Sarbanes Oxley Act

1. Sarbanes Oxley Act

2. WHY? • Public Company Accounting Reform and Investor Protection Act of 2002 • Response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Peregrine Systems and WorldCom. • Significant problems – conflict of interest and incentive compensation practices • Auditing firms – significant non-audit or consulting work – far more lucrative than auditing engagement

3. WHY? • These scandals resulted in a decline of public trust in accounting and reporting practices. • Wide-ranging and establishes new or enhanced standards for all U.S. public company boards, management, and public accounting firms.

4. General Provisions of S/Ox • 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 • Not applicable to NFP (not for profit) or foreign listed companies

5. Governing Members • Quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies.

6. PCAOB’s Duties • Write audit standards, temporarily they have adopted the AICPA’s (American Institute of Certified Public Accountants)‏ • 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 • CPE (Continuing Professional Education)‏ • Review company disclosures and financial statements at least every three years

7. The Act also covers issues such as • auditor independence – limit conflicts of interest, • corporate responsibility – senior executives take individual responsibility for accuracy and completeness, • internal control assessment, and • enhanced financial disclosure – timely reporting of material changes • Five Members, three of whom must NOT be CPAs • If the chair is a CPA, that person must be out of the business of auditing for the prior 5 years

8. Provisions for CPA firms • Maintain audit papers for 7 years • Managing Partner rotation every 5 yrs. • Second partner rotation every 5 yrs. • Audit manager rotation every 7 years • Reports to audit committee • All material findings • Disclose fees for all types of services in proxy statement • Review disclosures of firm • Attest to Internal Control of firm

9. Independence Rules • Can’t do other types of work for clients, - Other work needs pre-approval by audit committee • Can’t do audit if CEO, CFO from their firm, 1 year wait period

10. Audit Committee Reports • Operating committee of a publicly held company. Committee members are normally drawn from members of the Company's board of directors. An audit committee of a publicly traded company in the United States is composed of independent or outside directors. • Reports • All critical accounting policies • Alternate treatments • Internal Control findings • Material weaknesses

11. Corporate Provisions • Corporate Officers • Certify means they have • Reviewed the reports • Reviewed internal control • Certify that there are no material weaknesses • Certify that there is no fraud • Report fairly presents the financial condition of the company

12. Corporate Provisions • Corporate Officers • Can’t influence audit • No trading during blackout periods • In pro-formas, no material untrue statements, reconciliation • No officer loans • File any trading information within two business days • Code of ethics • Disclose off-balance sheet financing • Disclose any non-GAAP financial measures

13. Corporate Provisions • Audit Committee of Board • Responsible for oversight of external audit • Be independent of the firm • Set up whistle-blowing provisions • One must be financial expert

14. Penalties General penalties • If alter, destroy, cover-up or falsify documents with objective to hinder investigation – fines and up to 20 years • Give back to firms any bonuses, incentive compensation or equity based compensation earned within 12 months • 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

15. Penalties Audit firms • Temporary suspension from industry • Temporary or permanent revocation of license • Can’t go to another firm if suspended or license revoked • Fines of up to $100,000 personal for each violation, firm up to $2 m • If intentional up to $750,000 personal, firm up to $15 m • Destroy working papers within 5 years – fine and up to 10 years.

16. Arthur Andersen LLP, based in Chicago, was once one of the "Big Five" accounting firms (the other four are PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG), performing auditing, tax, and consulting services for large corporations. • In 2002 the firm voluntarily surrendered its licenses to practice as Certified Public Accountants in the U.S. pending the result of prosecution by the Department of Justice over the firm's handling of the auditing of Enron, the energy corporation, resulting in the loss of 85,000 jobs.