Presentation on Sarbanes Oxley Act 2002

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

• The Sarbanes–Oxley 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.

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

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

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

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

for 168 companies with average revenues of $4.7 million.8 billion. the average compliance costs were $2.Analyzing the cost-benefits of Sarbanes–Oxley • Compliance costs • FEI Survey (Annual): Finance Executives International (FEI) provides an annual survey on SOX Section 404 costs.7 billion.9 million down 23% from 2005. • The 2007 study indicated that. • The 2006 study indicated that. for 200 companies with average revenues of $6. the average compliance costs were $1. . These costs have continued to decline relative to revenues since 2004.

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

experienced much greater increases in share prices than companies that did not. • Skaife/Collins/Kinney/LaFond (2006): This research paper indicates that borrowing costs are lower for companies that improved their internal control. .5 percentage points).500 companies indicated that those with no material weaknesses in their internal controls. by between 50 and 150 basis points (. Corporate transparency is measured based on the dispersion and accuracy of analyst earnings forecasts.Benefits to firms and investors • Arping/Sautner (2010): This research paper analyzes whether SOX enhanced corporate transparency.5 to 1. or companies that corrected them in a timely manner. • Lord & Benoit Report (2006): A study of a population of nearly 2.

.Cont… • 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 Sarbanes–Oxley. two separate sections came into effect— one civil and the other criminal.” • The officers must "have evaluated the effectiveness of the company's internal controls as of a date within 90 days prior to the report" . • 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. • This Section mandates a set of internal procedures designed to ensure accurate financial disclosure. particularly during the period in which the periodic reports are being prepared.

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. • To take any action to fraudulently influence. 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. for any officer or director of an issuer. .Section 303 Improper Influence on Conduct of Audits • It shall be unlawful. or any other person. coerce.

The Commission is also required to determine whether generally accepted accounting principals or other regulations result in open and meaningful reporting by issuers. • These financial statements shall also include all material offbalance sheet liabilities. • The Commission was required to study and report on the extent of off-balance transactions resulting transparent reporting.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. . obligations or transactions.

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. • The registered accounting firm shall report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting. This statement shall also assess the effectiveness of such internal controls and procedures. .

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 409 Real Time Issuer Disclosures • Issuers are required to disclose to the public.

destroying. mutilating.Section 802 Criminal Altering Documents Penalties for • This section imposes penalties of fines and/or up to 20 years imprisonment for altering. impede or influence a legal investigation. documents or tangible objects with the intent to obstruct. concealing. • 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 . falsifying records.

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. 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. in all material respects. .Section 906 Criminal Penalties for CEO/CFO financial statement certification Section 906 states: Failure of corporate officers to certify financial reports. the financial condition and results of operations of the issuer.

for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense. takes any action harmful to any person. . or both.Section 1107 Criminal penalties for retaliation against whistleblowers • “Whoever knowingly. imprisoned not more than 10 years. including interference with the lawful employment or livelihood of any person. with the intent to retaliate. shall be fined under this title.

• The law lacks a "severability clause.S." if part of the law is judged unconstitutional.Legal challenges • A lawsuit (Free Enterprise Fund v. 2008. so is the remainder. If the plaintiff prevails. Public Company Accounting Oversight Board) was filed in 2006 challenging the constitutionality of the PCAOB. rather than the SEC. The lawsuit was dismissed from a District Court. the U. • The complaint argues that because the PCAOB has regulatory powers over the accounting industry. Congress may have to devise a different method of officer appointment. the decision was upheld by the Court of Appeals on August 22. . its officers should be appointed by the President. • The other parts of the law may be open to revision.

the United States Supreme Court unanimously turned away a broad challenge to the law. 2009. 2010. the United States Supreme Court agreed to hear this case. . On December 7. • On May 18. On June 28.• Judge Kavanaugh. in his dissent. it heard the oral arguments. but ruled 5–4 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. argued strongly against the constitutionality of the law. 2009.

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