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Presentation on Sarbanes Oxley Act 2002

Prepared by: Jalpa Choksi (2044) Moinuddin Shaikh (2045)

The SarbanesOxley Act- 2002 also known as the 'Public Company Accounting Reform and Investor Protection Act' and 'Corporate and Auditing Accountability and Responsibility Act More commonly called Sarbanes Oxley, Sarbox or SOX, is a United States federal law that set new or enhanced standards for all U.S. public company boards, management and public accounting firms.

It is named after sponsors U.S. Senator Paul Sarbanes and U.S. Representative Michael G. Oxley.
In addition, penalties for fraudulent financial activity are much more severe.

Also, SOX increased the independence of the outside auditors who review the accuracy of corporate financial statements, and increased the oversight role of boards of directors. The act was approved by the House by a vote of 423 in favor, 3 opposed, and 8 abstaining and by the Senate with a vote of 99 in favor, 1 abstaining. President George W. Bush signed it into law, stating it included "the most far-reaching reforms of American business practices. SOX-type laws have been subsequently enacted in Japan, Germany, France, Italy, Australia, Israel, India, South Africa, and Turkey.

Legislative History
Introduced in the House as "Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002" by Mike Oxley on February 14, 2002. Committee consideration by: House Financial Services, Senate Banking Passed the House on April 24, 2002 Passed the Senate as the "Public Company Accounting Reform and Investor Protection Act of 2002" on July 15, 2002 Reported by the joint conference committee on July 24, 2002; agreed to by the House on July 25, 2002 and by the Senate on July 25, 2002 Signed into law by President George W. Bush on July 30, 2002

Paul Sarbanes and Michael G. Oxley, the co-sponsors of the SarbanesOxley Act.

SOX has been a "godsend" for improving the confidence of fund managers and other investors with regard to the veracity of corporate financial statements. 1. Public Company Accounting Oversight Board (PCAOB) 2. Auditor Independence 3. Corporate Responsibility 4. Enhanced Financial Disclosures 5. Analyst Conflicts of Interest 6. Commission Resources and Authority 7. Corporate and Criminal Fraud Accountability 8. White Collar Crime Penalty Enhancement 9. Corporate Tax Returns 10. Corporate Fraud Accountability

Analyzing the cost-benefits of SarbanesOxley

Compliance costs

FEI Survey (Annual): Finance Executives International (FEI) provides an annual survey on SOX Section 404 costs. These costs have continued to decline relative to revenues since 2004.
The 2007 study indicated that, for 168 companies with average revenues of $4.7 billion, the average compliance costs were $1.7 million. The 2006 study indicated that, for 200 companies with average revenues of $6.8 billion, the average compliance costs were $2.9 million down 23% from 2005.

Cost for decentralized companies (i.e., those with multiple segments or divisions) were considerably more than centralized companies.
Foley & Lardner Survey (2007): This annual study focused on changes in the total costs of being a U.S. public company, which were significantly affected by SOX. Such costs include external auditor fees, directors and officers insurance, board compensation, lost productivity, and legal costs. Nearly 70% of survey respondents indicated public companies with revenues under $251 million should be exempt from SOX Section 404.

Benefits to firms and investors

Arping/Sautner (2010): This research paper analyzes whether SOX enhanced corporate transparency. Corporate transparency is measured based on the dispersion and accuracy of analyst earnings forecasts. Skaife/Collins/Kinney/LaFond (2006): This research paper indicates that borrowing costs are lower for companies that improved their internal control, by between 50 and 150 basis points (.5 to 1.5 percentage points). Lord & Benoit Report (2006): A study of a population of nearly 2,500 companies indicated that those with no material weaknesses in their internal controls, or companies that corrected them in a timely manner, experienced much greater increases in share prices than companies that did not.

Institute of Internal Auditors (2005): The research paper indicates that corporations have improved their internal controls and that financial statements are perceived to be more reliable.

Implementation of key provisions

Sarbanes-Oxley Section 302 Sarbanes-Oxley Section 303 Sarbanes-Oxley Section 401 Sarbanes-Oxley Section 404 Sarbanes-Oxley Section 409 Sarbanes-Oxley Section 802 Sarbanes-Oxley Section 906 Sarbanes-Oxley Section 1107

Section 302 Disclosure controls

Under SarbanesOxley, two separate sections came into effect one civil and the other criminal. This Section mandates a set of internal procedures designed to ensure accurate financial disclosure. The signing officers must certify that they are "responsible for establishing and maintaining internal controls" and "have designed such internal controls to ensure that material information relating to the company and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared. The officers must "have evaluated the effectiveness of the company's internal controls as of a date within 90 days prior to the report"

Section 303 Improper Influence on Conduct of Audits

It shall be unlawful, in contravention of such rules or regulations as the Commission shall prescribe as necessary and appropriate in the public interest or for the protection of investors, for any officer or director of an issuer, or any other person.
To take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial statements of that issuer for the purpose of rendering such financial statements materially misleading.

Section 401 Disclosures in periodic reports (Off-balance sheet items)

Financial statements are published by issuers are required to be accurate and presented in a manner that does not contain incorrect statements or admit to state material information. These financial statements shall also include all material offbalance sheet liabilities, obligations or transactions.
The Commission was required to study and report on the extent of off-balance transactions resulting transparent reporting. The Commission is also required to determine whether generally accepted accounting principals or other regulations result in open and meaningful reporting by issuers.

Section 404 Assessment of internal control

Issuers are required to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. This statement shall also assess the effectiveness of such internal controls and procedures.
The registered accounting firm shall report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting.

Section 409 Real Time Issuer Disclosures

Issuers are required to disclose to the public, on an urgent basis, information on material changes in their financial condition or operations. These disclosures are to be presented in terms that are easy to understand supported by trend and qualitative information of graphic presentations as appropriate.

Section 802 Criminal Altering Documents



This section imposes penalties of fines and/or up to 20 years imprisonment for altering, destroying, mutilating, concealing, falsifying records, documents or tangible objects with the intent to obstruct, impede or influence a legal investigation. This section also imposes penalties imprisonment up to 10 years on any knowingly and wilfully violates the maintenance of all audit or review papers years of fines and/or accountant who requirements of for a period of 5

Section 906 Criminal Penalties for CEO/CFO financial statement certification

Section 906 states: Failure of corporate officers to certify financial reports. 1) Certification of Periodic Financial Reports Each periodic report containing financial statements filed by an issuer shall be accompanied by Section 802(a) of the SOX a written statement by the chief executive officer and chief financial officer of the issuer. 2) Content The statement required under subsection (a) shall certify that the periodic report containing the financial statements and that information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer.

Section 1107 Criminal penalties for retaliation against whistleblowers

Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense, shall be fined under this title, imprisoned not more than 10 years, or both.

Legal challenges
A lawsuit (Free Enterprise Fund v. Public Company Accounting Oversight Board) 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 law lacks a "severability clause," if part of the law is judged unconstitutional, so is the remainder. If the plaintiff prevails, the U.S. Congress may have to devise a different method of officer appointment. The other parts of the law may be open to revision. The lawsuit was dismissed from a District Court; the decision was upheld by the Court of Appeals on August 22, 2008.

Judge Kavanaugh, in his dissent, argued strongly against the constitutionality of the law.

On May 18, 2009, the United States Supreme Court agreed to hear this case. On December 7, 2009, it heard the oral arguments. On June 28, 2010, 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.