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SARBANESSARBANES-OXLEY ACT OF 2002

-Regulations Affecting Corporate Responsibility and Its DisclosureDisclosure-

SarbanesSarbanes-Oxley Act of 2002(SOA-Act) 2002(SOA-Regulations Affecting Corporate Responsibility and Its DisclosureDisclosureOutline of the project
First Chapter- Reasons behind the SOA ChapterSecond Chapter- General overview of major Chapterprovisions and critics about the Act Third Chapter- Focused on the responsibilities and Chapterrelated disclosure requirements for companies` executives & attorney s by referring related SEC Rules. In this chapter discussions about each of the regulations are also provided.

Reasons Behind The Sarbanes-Oxley SarbanesSOA was enacted soon after the significant corporate scandals most popular ones are Enron and WorldCom, The environment triggering corporate scandals is provided in the paper in summary; Take over movement, equity compensation linked executives interest to the share price. Motivations to meet market expectations among concerns. Long term bull market effect (1994-2000), (1994Specifically, the reasons for failure of gatekeepers e.g. auditors, lawyers, analyst in the scandals. (deterrence, bubble) Investors` position in that environment is also considered.

promptly after restating their financial reports. The most highlighted event at the collapse of the Enron is its relations with limited partnerships (Special Purpose EntityEntity. Enron when its stock price was $90 in August 2000.Enron failed to disclose the extent of these relations (off(off-balance sheet and related party transaction) .Reasons Behind The Sarbanes-Oxley SarbanesEnron Case As a main model to enlighten the objectives of the SOA the short timeline of Enron s fall and the comments about the role of participants provided.Executives got personal gains being on both sides (Fastow -CFO-more than $ 30 million) CFO. as largest bankruptcy reorganization in American history. .SPEs). was America s 7th largest company. It went to chapter 11 (bankruptcy) on December 2. the stock history. price at that time was 60 cents. 2001.

noted failures all levels of monitoring within the company including board.Reasons Behind The Sarbanes-Oxley SarbanesEnron Case (Cont d) Special Committee founded to investigate the events. The gatekeepers such as lawyers (Vinson & Elkins). Some investment banks after the event alleged aiding and abetting the securities fraud. shredding of Enron-related Enrondocuments. indicted to obstruction of justice. vice president of Enron until resigned. Andersen. Sharon Watkins. Enron s both internal and outside auditor Arthur Andersen. . letter to the top of Enron highly emphasized by media. whistle-blower. The whistle-blower. rating agencies severely criticized.

into Law on July 30 2002. the announcement staggered billion. WorldCom confessed that it had overstated its income by $3. Senate. March 2002. President signed 2002. SOA passed the Senate.Reasons Behind The Sarbanes-Oxley SarbanesOther Scandals way through legislation. June 25 2002.8 billion. On July 25 2002. . financial world because of the size and simplicity of overstatement.Enron demise followed by over 30 Enron 2002inspired bills and several regulatory responses from the SEC and SRO s.

Analyst`s potential conflict of interest. . Foundation of Public Company Accounting Oversight Board Auditor independence provisions. Criminal penalties & fraud. Increase in SEC funding & enforcement power and direction of various studies and reports. A range of corporate governance measures.What Sarbanes-Oxley Brings SarbanesMajor Provisions of Sarbanes-Oxley SarbanesThe Act has 11 titles can be summarized within. Expanded financial disclosure requirements.

What Sarbanes-Oxley Brings SarbanesMajor Provisions of Sarbanes-Oxley SarbanesTitle I and II.Auditor independence from corporate management supported by creating more separation between auditing and consulting function. and some related disclosure requirements. . inspect registered accountants. take disciplinary actions. . provided in detail in Chapter III.Funding of FASB changed by providing full financial independence from the accounting industry. . -Foundation of PCAOB-empowered to set auditing PCAOBquality. regulates. Title III and IV brought enclosed provisions about responsibility of public company officers and lawyers for the quality and accuracy of financial reporting. control and ethic standards.

