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Sarbanes-Oxley Act of 2002

Sarbanes-Oxley Act of 2002. Benefits of Act. Three quarters of the financial executives in the Oversight Systems survey said that their company had realized a benefit from Sarbanes-Oxley compliance. The main ones were that it: Ensures the accountability of individuals involved in financial

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Sarbanes-Oxley Act of 2002

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  1. Sarbanes-Oxley Act of 2002

  2. Benefits of Act • Three quarters of the financial executives in the Oversight Systems survey said that their company had realized a benefit from Sarbanes-Oxley compliance. The main ones were that it: • Ensures the accountability of individuals involved in financial • reports and operations. • Decreases the risk of financial fraud. • Reduces errors in their financial operations. • Improves the accuracy of financial reports. • Empowers the board audit committee by providing it with • deeper information. • Strengthens investors’ view of the company. Sarbanes-Oxley Act of 2002

  3. Section 3: Commission Rules and Enforcement • a violation of this Act is treated as a violation of the ’34 Act • a violation of this Act is subject to the same penalties that may be imposed for violations of the ‘34 Act Sarbanes-Oxley Act of 2002

  4. Section 101: Board Membership • five financially-literate members • five-year terms • serve on full-time basis • two must be CPAs • three must never have been CPAs Sarbanes-Oxley Act of 2002

  5. Section 101: Duties of the Board • register public accounting firms • conduct inspections of accounting firms and impose appropriate sanctions Sarbanes-Oxley Act of 2002

  6. Section 102: Registration and Funding • public accounting firms must be registered with the Board in order to audit a public company • CPA firms must pay a registration fee and an annual fee • the Board shall establish an annual accounting support fee paid by issuers Sarbanes-Oxley Act of 2002

  7. Section 103: Standards and Rules • establish, or adopt by rule, auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers • the Board must cooperate with groups designated to issue standards • the Board may adopt those standards, or modify, amend, repeal, or reject those standards • registered CPA firms must maintain for a period of not less that seven years work papers in sufficient detail to support the conclusions reached in the audit report Sarbanes-Oxley Act of 2002

  8. Section 103: Standards and Rules (continued) • the Board must require a 2nd partner review of audit reports • the Board must adopt a standard to implement an internal control review requiring the auditor to evaluate whether the internal control structure and procedures include records that accurately and fairly reflect the transactions of the issuer, provide reasonable assurance that the transactions are recorded in a manner that will permit the preparation of financial statements in accordance with GAAP, and the report must include a description of any material weaknesses in the internal controls Sarbanes-Oxley Act of 2002

  9. Section 104: Inspections of Registered CPA Firms • annual review required if annually audit more than 100 issues • review every three years otherwise Sarbanes-Oxley Act of 2002

  10. Section 105: Investigations • sanctions can be imposed by the Board on a firm if it fails to reasonably supervise any associated person with regard to auditing or quality control procedures Sarbanes-Oxley Act of 2002

  11. Section 106: Foreign Public Accounting Firms • foreign accounting firms who audit a U.S. company are subject to the Act • this includes foreign firms that do some audit work that is relied on by the primary auditor Sarbanes-Oxley Act of 2002

  12. Section 107: Commission Oversight • the SEC has oversight and enforcement authority over the Board Sarbanes-Oxley Act of 2002

  13. Section 108: Accounting Standards • the SEC will recognize as GAAP any principles that are established by a standard-setting body that meets the bill’s criteria Sarbanes-Oxley Act of 2002

  14. Section 201: Prohibited Activities for Auditors • it is unlawful for a registered CPA firm to provide any non-audit service to an issuer contemporaneously with the audit • non-audit services include: bookkeeping, IS design and implementation, appraisal or valuation services, actuarial services, internal audit outsourcing, HR functions, broker or investment services, legal services, and any other service that the Board determines is impermissible • other non-audit services (including tax services) are not unlawful if they are pre-approved by the audit committee • the pre-approval requirement is waived for other non-audit services if the aggregate amount of such services is less than 5% of total fees paid by the issuer to the firm (de minimis rule) Sarbanes-Oxley Act of 2002

  15. Section 203: Audit Partner Rotation • the lead auditor or coordinating partner and the reviewing partner must rotate off the audit every five years Sarbanes-Oxley Act of 2002

  16. Section 204: Auditor Reports to Audit Committees • the CPA firm must report to the audit committee all critical accounting policies and practices to be used, all alternative treatments of financial information within GAAP that have been discussed with management, ramifications of the use of alternative disclosures and treatments, and the treatment preferred by the firm Sarbanes-Oxley Act of 2002

  17. Section 206: Conflicts of Interest • the CEO, CFO, Controller, Chief Accounting Officer, or any person in an equivalent position cannot have beenemployed by the company’s audit firm during the 1-year period preceding the audit Sarbanes-Oxley Act of 2002

  18. Section 207: Study • the GAO will do a study on the potential effects of requiring the mandatory rotation of audit firms • GAO issued report November 2003 • survey of Fortune 1000 firms found almost all believe cost of rotation would exceed benefits • most believe partner rotation will achieve the intended benefits of firm rotation • GAO believes several years’ experience with Act is needed before can make final decision Sarbanes-Oxley Act of 2002

  19. Section 209: Consideration by State Regulatory Authorities • state regulators are directed to make an independent determination as to whether the Boards standards shall be applied to small and mid-size non-registered accounting firms • Several states are seeking to duplicate or extend the provisions of the Act to private companies in their states Sarbanes-Oxley Act of 2002

  20. Section 301: Audit Committees • each member of the audit committee must be independent • the audit committee is directly responsible for the appointment, compensation, and oversight of the work of the CPA firm Sarbanes-Oxley Act of 2002

  21. Section 302: Corporate Responsibility • the CEO and CFO must prepare a statement to accompany the audit report to certify the appropriateness of the financial statements and disclosures contained in the report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer Sarbanes-Oxley Act of 2002

  22. Section 304: Forfeiture of Bonuses and Profits • if restated financial statements are required because of material noncompliance with reporting requirements, the CEO and CFO must reimburse the issuer for any bonus or other incentive-based or equity-based compensation received during the 12 months following the issuance of the report Sarbanes-Oxley Act of 2002

  23. Section 401: Disclosures • each financial report must reflect all material correcting adjustments that have been identified by the CPA firm • all off-balance sheet transactions with unconsolidated entities must be disclosed Sarbanes-Oxley Act of 2002

  24. Section 402: Loans to Executives • it is unlawful for an issuer to extend credit to any director or executive officer Sarbanes-Oxley Act of 2002

  25. Section 404: Management Assessment of Internal Controls • each annual report of an issuer must contain an internal control report • the report must state: management’s responsibility for establishing and maintaining an adequate internal control structure and an assessment of its effectiveness • the auditor must attest to the assessment made by the management of the issuer • issuers must report to the SEC whether they have adopted a code of ethics for their senior financial officers Sarbanes-Oxley Act of 2002

  26. Section 701: GAO Study • the GAO must conduct a study regarding the consolidation of public accounting firms since 1989 to determine the impact of the consolidation • report issued in September 2003 • Big 4 audit 78% of, and 99% of annual sales of, public companies • survey found most companies satisfied with their CPA firm and 50% had same firm ≥ 10 • 50% of respondents believe past consolidation had some influence on fees, but little influence on audit quality Sarbanes-Oxley Act of 2002

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