Sarbanes Oxley Act (Sox)

Corporate and Auditing

Accountability, Responsibility and
Transparency Act of 2002
Presented by:-
Akshay Jain
Aditi Chauhan
Aditya Mishra
Priya Swami
Sagar Sundik
Prasen Bhosale
Introduction
SOX was signed into law July 30, 2002 to protect investors by
improving the reliability and accuracy of disclosures made
pursuant to the securities laws.
SOX is also known as 'Public Company Accounting Reform
and Investor Protection Act' (in the Senate) and 'Corporate
and Auditing Accountability and Responsibility Act' .
It was named after sponsors U.S. Senator Paul Sarbanes (D-
MD) and U.S. Representative Michael G. Oxley (R-OH).


Objectives
In response to the Arthur Anderson, Enron and WorldCom scandal, the
Sarbanes-Oxley 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.



Reasons for Sarbanes Oxley Act 2002
A variety of complex factors created the conditions and culture in which a series of large
corporate frauds occurred between 20002002. The spectacular, highly publicized frauds
at Enron, WorldCom, and Tyco exposed significant problems with conflicts of interest and incentive
compensation practices. The analysis of their complex and contentious root causes contributed to the passage
of SOX in 2002.

Problems:
Auditor conflicts of interest;
Boardroom failures;
Securities analysts' conflicts of interest;
Inadequate funding of the SEC;
Banking practices;
Executive compensation and;
Internet bubble.

To Whom Does SOX Apply?

SOX is generally applicable to all companies, regardless of size, who are
required to file reports with the SEC under the 1934 Act or that have a
registration statement on file under the 1933 Act.
Certain SOX provisions apply only to companies listed on a national
securities exchange.
Small business issuers that file reports on Form 10-QSB and Form 10-KSB
are generally subject to SOX in the same way as larger companies.

Public Company Accounting Oversight Board
Auditor Independence
Corporate Responsibility
Enhanced Financial Disclosures
Analyst Conflicts of Interest
Commission Resources and Authority
Studies and Reports
Corporate and Criminal Fraud Accountability
White Collar Crime Penalty
Corporate Tax Returns
Corporate Fraud and Accountability
Titles of
the Act
Public Company Accounting Oversight Board
SOX established the creation of the PCAOB to oversee the audit
of public companies that are subject to the securities laws.
Created as a non-profit organization, the 5 member board
oversees audits of public companies; it is under the authority of
the sec but above other professional accounting organizations
such as the AICPA.

Provisions of PCAOB
To make rules governing audits of public companies
To make rules governing audits of public companies
To oversee audits and audit firms
Independent of federal government
Self-funded through fees assessed on CPA firms and publicly
traded companies
Regulations not applicable to not for profit or some foreign
listed companies

PCAOB Duties
Write audit standards, temporarily they have adopted the AICPAs
Register public CPA firms to do audits
Set Quality Control standards for audits
Do peer reviews of CPA firms at least every three years
Investigate and discipline
Set Continuing Professional Education requirements for auditors
Review company disclosures and financial statements at least every three
years

PCAOB Governing Members
Auditor Independence
Pursuant to SOX, the SEC has auditor independence requirements that are applicable to
all public companies, regardless of size, and include the following:
Prohibition of certain non-audit services;
Requirement of audit committee pre-approval of all audit and non-audit services;
Audit partner rotation;
Auditor reports to the audit committee;
Certain prohibited employment relationships;
Prohibited compensation.
Enhancing
Financial
Disclosure


Disclosures in periodic report.



Enhanced conflict of interest provisions.



Disclosures involving management and
principal stockholders.
Enhancing
Financial
Disclosure

Management assessment of internal
controls.


Code of ethics.


Enhanced review of of periodic
disclosures and real time disclosures.
Corporate
Responsibility

Board composition and
independence.



Audit committee requirements.



CEO/CFO certification.
Corporate
Responsibility
Improper auditor influence prohibition.



Insider trading requirement.



Reimbursement requirements and D&O
bars.
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 work papers must be kept by the auditor for at least 5 years
PCAOB AS 3 says 7 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).

