Sarbanes Oxley ActSarbanes Oxley Act

The Sarbanes Oxley Act The Sarbanes Oxley Act consists of 11 Sectionsconsists of 11 Sections

I – Public Company Accounting Oversight BoardI – Public Company Accounting Oversight Board

II – Auditor independence II – Auditor independence

III – Corporate ResponsibilityIII – Corporate Responsibility

IV – Enhanced Financial DisclosuresIV – Enhanced Financial Disclosures

V – Analyst Conflicts of InterestV – Analyst Conflicts of Interest

VI – Commission Resources and AuthorityVI – Commission Resources and Authority

VII – Studies and ReportsVII – Studies and Reports

VIII – Corporate and Criminal Fraud Accountability VIII – Corporate and Criminal Fraud Accountability Act of 2002Act of 2002

IX – White-Collar Crime Penalty EnhancementsIX – White-Collar Crime Penalty Enhancements

X – Corporate Tax ReturnsX – Corporate Tax Returns

XI – Corporate Fraud and AccountabilityXI – Corporate Fraud and Accountability

General Provisions of S/OxGeneral Provisions of S/Ox

PCAOB To make rules governing PCAOB To make rules governing audits of public companiesaudits of public companies

PCAOB To oversee audits and audit PCAOB To oversee audits and audit firmsfirms

PCAOB independent of Federal PCAOB independent of Federal GovernmentGovernment

PCAOB Self-funded through fees PCAOB Self-funded through fees assessed on CPA firms and publicly assessed on CPA firms and publicly traded companiestraded companies

Regulations not applicable to NFP or Regulations not applicable to NFP or foreign listed companiesforeign listed companies

PCAOB Governing MembersPCAOB Governing Members

Five Members, Five Members, three of whom three of whom must NOT be must NOT be CPAsCPAs

If the chair is a If the chair is a CPA, that person CPA, that person must be out of must be out of the business of the business of auditing for the auditing for the prior 5 yearsprior 5 years

PCAOB’s DutiesPCAOB’s Duties

Write audit standards, temporarily they Write audit standards, temporarily they have adopted the AICPA’s have adopted the AICPA’s

Register public CPA firms to do auditsRegister public CPA firms to do audits Set Quality Control standards for auditsSet Quality Control standards for audits Do peer reviews of CPA firms – at least Do peer reviews of CPA firms – at least

every three yearsevery three years Investigate and discipline Investigate and discipline CPE CPE Review company disclosures and financial Review company disclosures and financial

statements at least every three yearsstatements at least every three years

Duties of the are:Duties of the are:Register public accounting firms that prepare Register public accounting firms that prepare

audit reports for issuers. audit reports for issuers.

Establish or adopt rules: Auditing, Quality Establish or adopt rules: Auditing, Quality control, Ethics, Independence, as related to control, Ethics, Independence, as related to preparation of audit reportspreparation of audit reports

Conduct investigations of and disciplinary Conduct investigations of and disciplinary proceedings involving registered public proceedings involving registered public accounting firms.accounting firms.

Establish auditing standards Establish auditing standards

Establish quality control standards. Quality Establish quality control standards. Quality control standards could include rules to control standards could include rules to require monitoring professional ethics and require monitoring professional ethics and independenceindependence

Provisions for Audit firmsProvisions for Audit firms Maintain audit papers for 7 yearsMaintain audit papers for 7 years Managing Partner rotation every 5 yrs.Managing Partner rotation every 5 yrs. Second partner rotation every 5 yrs.Second partner rotation every 5 yrs. Audit manager rotation every 7 yearsAudit manager rotation every 7 years Reports to audit committee Reports to audit committee

All material findings All material findings Disclose fees for all types of services Disclose fees for all types of services

in proxy statementin proxy statement Review disclosures of firmReview disclosures of firm Attest to Internal Control of firmAttest to Internal Control of firm

Auditor Independence RulesAuditor Independence Rules Can’t do other types of work for Can’t do other types of work for

clients, de minimus exceptionsclients, de minimus exceptions BookkeepingBookkeeping Systems designSystems design Valuation services Valuation services Actuarial servicesActuarial services Internal auditInternal audit Management functionsManagement functions

Other work needs pre-approval by Other work needs pre-approval by audit committeeaudit committee

Can’t do audit if CEO, CFO from their Can’t do audit if CEO, CFO from their firm, 1 year wait period firm, 1 year wait period

SOx requires every public SOx requires every public accounting firm to use quality accounting firm to use quality

control policies relating tocontrol policies relating to(i) monitoring of professional ethics and (i) monitoring of professional ethics and

independence from entities on which the independence from entities on which the firm issues audit reports;firm issues audit reports;

(ii) consultation within the firm on (ii) consultation within the firm on accounting and auditing questions;accounting and auditing questions;

