The Sarbanes-Oxley Act of 2002 cracks down on corporate fraud.

It created the Public Company

Accounting Oversight Board to oversee the accounting industry. It banned company loans to executives
and gave job protection to whistleblowers. The Act strengthens the independence and financial literacy of
corporate boards. It holds CEOs personally responsible for errors in accounting audits.

Background
The Sarbanes-Oxley Act of 2002 also known as the Public Company Accounting Reform and Investor
Protection Act of 2002, and commonly called “SOX” or “Sarbox”, is a United States federal law enacted
on July 30, 2002 in response to a number of major corporate and accounting scandals.
As of 2006, all public companies are required to submit an annual assessment of the effectiveness of
their internal financial auditing controls to the U.S. Securities and Exchange Commission (SEC).
Additionally, each company’s external auditors are required to audit and report on the internal control
reports of management, in addition to the company’s financial statements.

Who Needs To Comply

A YES to any of these questions and SOX Affects Your Company

 Is your company publicly traded?

The SOX legislation establishes new or enhanced standards for all U.S. public company boards,
management, and public accounting firms. For compliance with Section 404, public companies with a
market capitalization over US $75 million needed to have their financial reporting frameworks
operational for their first fiscal year-end report after November 15, 2006, then for all quarterly reports
thereafter. For smaller companies, compliance is required for the first fiscal yearend financial report,
then for all subsequent quarterly financial reports after July 15, 2006.

 Is your company private, but planning an initial public offering (IPO)?

SOX does not apply to privately held companies, although those considering filing for an initial public
offering (IPO) must demonstrate a SOX compliant framework.

Section 404 and Certification

Section 404 requires corporate executives to certify the accuracy of financial statements personally. If
the SEC finds violations, CEOs could face 20 years in jail. The SEC used Section 404 to file more than
200 civil cases. But only a few CEOs have faced criminal charges.
Section 404 made managers maintain “adequate internal control structure and procedures for financial
reporting." Companies' auditors had to “attest” to these controls and disclose “material weaknesses."
(Source: "Sarbanes-Oxley," The Economist, July 26, 2007.)

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Requirements
SOX created a new auditor watchdog, the Public Company Accounting Oversight Board. It
set standards for audit reports. It requires all auditors of public companies to register with them. The
PCAOB inspects, investigates and enforces compliance from these firms. It prohibits accounting firms
from doing business consulting with the companies they are auditing.

The Benefits of the Sarbanes-Oxley Act

The original purpose behind the effort that produced SOX was to restore public confidence in the
financial statements prepared by public companies. One of the main of objectives of the internal control
must be to produce reliable financial information as the more effective internal controls are, the more
reliable the information produced will be. As one of SOX’s requirements is the maintenance of effective
internal controls one should reasonably expect that reliable information would be produced. Support
for this expectation can be found in several studies.

Key Provisions of the Sarbanes-Oxley Act

of 2002
AUDITS AND AUDITORS
 Establishes Public Company Accounting Oversight Board
 Mandatory disclosure of non-auditing services to shareholders
 Committee members must be independent
 Auditing firm must report to Audit Committee on specified matters

 Prohibits an audit firm from providing audit services to a public company if any member of
senior management of the issuer had been associated with the auditing firm for at least one
year

FINANCIAL REPORTING

 Immediately effective requirement for CEO and CFO to certify annual and quarterly reports,
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 SEC may bar officers and directors if “unfit to serve” (lowers standard from “substantially
unfit”)

 Prohibits director or executive officer trading during blackout periods and imposes strict
liability for any trading profits; amends ERISA regarding blackout periods (amendments
effective in 180 days)ubject to criminal and fines and imprisonment

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MANDATES ADDITIONAL SEC RULES DEALING WITH

 Disclosure of off-balance sheet transactions (within 180 days)

 Proforma presentations (within 180 days)

 Code of ethics for senior financial officers and immediate Form 8-K reporting of waivers and
changes in the code of either (must be proposed within 90 days and finalized within 180 days)
Disclosure of whether a “financial expert” is on the Audit Committee (must be proposed within
90 days and finalized within 180 days)

OTHER CHANGES
 Whistleblower protection

 Nondischargeability of some securities laws related debt in bankruptcy

 Enhanced white collar crime penalties, including for interference with an audit or
investigation

 Enhanced securities laws violation penalties

 Penalties for document destruction

MANDATES STUDIES ON

 Adoption of a principles-based accounting system for U.S. (SEC)

 Audit firm rotation (GAO)

 Off-Balance Sheet transactions (SEC)

 Consolidation in the accounting industry (GAO)

 Credit rating agencies (SEC)

 Violation by securities professionals (SEC)

 Restatement of financial statements (SEC)

 Investment banks and financial advisers roles in earnings manipulation (GAO)

 Civil penalties and disgagement funds for relief of investors (SEC)

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