Penalties
White-collar Crime Penalty Enhancements
Financial statements filed with the SEC by any public company must be certified by
CEOs and CFOs; all financials must fairly present the true condition of the issuer and
comply with SEC regulations.
Violations will result in fines less than or equal to $5 million and /or a maximum of
20 years imprisonment.
Mail fraud/wire fraud convictions carry 20 year sentences (previously 5 year
sentences).
Anyone convicted of securities fraud may be banned by SEC from holding
officer/director positions in public companies.

Penalties
Corporate Officers

Give back to firms any bonuses, incentive
compensation or equity based compensation
earned within 12 months.
Give back profit on sales during blackout
period.
False certification - $1m and up to 10 yrs.
Willful false cert. - $5 m and up to 20 yrs.
Company can hold up any payments to
officers.
Audit Firms

Temporary suspension from industry.
Temporary or permanent revocation of license.
Cant go to another firm if suspended or license
revoked.
Fines of up to $100,000 personal for each
violation, firm up to $2 millions.
If intentional up to $750,000 personal, firm up to
$15 millions.
Destroy working papers within 5 years fine
and up to 10 years.


Corporate Fraud Accountability
Destroying or altering a document or record with the intent to impair
the objects integrity for the intended use in a securities violation
proceeding, or otherwise obstructing that proceeding, will be subject to
a fine and/or up to 20 years imprisonment.
The SEC has the authority to freeze payments to any individual
involved in an investigation of a possible security violation.
Any retaliatory act against whistleblowers or other informants is
subject to fine and/or 10 year imprisonment.
Implementation of Key Provisions
Section 302: Disclosure controls.
Section 303: Improper Influence on Conduct of Audits.
Section 401: Disclosures in periodic reports (Off-balance sheet items).
Section 404: Assessment of internal controls.
Section 802: Criminal penalties for influencing US Agency investigation/proper
administration.
Section 906: Criminal Penalties for CEO/CFO financial statement certification.
Section 1107: Criminal penalties for retaliation against whistle blowers.


Criticism
An election year is not proper to overhaul a complicated area like
securities regulation.
Simply follows headlines from Enron and others with little appreciation
for systemic problems.
The efforts of SEC and other SROs is not taken into account by
Congress.
Little appreciation for markets` response to the scandals.
Many provisions are simply delegations of authority to the SEC to adopt
rules, some of them involve the SEC or the other SROs had already
undertaken rulemaking initiatives.

May cause long-term systemic harm to the competitiveness of US capital
markets.
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.
Smaller international companies were more likely to list in stock
exchanges in the U.K. rather than U.S. stock exchanges.
During the financial crisis of 20072010, critics blamed SarbanesOxley
for the low number of Initial Public Offerings (IPOs) on American stock
exchanges during 2008.
.

Praises
Former federal reserve chairman Alan Greenspan praised the Sarbanesoxley act in
2005 "the act importantly reinforced the principle that shareholders own our
corporations and that corporate managers should be working on behalf of shareholders
to allocate business resources to their optimum use.
SEC chairman Christopher cox stated in 2007: "Sarbanesoxley helped restore trust in
U.S. Markets by increasing accountability, speeding up reporting, and making audits
more independent.
Sarbanes oxley act has been praised for nurturing an ethical culture as it forces top
management to be transparent and employees to be responsible for their acts whilst
protecting whistleblowers.


Legal Challenges
A lawsuit was filed in 2006 challenging the constitutionality of the PCAOB.
The complaint argues that because the PCAOB has regulatory powers over the accounting
industry, its officers should be appointed by the President, rather than the SEC.
the United States Supreme Court unanimously turned away a broad challenge to the law, but
ruled 54 that a section related to appointments violates the Constitution's separation of
powers mandate. The act remains "fully operative as a law" pending a process correction.
the United States Supreme Court rejected a narrow reading of the SOX whistleblower
protection and instead held that the anti-retaliation protection that the Sarbanes-Oxley Act of
2002 provides to whistleblowers applies also to employees of a public company's private
contractors and subcontractors.
Conclusion
The Sarbanes-Oxley Act is perhaps the most far-reaching set of government-
enforced rules since, the SEC Act
Sarbanes-Oxley makes it easier to prosecute securities fraud, particularly financial
fraud.
One of the most direct ways in which the Act accomplishes this objective is to place
greater responsibility on senior management and directors, particularly
independent directors and audit committee members, by requiring them to take a
substantially more proactive role in overseeing and monitoring the financial
reporting process, including disclosure and reporting systems and internal controls