(iii) supervision of audit work;(iii) supervision of audit work;(iv) hiring, professional development, and (iv) hiring, professional development, and

advancement of personnel;advancement of personnel;(v) the acceptance and continuation of audit (v) the acceptance and continuation of audit

engagements;engagements;(vi) internal inspection(vi) internal inspection

CPAs Report to Audit CommitteeCPAs Report to Audit Committee

All critical accounting All critical accounting policiespolicies

Alternate treatmentsAlternate treatments Internal Control findingsInternal Control findings Engagement letterEngagement letter Independence letterIndependence letter Management Management

representation letterrepresentation letter Material weaknessesMaterial weaknesses

Corporate ProvisionsCorporate Provisions Corporate OfficersCorporate Officers

Certify means they haveCertify means they have Reviewed the reports Reviewed the reports Reviewed internal control Reviewed internal control Certify that there are no Certify that there are no

material weaknessesmaterial weaknesses Certify that there is no Certify that there is no

fraudfraud Report fairly presents the Report fairly presents the

financial condition of the financial condition of the companycompany

Corporate ProvisionsCorporate Provisions

Corporate OfficersCorporate Officers Can’t influence auditCan’t influence audit No trading during blackout periodsNo trading during blackout periods In pro-formas, no material untrue In pro-formas, no material untrue

statements, reconciliationstatements, reconciliation No officer loansNo officer loans File any trading information within two File any trading information within two

business daysbusiness days Code of ethics – if don’t have one – why?Code of ethics – if don’t have one – why? Disclose off-balance sheet financingDisclose off-balance sheet financing Disclose any non-GAAP financial Disclose any non-GAAP financial

measuresmeasures

Corporate ProvisionsCorporate Provisions

Audit Committee of BoardAudit Committee of Board Responsible for oversight of Responsible for oversight of

external auditexternal audit Be independent of the firmBe independent of the firm Set up whistle-blowing provisionsSet up whistle-blowing provisions One must be financial expertOne must be financial expert

Audit CommitteeAudit CommitteeIndependent DirectorsIndependent Directors

Audit committee members should not receive Audit committee members should not receive fees other than for board service and should fees other than for board service and should not be an “affiliated person” of the company.not be an “affiliated person” of the company.

Financial ExpertFinancial Expert At least one member of its audit committee At least one member of its audit committee

must be a "financial expert" (expertise in US must be a "financial expert" (expertise in US GAAP)GAAP). .

Auditor OversightAuditor OversightResponsible for oversight of external reporting, Responsible for oversight of external reporting, internal controls and auditing, and the internal controls and auditing, and the appointment and compensation of the auditor.appointment and compensation of the auditor.

Whistle-Blower Communications Whistle-Blower Communications Confidential and anonymous submissions by Confidential and anonymous submissions by employees.employees.

SOx Company Audit CommitteeSOx Company Audit Committee

Ω Under SOx Sec 301 public company audit Under SOx Sec 301 public company audit committees are directly responsible for the committees are directly responsible for the appointment, compensation, and oversight appointment, compensation, and oversight of the work of any registered public of the work of any registered public accounting firm employed by their company accounting firm employed by their company (including resolution of disagreements (including resolution of disagreements between management and the auditor between management and the auditor regarding financial reporting). regarding financial reporting).

Ω Audit firm reports directly to the audit Audit firm reports directly to the audit committee. Auditors may also have to committee. Auditors may also have to discuss accounting complaints with the discuss accounting complaints with the Audit Committee. Audit Committee.

PenaltiesPenalties

General penaltiesGeneral penalties If alter, destroy, If alter, destroy,

cover-up or falsify cover-up or falsify documents with documents with objective to objective to hinder hinder investigation – investigation – fines and up to 20 fines and up to 20 yearsyears

Penalties – Corporate OfficersPenalties – Corporate Officers

Give back to firms any bonuses, incentive Give back to firms any bonuses, incentive compensation or equity based compensation or equity based compensation earned within 12 monthscompensation earned within 12 months

Give back profit on sales during blackout Give back profit on sales during blackout periodperiod

False certification - $1m and up to 10 yrs.False certification - $1m and up to 10 yrs. Willful false cert. - $5 m and up to 20 yrs.Willful false cert. - $5 m and up to 20 yrs. Company can hold up any payments to Company can hold up any payments to

officersofficers

PenaltiesPenalties

Audit firmsAudit firms Temporary suspension from industryTemporary suspension from industry Temporary or permanent revocation of Temporary or permanent revocation of

licenselicense Can’t go to another firm if suspended or Can’t go to another firm if suspended or

license revokedlicense revoked Fines of up to $100,000 personal for each Fines of up to $100,000 personal for each

violation, firm up to $2 mviolation, firm up to $2 m If intentional up to $750,000 personal, If intentional up to $750,000 personal,

firm up to $15 mfirm up to $15 m Destroy working papers within 5 years – Destroy working papers within 5 years –

fine and up to 10 years. fine and up to 10 years.

Statute of LimitationsStatute of Limitations

Two years after violation found or Two years after violation found or Five years after violationFive years after violation