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The Sarbanes-Oxley Act Public Law 107-204 (JFZ edited)

The Sarbanes-Oxley Act Public Law 107-204 (JFZ edited). The “Perfect Storm”. Unethical Behavior Fraudulent Activity (WorldCom, Enron, etc.) Downturn in the Economy Massive Business Failures Audit Failures Loss of Investor Faith in the Capital Markets

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The Sarbanes-Oxley Act Public Law 107-204 (JFZ edited)

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  1. The Sarbanes-Oxley ActPublic Law 107-204 (JFZ edited)

  2. The “Perfect Storm” • Unethical Behavior • Fraudulent Activity (WorldCom, Enron, etc.) • Downturn in the Economy • Massive Business Failures • Audit Failures • Loss of Investor Faith in the Capital Markets Result: The most significant legislation affecting the accounting profession since 1934

  3. Sarbanes-Oxley Act • Law was enacted on July 30, 2002 • Created the Public Company Accounting Oversight Board (PCAOB), funded by accounting firms and registrants • Revised “Corporate Governance” standards • Creates new federal crimes related to fraud • Significantly increases criminal penalties for violations of the securities laws

  4. Public Company Accounting Oversight Board • 5 members must be full-time and independent. Requires 2 CPAs (but only 2) to serve. • PCAOB is responsible for: • Oversight of the auditors of public companies • Conducting inspections of and discipline of those auditors • Enforcing compliance with law • Establishing and/or adopting auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers

  5. Corporate Governance Revisions w/ “Sarbox” • CEO & CFO must establish Internal Controls • Auditors must form an opinion as to the adequacy of these internal controls (as established by mgmt) • CEO & CFO must “certify” financial statements • Potential $5mm fine and 20 years prison for fraud • Mgmt must establish a company Code of Ethics • Mgmt must establish a “hotline” or other mechanism to allow anonymous (i.e. “Whistleblower”) reporting of fraudulent activities.

  6. Sarbanes-Oxley Act • Auditor Independence, Partner Rotation & Other • Prohibits accounting firms from performing certain non-audit services for audit clients • Requires audit partner and review partner rotation every 5 years (8-2011 PCAOB proposal to rotate auditor firms entirely) • Audit firm cannot perform audit if CEO, CFO, controller, chief accounting officer, etc. was employed by the company 1-year prior to the start of the audit • Prohibits most director and officer loans Overall, the law applies to public firms, but represents “best practices” that effectively impact private firms.

  7. The Sarbanes-Oxley ActPublic Law 107-204

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