408. -Required SEC prepare a study on SPEs. -Off-balance sheet transactions. . SOA directs SEC to balanceprepare regulations requiring companies to disclose in their periodic reports all material off balance-sheet information (including contingent balanceobligations). 401-As a direct response use of Offtransactions401Enron SPEs to keep liabilities off balance-sheet. large market capitalization ) -Rapid Disclosure of Financial Change-Sec.Sec.g. -Pro Forma Disclosure.Sec.What Sarbanes-Oxley Brings SarbanesMajor Provisions of Sarbanes-Oxley SarbanesTitle IV cited provisions aiming to enhance financial disclosure. -Enhanced SEC Review of Disclosure.review corporate filings at least once a three year. stock price volatility. (Selection criterias e. 409-Disclosure of additional Change409information concerning material changes in financial conditions or operations on a rapid and current basis.Requires SEC to adopt rules requiring the Disclosurecompanies to publish Pro Forma data with a reconciliation to comparable data calculated according to GAAP.-SEC must systemically Disclosure408.

-To reduce the migration of fraud. -Codified SEC s authority to censure and deny temporarily or permanently preparing and practicing before.Increased SEC funding. Sec. 501 of the Act obliged. in that respect. . analysts.What Sarbanes-Oxley Brings SarbanesMajor Provisions of Sarbanes-Oxley SarbanesTitle V seeks to limit and expose to public possible conflict of interest effecting securities analysts. Title VI is related to SEC s resources and authority and Title VII requires some studies and reports to be conducted. -Protects analysts from retaliation or threats. SEC or on the SEC s direction exchanges. -Limiting supervision and compensation of analysts to one other than investment banking. -Restricting the pre-publication clearance of research or prerecommendation by other staff. SEC was authorized to bar securities industry employees barred from other financial sectors. . designed regulations.

702-Role of credit rating agency in the operation of 702securities markets (SEC) -Sec. 701-Consolidation of public accounting firms 701(Comptroller General) -Sec.What Sarbanes-Oxley Brings SarbanesMajor Provisions of Sarbanes-Oxley SarbanesTitle VI is related to SEC s resources and authority and Title VII requires some studies and reports to be conducted. -Required special studies. -Sec. 705-Role of investment bankers and financial advisers 705in assisting public companies manipulation of their earnings (GAO) .

. called securities fraud. violation of this statue will be punishable by fine and imprisonment upto 25 years. -Contains federal protection for whistle blowers when act lawfully to disclose information. creates new document destruction crime. -Strengthens the existing penalties of mail and wire fraud.What Sarbanes-Oxley Brings SarbanesMajor Provisions of Sarbanes-Oxley SarbanesSOA imposes new criminal penalties for fraud and other wrongful act. -Creates a new federal criminal violation. -Direct respond to Arthur Andersen`s shredding event. -Increases statue of limitation in private lawsuits.

What Sarbanes-Oxley Brings SarbanesCritics of Sarbanes-Oxley SarbanesAn election year is not proper to overhaul a complicated area like securities regulation. . May cause long-term systemic harm to the competitiveness longof US capital markets. Simply follows headlines from Enron and others with little appreciation for systemic problems The efforts of SEC and other SROs is not taken into account by Congress. Many provisions are simply delegations of authority to the SEC to adopt rules. Little appreciation for markets` response to the scandals. some of them involve the SEC or the other SROs had already undertaken rulemaking initiatives.

The Responsibilities of Audit Committees cited as. internal accounting controls. the entire board of directors serves in that capacity. 301-SEC Proposed Rule Standards Relating to Listed 301Company Audit Committees Sec.Regulations of Sarbanes-Oxley SarbanesAffecting Corporate Responsibility and Its Disclosure Audit Committees Sec. 301 requires the SEC to direct the exchanges and NASD to prohibit the listing of securities of companies not complying with certain audit committee requirements. If the issuer does not establish such a statements. -Relationships to auditors -Audit committee independence -Authority and funding to hire advisers -Procedures to address complaints regarding accounting.A committee (or equivalent body) established by and composed of members of an issuer s board of directors to oversee the accounting and financial reporting processes and audits of the financial statements. or auditing matters . committee. DefinitionDefinition.

compensation. -Compensation-They can t accept any consultation fee Compensationother than for their service as a board member -Affiliated person-Not being an affiliated person of the personissuer (controls the issuer or under common control)-(A safe control)harbor provision defined for affiliated person definition by Rule) . IndependenceIndependence-Two criterias were set for the independence.Audit Committees SEC rule details the audit committee responsibilities and add some disclosure requirements to ensure the investors are informed about the composition.directly responsible for the auditorsappointment. including the resolution of disagreements over financial reporting. and oversight of the registered audit firm s work. Relationships to auditors.

).Requires the audit complaintscommittee establish procedures for complaints of employees and others. internal control and audit. For foreign private issuers limited exemptions enabled (permission for employee etc). Procedures to handling complaints. holding companies etc. (Anonyms also to make sure to enable whistle blowing) Some exemptions are also provided by Rule (IPO.Audit Committees Authority and funding to hire advisor.For auditors and other advisoroutside advisors funding will be determined by audit committee. . about accounting.

