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SARBANES-OXLEY ACT, 2002

Submitted by:-
Harjot Kaur
M.Com (Hons.)
153706008
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CONTENT
• Meaning and definition
• Corporate governance in US
• Corporate scandal: ENRON
• Sarbanes-Oxley Act, 2002
o Objectives
o Provisions
• OECD Principles
• Similar Laws in other countries
• Impact in India
• Conclusion
• References
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CORPORATE GOVERNANCE
• Meaning
Corporate governance is seen as one that addresses
“the problems that result from the separation of
ownership and control”.
• Definition
“Corporate governance is about how suppliers of
capital get managers to return profits, make sure
managers do not misuse the capital by investing in
bad projects, and how shareholders and creditors
monitor managers.”
-American Management Association
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CORPORATE GOVERNANCE IN US
Occurrence of the Watergate scandal

Highlighted- illegal political contributions and bribe to government officials

Led to development of Foreign and Corrupt Practices Act of 1977

Securities and Exchange Commission in 1979

Cadbury Committee Report, 1992

Sarbanes-Oxley Act, 2002

OECD Principles, 2004 (Revised)

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CORPORATE SCANDAL: ENRON

• Enron was a Houston-based natural gas pipeline
company formed by merger in 1985.
• Heavily involved in energy brokering, electronic energy
trading, global commodity and options trading, etc.
• By early 2001, Enron had morphed into 7th largest U.S.
company, and the largest U.S. buyer/seller of natural gas
and electricity.
• Fortune named Enron as ‘America’s most innovative
company’ for the six consecutive years.
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SARBANES-OXLEY ACT, 2002

• The Sarbanes-Oxley Act of 2002, is a Unites States
federal law also known as the Public Company
Accounting Reform and Investor Protection Act of
2002.
• It was enacted in July 30,2002.
• The act came in the wake of a series of corporate
financial scandals including those affecting Enron,
Tyco International and WorldCom.
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Cont’d…
• This act has created new corporate standards for
accountability to protect stakeholders and the public
from fraudulent practices by organizations.
• The act requires companies to implement extensive
procedures that prevent illegal activities internally
within the company and to respond to any illegal
activity investigations without delay.
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OBJECTIVES
• To re-establish investors confidence in the securities
market,
• To prevent future corporate frauds.
Other objectives
• To enhance the accountability of corporate affairs,
• To improve corporate disclosure,
• To introduce new standards and responsibilities,
• To strengthen internal control mechanisms,
• To ensure full disclosures in financial reports,
• To transact corporate governance with full
transparency.
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PROVISIONS
• Public Company Accounting Oversight Board
• Audit committee
• Conflict of interest
• Audit partner rotation
• Improper influence on conduct of audits
• Prohibition of non-audit services
• Attorneys
• Securities analysts
• Penalties
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Public Company Accounting Oversight Board

• PCAOB consist of five members of whom two will

be certified public accountants.
• All accounting firms have to register themselves with
this board.
• The Board will conduct annual inspections of firms,
which audit more than 100 public companies.
• The Board will establish rules governing audit quality
control, ethics, independence and other standards.
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Audit Committee
• The members of the committee are independent
directors.
• The audit committee is responsible for appointment,
fixing fees and oversight the work of independent
auditors.
• The committee is also responsible for establishing
and reviewing the procedures for the receipt of
complaints received by the affected parties.
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Conflict of Interest
• Public accounting firms should not perform any audit
service for a publicly traded company if the CEO,
CFO, CAO, or any other person serving in an
equivalent position was employed by such firm and
participated in any capacity in the audit of that
company during the one year period preceding the
date of initiation of the audit.
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Audit Partner Rotation

• The SOX Act provides for mandatory rotation of the
o lead auditor,
o co-ordinating partner and
o the partner reviewing audit once every 5 years.
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Improper influence on conduct of audits

• It will be unlawful for any executive or director of the
firm to take any action to fraudulently influence,
manipulate or mislead any auditor engaged in the
performance of an audit with the view to rendering
the financial statements materially misleading.
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Prohibition of non-audit services

• Auditors are prohibited from providing non-audit
services concurrently with audit financial review
services.
• Non-audit services include:-
book keeping or financial statements of the client,
financial information system, design &
implementation, internal audit outsourcing services,
management of human resource functions, legal or
expert services unrelated to the audit, any other
service that the board determines, is impermissible.
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Attorneys
• The attorneys dealing with the publicly traded
companies are required to report evidence of material
violation of securities law or breach of fiduciary duty
or similar violations by the company or any other
agent of the company to the CEO and if CEO does
not appropriately respond to the evidence, the
attorney must report the evidence to the audit
committee or the Board of Directors.
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Securities analysts
• The analyst has investment or debt in the company he
is reporting on.
• Any compensation received by the broker dealer or
analyst is “appropriate in the public interest and
consistent with the protection of investors”.
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Penalties
• The penalties prescribed under SOX Act for any
wrongdoing are very stiff. Any CEO/CFO providing
a certificate knowing that it does not meet with the
criteria stated may be fined upto $1 million or
imprisonment upto 10 years.
• Penalties for wilful violations are even stiffer. If
CEO/CFO wilfully indulged in, may be fined upto $5
million or prison term upto 20 years.
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OECD PRINCIPLES

Rights of shareholders

Equitable treatment of shareholders

Role of stakeholders in corporate governance

Disclosure and transparency

Responsibilities of the board

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SIMILAR LAWS IN OTHER COUNTRIES

India •Clause 49
•Germany Corporate
Germany Governance Code

•Financial Security Law of

France France
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IMPACT IN INDIA
• With the coming of SOX in US, India also took new
corporate governance norms under Clause 49 of
listing agreement which came into effect from 31st
December, 2005.
• Some of the important provisions are:-
o If the company has executive chairman, 1/3rd of
directors should be independent directors, in case of
non-executive chairman, there should be 50%
independent directors on Board.
o CEO/CFO are required to assess internal controls and
certify the financial statements.
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Cont’d…
o All the companies are required to submit quarterly
Compliance Reports at Stock Exchanges.
o Establishment of an audit committee.
o Whistle blower policy is to be set out to provide
security to those who retaliate against wrong doers.
o Formal code of conduct is to be laid down for BOD
and senior management of the organization.
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CONCLUSION
The SOX Act would certainly enhance
accountability levels for directors, officers, auditors,
security analysts and legal counsel involved in the
financial markets. It would have far reaching
implications worldwide particularly in areas of audit.
It applies to all companies with a listing in the US.
The aspect of SOX Act is that it makes it clear that a
company’s senior officers are responsible for the
corporate culture they create, and must be faithful to
the same rules they set out for other employees.
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REFERENCES

• Fernado, A.C.. Corporate Governance. India: Dorling

Kindersley, 2009. Print.
• Sharma, J.P.. Corporate Governance Business Ethics
and CSR. India: Ane Books Pvt. Ltd., 2016. Print.
• https://www.google.com/images
• Portable document format, file. Legislative Initiatives
and Proposals: Sarbanes-Oxley act, 2002
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