- 9. 9Wow. Where do we start??Section 101-109: Creation of PCAOBEstablished to oversee the audits of public companiesSets forth composition of the Board (5 members)All public accounting firms must register with the Board Board must create auditing ‘standards’, conduct inspections/investigations, enforce compliance with SOX, and establish a budgetSEC is to oversee the Board and can give the Board additional duties / responsibilities
- 10. 10Major Sections of SOX: REPORTINGUpgraded Disclosures KEY to SOXExecutive Management Certifications – Certify that all financial info contained in company filings materially reflects company’s financial position (302)Enhanced disclosures of off-balance sheet transactions, pro forma financial info, and material correcting adjustments (401)
- 11. 11REPORTINGManagement takes responsibility for and assesses the effectiveness of internal controls and procedures (404)Rules for ‘real time’ disclosures of material changes in financial conditions or operations, including early time for company filings (409)Additional 8K filing requirementsTiming for public disclosures shortened
- 12. 12Major Sections of SOX: ROLESStrengthened Corporate Governance KEY to SOXIncrease communications between auditor and Audit Committee on accounting policies and practices (204)Audit Committee now made up of only independent directors, directly responsible for selecting auditor, can have independent advisors (lawyers, accountants) reporting to Audit Committee (301)
- 13. 13ROLESProhibits Company loans to Executive Officers and Directors (402) No more personal piggybank Conflict of Interest ProvisionCompany must disclose its make up and financial expertise on Audit Committee (407)Committee members must meet certain qualifications/criteria and must have at least one financial “expert”
- 14. 14Major Sections of SOX: CONDUCTExpanded Insider Accountability KEY to SOXUnlawful for Director/Officer to manipulate or mislead any independent auditor (303)Prohibits Insider trading during blackout dates (306)Accelerated reporting of trades by Insiders to “within two business days” (403)Form 4 reporting
- 15. 15CONDUCTCompany must publicly disclose Code of Ethics/Conduct and keep on website (406)Unlawful to retaliate against Whistleblowers who provide evidence of fraud or non-compliance with the Act (806)Professional Conduct Standards for Attorneys working for/with Public Companies (307)“Up the Chain” reporting
- 16. 16Major Sections of SOX: ENFORCEMENTIncreased Oversight KEY to SOXAll public accounting firms must register, pay fees, and supply info to PCAOB (101, 102)PCAOB to conduct investigations into audit company compliance (104)
- 17. 17ENFORCEMENTIndependent Auditor to attest to the assessments made by management in reference to internal controls (404)Auditors have to verify accurate and effectiveness of internal controls and managements testing thereofExpanded SEC review of 10-Ks and 10-Qs at least once every 3 years for every company (408)
- 18. 18Major Sections of SOX: RELATIONSHIPSHeightened Auditor Independence KEY to SOXProhibits ‘independent’ auditors from providing 9 specific non-audit services (201)Examples: investment banking, valuation opinions, legal services, tax servicesRequires Pre-Approval by Audit Committee of all services provided by independent auditor (202)
- 19. 19RELATIONSHIPSRequires a lead auditor and reviewing audit partner rotation every 5 years (203)Theory is that changing auditors every so often puts a ‘fresh pair of eyes’ on a company’s financialsRequires “cooling off” period of one year before an employee of an audit firm can be hired into executive positions with the audited company (206)
- 20. 20Major Sections of SOX:PENALTIESBroadened Sanctions KEY to SOXForfeiture of bonuses or profits on the sale of securities by CEO or CFO if restatement in financial disclosures occurs due to material non-compliance with SOX (304)Increased (and heavily enforced) criminal penalties for CEO/CFO who certifies a financial or tax filing in bad faith (906)Up to $5M fine and up to 20 yrs in prison or both.
- 21. 21PENALTIESLonger Statute of Limitations for private securities fraud lawsuits Increased Criminal PenaltiesExtends prison term for “knowingly defrauding” to 25 yrsCreates criminal penalties for destroying audit-related docs before record retention time period expiresAmends US Sentencing Guidelines related to white-collar crimes, securities fraud, and accounting fraudMakes it more ‘personal’ to those committing the fraud/crimes
- 22. 22Internal ControlsTwo certifications as to internal controls implemented by SOXCivil penaltiesCriminal penaltiesSec 302 mandates a set of internal procedures to ensure accurate financial disclosure.
- 23. 23INTERNAL CONTROLSThe signing officer must certify 1.) that he/she is responsible for establishing and maintaining internal controls, and 2.) that she/he has designed the internal controls to ensure that material information relating to the company is made known to the officers particularly during the period in which a periodic report is being preparedThe officer must have “evaluated the effectiveness of the company’s internal controls within 90 days prior to the report” and have “presented in the report conclusions about the effectiveness of the internal controls based on the evaluation”Adds significant personal responsibility and liability to CEO/CFO for their company’s public financial reports
- 24. 24INTERNAL CONTROLSAdditionally, outside auditors must attest to management’s internal controls assessment (i.e. do they agree?)Major challenges: Controls within IT systems Electronic data management, electronic document retention, and key operational processes kept on IT systemsImplementation Costs
- 25. 25Future of SOXWidely criticized for its far-reaching effectsMaking some sectors significant money (attorneys, CPAs, SOX consultants), BUT those same sectors are taking on significant liabilityCost to business high, but comfort to investors also high
- 26. 26Future of SOXThe result: SOX IS NOT GOING ANYWHERE!!
- 27. Many CPAs have become affectionate towards SOXWatch the Singing CPA in the You Tube video below27Future of SOXhttp://www.youtube.com/watch?v=n2ylBKOURtw&feature=player_embedded ¹¹ Steven Zelin, (12 July 2007), Singing CPA Sings Happy Birthday to Sarbanes-Oxley . YouTube. http://www.youtube.com/watch?v=n2ylBKOURtw&a.
- 28. 28Resources for more detail on SOXwww.legalarchiver.org/soa.htm = Full text of the statuteSEC websiteSOX compliance personnelCorporate Legal Departments