-Issuers must notify the exchanges or associations in case of material nonnoncompliance -Exchanges expected to establish procedures for correcting problems and dedelisting -Exchanges must adopt the rules provisions no later than the anniversary of Final Rule. (Definition is among the controversial areas-whether have direct expertise at the areaspreparation of financial statements) . how it is expected to be acquired. -SEC rule only sets a base line. the audit committee of that company is comprised of at least one member who is a financial expert at annual reports. the Sec. the reasons why not. 407 SEC Final Rule Disclosure Required by Sec. Rules had a detail definition for audit committee financial expert . and if not. exchanges expected to add information on implementation and enforcement. 407 directs SEC to issue Rules that require a company to disclose whether or not. Financial Expertise of Audit Committee Member Sec. 406 and 407 of SarbanesSarbanesOxley Act Role of audit committee member requires financial expertise.Audit Committees Exchanges Situation. regulating attributes of financial expert.

Audit Committees Financial Expertise of Audit Committee Member A safe harbor generated by Rule: Mentioning this title do not impose any additional duty. Discussions about Audit Committee Regulations -Before the SOA exchanges had already have audit committee requirements including their financial expertise. -Key issue for the effectiveness of new audit committee regulations is lied in the exchanges attributes to the violations. -One of the benefits of SOA: Common regulation base for audit committees (Financial expertise requirements used with a diverse interpretation by exchanges) -The financial expertise regulation do not include any penalty so its efficiency is limited to the investors awareness to that kind of information. obligation or liability. Since before the SOA they are unwilling to use delisting threat . NYSE and NASDAQ has already proposed changes to their corporate governance listing requirements which is waiting for SEC approval.

Audit Committees Discussions about Audit Committee Regulations -The Rule s exemptions for audit committee requirements for foreign issuers is restricted when compared with the exchange s listing rules in the past.e. new regulations can affect to find eligible audit committee members because of increased risk. But its success is limited with the company s approach towards these cases. . the requirement for establishing procedures for handling anonyms complaints is a result of that. -The recent decisions about the audit committee members (accepting them as control person. so the effect of these regulations to the competitiveness of the US capital markets are among concerns. Safe harbor for audit committee financial expert s would be helpful. -During the corporate scandals whistle blowers role for dissemination of information about irregularities emphasized. Lernout&Hauspie) represent the increased personrisk.g.

attorney must report the evidence to the board s audit committee or to another board committee comprised solely of directors not employed directly or indirectly by the company or to the board of directors. 307 . Sec. 307 requires and gives authority SEC to adopt rules establishing minimum standards of professional conduct for attorneys appearing and practicing before the SEC The Rule defines appearing and practicing before the SEC expansively including in-house inand outside attorneys (even advising an issuer to whether a statement required under the securities laws or the SEC`s Rule) Up-ToUp-To-Ladder Reporting -Report evidence of a material violation of securities law or breach of a fiduciary duty or similar violation by the company or one of its agents to the chief legal officer or the CEO of the company. -This committee has at least one member of the issuers audit committee or equivalent committee of independent directors and two or more independent board members. -If they does not appropriately respond to the evidence. . Alternative procedure -Rules establish a new term Qualified Legal Compliance Committee as an alternative to the reporting evidence.SEC Final Rule Implementation of Standard of Professional Conduct for Attorneys Reflecting the critics about the lawyers` role in scandals. Disclosure to QLCC relieves attorney s reporting requirements mentioned above.Regulations of Sarbanes-Oxley SarbanesAffecting Corporate Responsibility and Its Disclosure Professional Responsibility of Attorneys Sec.

Allow an attorney to reveal to the SEC. confidential information related to the attorney s representation of the issuer to the extent he or she reasonably believes necessary to prevent (e.g. Proposed rule required a lawyer to make a noisy withdrawal from representing the company if the attorney sees evidence of fraud and the company fails to react (As reporting to SEC his/her withdrawal "for professional reasons.Rules contains a self-defense exception to issuer confidentiality self. a material violation by the issuer that is likely to cause substantial injury to the issuer or investors) Rules do not create a private cause of action and that authority.") SEC delayed the application .Professional Responsibility of Attorneys Disclosure of Confidential Information . without issuer consent.

