SarbanesOxley Act

1
Sarbanes-Oxley Act
2
What Is It?

• Act passed by Congress in response to the recent
  and continuing corporate scandals.
• Signed into law July 30, 2002.
• Established sweeping changes dealing with
  financial reporting, conflicts of interest,
  corporate ethics, and oversight of the accounting
  profession.
• Applies to public companies.

3
Key Provisions
3
4
Sections 101, 102 and 104 Public Company
Accounting Oversight Board

• The act requires the establishment of a Public
  company Accounting Oversight Board
• All accounting firms that audit public companies
  must register with the board.
• Board will establish rules governing substance
  and content of audits.
• Inspections of auditing firms will be conducted
  by the Board.

5
Section 204 - Communications

• Auditor Communications with Audit Committees
• Increases communications between auditor and
  audit committee on critical accounting policies
  and practices, alternative accounting treatments,
  and other material written communications with
  management.

6
Section 301- Audit Committee Standards

• Makes audit committee directly responsible for
  the appointment, compensation, and oversight of
  auditors
• Limits audit committee membership to independent
  directors.
• Requires procedures for complaints from
  whistleblowers and others.
• Requires company to provide audit committee with
  funding for auditors and other advisors as audit
  committee deems necessary.

7
Section 302 Certifications

• Certifications must include
• CEO and CFO have reviewed the periodic filing and
  to their knowledge, information provided presents
  fairly the financial results of the company.
• CEO and CFO have established and maintain
  disclosure controls and procedures that ensure
  that all material information is made known to
  them.
• CEO and CFO have evaluated the effectiveness of
  the disclosure controls and procedures as of 90
  days prior to the date of the periodic report and
  presented their conclusions in the report.
• CEO and CFO have disclosed all internal control
  deficiencies and any fraud, whether or not
  significant, that involves management or other
  employees who have a significant role in the
  companies internal controls.
• Statement of whether the company has established
  a Code of Ethics for senior financial officers.
• Other miscellaneous items.

8
Section 304 Forfeiture of Certain Bonuses and
Profits

• Requires CEO and CFO to forfeit certain bonuses
  received and profits realized on the sale of
  securities following a financial report that is
  later restated due to material non-compliance
  with securities laws, as a result of misconduct.

9
Section 402 Executive Loans

• Prohibits personal loans to officers and
  directors.

10
Section 403 Accelerated Reporting

• Requires accelerated reporting of trades by
  insiders.
• Transactions must be reported via EDGAR by the
  end of the second business day following
  execution of a transaction.

11
Section 404 Evaluating Internal Controls

• Requires a public company to document and
  evaluate the effectiveness of internal controls
  and procedures for financial reporting.
• Elements of internal control.
• Internal control environment
• Risk assessment
• Control activities
• Information and communication
• Monitoring
• Effective internal controls provide reasonable
  assurance that risk is manageable.
• Effective internal controls provide clear
  definition of responsibilities and
  accountabilities.

12
(Contd)

• Requires external auditor to attest to
  managements assertions in the annual report.
• Annual report to include managements assessment
  of the effectiveness of internal control over
  financial reporting.
• Effective for fiscal years ending after June 30,
  2004.

13
Section 409 Real Time Issuer Disclosures

• Rapid and current disclosure of material
  changes in financial condition or operations.

14
Section 906 Certifications

• Requires that each periodic report filed with the
  SEC (Securities and Exchange Commission) be
  accompanied by the certification of the CEO and
  CFO that
• The report fully complies with applicable
  Security Exchange Act rules.
• The information contained in the report fairly
  presents, in all material respects, the financial
  condition and results of operations of the
  company.
• Fraudulent certifications carry penalties!
• 1 million fine
• Up to 10 years in prison
• Willful falsification carries a steeper penalty
• 5 million fine
• Up to 20 years in prison

15
Sections 1102 802 - Penalties

• Record tampering or otherwise impeding an
  official proceeding and Criminal penalties for
  altering documents
• Criminal penalties for corruptly altering or
  destroying documents or otherwise impeding an
  official proceeding.
• Expands criminal penalties for whoever alters
  documents, including audit reports, to obstruct
  an investigation.