These Rules are likely to have a profound impact on attorney-client confidentiality rules. -firstly causing lawyers to investigate potential corporate misconduct more vigorously. 307 s reporting up requirement is attempted to force attorneys as an information intermediary This can affect attorney s behavior in two ways. Willingness of the employee to provide information to attorney can be affected. Other managers will be unwilling to hire a lawyer who is known as a whistle blower. who are not involved in day to day corporate operations much.Professional Responsibility of Attorneys Discussions on Professional Responsibility of Attorneys Sec. This regulation can inhibit information flow between customers and attorney. . Sec. so corporate decision maker will be informed. 307 s intention. On the other hand to reduce the risk lawyers may choice over disclosure or decrease incentive to become fully informed. -secondly bringing evidence of misconduct to the officers and the Board. The cost of the regulation can be threatening for the quality of information flow between corporate attorneys and their clients. Regulations like noisy withdrawal may compromise a lawyers professional reputation. attorneyThe debated noisy withdrawal requirements which SEC is proposed and delayed to apply seem beyond the Sec. 307 can provide a type of early warning system for independent directors.

Certifications must use the exact wording prescribed in the rules. public company s principal executive officer and principal financial officer or person performing similar functions certify each annual and quarterly report filed under Section 13(a) or 15(d) of the Securities Exchange Act. Sec. The certifications pertain to the content of each report and to a company s system of controls designed to enable it to meet its periodic disclosure obligations. . 302 Sec Final Rule Certification of Disclosure in Companies Quarterly and Annual Reports Certification application starts with the order of SEC to 947 biggest public companies.Regulations of Sarbanes-Oxley SarbanesAffecting Corporate Responsibility and Its Disclosure Corporate Responsibilities of Financial Reports Sec. 302 regulates that SEC must adopt regulations. Then transferred to SOA. rules.

The officers must also affirm that they have disclosed their evaluations for the effectiveness of the disclosure controls and procedures and must indicate whether there have been significant changes in the internal controls or in factors that might significantly change them. The officers have made required disclosures to the auditors and to the audit committee about fraud and about significant deficiencies and material weaknesses in internal controls. .Corporate Responsibilities of Financial Reports The rules require these principal executive and financial officers to certify that the report is accurate. and fairly presented and to take responsibility for maintaining and evaluating the issuer s disclosure controls and procedures. complete.

could be subject to SEC s action. Intended to enable the financial and non-financial noninformation required to meet its reporting obligations. summarized and disclose in a timely manner. Failure to maintain adequate disclosure controls and procedures and review them. SEC interpreted that this term is different from the internal control. processed. In that way SEC is regulating the company s disclosure preparation procedures. .Corporate Responsibilities of Financial Reports Disclosure Controls and Procedures A new term established by SEC to ensure that information required to be disclosed in reports is gathered. reported.

This certification requirement is effective immediately. 906 Certification In addition to Sec. . Sec. 906 of the Act also requires a certification by the companies chief executive officer and the financial officer accompany each period filed under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 containing financial statements. the financial condition and results of operations of the company. 302 certification requirements. and up to $5 million and/or 20 years in prison for willfully filing a false certification. Imposes criminal penalties of up to $1 million and/or ten years in prison for knowingly filing a false certification. Providing that: -The report fully complies with the requirements of reporting.Corporate Responsibilities of Financial Reports Sec. -The information in the report fairly presents in all material respects.

302 and Sec. So before the certification CEOs or CFOs that make knowingly false certification would have been subject to prosecution for making false statements. may be interpreted as an evidence of the disorganized manner of the Act. However only Sec.Corporate Responsibilities of Financial Reports Discussions on Corporate Responsibility Certification requirements Sec. Primary certification is the one codified in Sec. Bringing two separate certification burden for officers. Using different officer terms is another evidence. 906 seems to overlap. . Both of them covers the certification of fair presentation of financial conditions and results of operations of the company. 302 which is also including the procedures to ensure the financial statements accuracy. 906 certifications has criminal provisions. CEO and CFO s have been signing the annual reports.

. This can affect further cases concept. which held that an accountant could be convicted of securities fraud even if the accounting practice at issue complied with GAAP. It reflects intention of evolving the principal based standards to rule based standards. Simon. CEOs and CFOs of the company s would require downside certifications. SEC s view about disclosure in periodic reports would not be only restricted with the GAAP compliance for financial statements resembles a new perspective beyond the GAAP. can harm the trust in company Certification requirement may bring more conscience to the process of report preparation. So the certification statement is not limited to a representation that the financial statements and other financial information have been presented in accordance with GAAP. The effect of fair presentation clause is concluded as codification of Judge Friendly s decision in United States v.Corporate Responsibilities of Financial Reports Discussions on Corporate Responsibility Certification requirements use fairly present clause not the GAAP compliance requirement. besides bringing new paperwork burden.

406 404and 407 of Sarbanes-Oxley Act of 2002 SarbanesDefinition Controls that pertain to the preparation of financial statements for external purposes that are fairly presented in conformity with GAAP Managements Internal Control Report Annual reports must include a report of management on internal controls and procedures for financial reporting. Contain an assessment. The responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting . Stating. as of the end of the most recent fiscal year of the issuer. of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. 404-SEC Proposed Rule Disclosure Required by Section 404. In addition external auditor attestation.Regulations of Sarbanes-Oxley SarbanesAffecting Corporate Responsibility and Its Disclosure Management Assessment of Internal Control SEC. .

302 and Sec. . ( SEC tried to differentiate them bringing a new concept as disclosure control and procedures) Disclosure controls and procedures should entail some level of internal controls review. Act s two separate sections possess the same aim effective internal control procedures. 404 requirements.Management Assessment of Internal Control Rule proposes changes to certification requirements every periodic report include both evaluation of disclosure and internal control. Discussions on Assessment of Internal Control There is overlap between Act s Sec.

402-Loans to Officers and Directors 402Makes unlawful for any issuer to arrange or to renew an extension of credit.Regulations of Sarbanes-Oxley SarbanesAffecting Corporate Responsibility and Its Disclosure Compensation of CEOs and CFOs Sec. in the form of a personal loan to or for any director or executive officer (Prohibits indirect compensation) FASB s and exchange s proposals . as a result of misconduct. the CEO and CFO of the issuer shall reimburse the issuer for: Any bonus or other incentive-based or equity based compensation incentiveAny profits realized from the sale of securities of the issuer Sec. 304-Forfeiture of Bonuses and Profits 304In case an accounting restatement due to the material noncompliance.

Compensation of CEOs and CFOs Discussions on Compensation Forfeiture required regardless of effect of restatement or whether directly attributable to the misstatement of financial results. Loans to officers and directors concept is ambiguous Types of indirect compensations can be created if there is an intention for it. Cost inhibiting the CEO and CFO s eager to make prompt disclosure of nonnon-compliances. After these penalizing attempts compensation techniques can evolve .

305 Replaces substantial unfitness standard for banning officer and directors with an unfitness standard. 1105 In any cease-and-desist proceeding.Regulations of Sarbanes-Oxley SarbanesAffecting Corporate Responsibility and Its Disclosure Officer Bar and Penalties Sec. the SEC may order to prohibit officer cease-andor director of any issuer with registered securities demonstrates unfitness Discussions -SEC has a lower standard and new administrative technique for banning the officers -Responsibility of the fraud for officers is also increased . Contains an equitable relief section Sec.

Regulations of Sarbanes-Oxley SarbanesAffecting Corporate Responsibility and Its Disclosure Fair Fund For Investors Sec. be added to a fund for the benefit of the victims of the violations if the SEC so directs. Discussions -Civil money penalties can be distributed harmed investors-prior investorsforwarded to Treasury -Utilization requires amendments to Act and enhanced collection techniques (another spontaneous manner of the Act) . 308 Disgorgement of profits ordered against those who have violated securities laws. or any other funds collected as a result of the imposition of penalties following securities laws violations.

Regulations of Sarbanes-Oxley SarbanesAffecting Corporate Responsibility and Its Disclosure Code of Ethics Sec. Definition -honest and ethical conduct -Full fair. post internet web site. Disclosure -Made publicly available by exhibit to annual report. by giving information in annual report give copy to any person without charge . -Compliance with laws. or waiver of an issuer s code of ethics in annual reports. 406-SEC Final Rule Disclosures Required by Section 406 406and 407 of Sarbanes-Oxley Sarbanes-Requires disclosure of whether they have adopted a code of ethics and of any change in. accurate timely disclosure in reports and documents. rules and regulations. -Prompt reporting to violations.

. Only raise the level of ethical behavior if taken seriously and enforced Provide information to investors on code of ethic but can not guarantee or impose ethical behavior to officers. or waivers of. the code of ethics on Form 8-K or on its Internet Web site 8Discussion on Code of Ethics Has been used by companies for several years (Enron also had a code of ethics).Code of Ethics Waiver of Code of Ethics Required to promptly disclose any changes to.

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