• Signed into law on July 30, 2002

• Response to highly publicized corporate scandals

• Provisions affect corporate governance, accounting, and auditing

• Purpose is to restore ____________

• Enron– Material misstatements due to fraud: off-balance sheet financing, abuse

of fair value accounting rules– Outcome: $3 billion in required restatements. Largest bankruptcy in

history. Auditor Arthur Andersen convicted (later overturned) of obstruction of justice. Big 5 Big 4

– Key Players: Ken Lay, Jeff Skilling, Andrew Fastow, David B. Duncan– Whistleblower: Sherron Watkins

• WorldCom– Material misstatements due to fraud: capitalization of expenses,

improper use of reserves– Outcome: First 4 billion then 11 billion in restatements. WorldCom

bought out by Verizon– Key Players: Bernard Ebbers, Scot Sullivan, Mike Meyers, Betty Vinson,

Buddy Yates– Whistleblower: Cynthia Cooper

• Other Frauds: Global Crossing, Adelphia, Qwest, Tyco

• Prior to PCAOB the profession was ______ - regulating. • The PCAOB is a private nonprofit organization with

members appointed by the __________• Responsible for setting ________________ for

_________ of __________ companies• Composed of ___ members, three ______• Funded by firms that _________________• Sets standards for _________• Conducts __________ to ensure that performance is up

to standards.• Has authority to ________ members for wrongdoing.

• Specified non-audit services are prohibited– bookkeeping, information systems design and

implementation, appraisals, actuarial services, internal audit, human resources, investment banking, unrelated legal services

• Audit partner rotation Cannot serve as partner for more than __________ years

• ____________ partner review• _____________ period

• To whom do the auditors report?– External auditor– Internal auditor

• Who hires and approves services?• What kind of items get reported to the audit

committee?• Majority of members are ________ (What does

this mean?)• Members must be __________ and __________

• What is the role of the PCAOB?• What is the new role of ASB (of the AICPA)?

– Past– Future

• Role of the IFAC and IAPC• Convergence PCAOB Audit Standards, SASs, ISAs

• Certain acts now carry federal penalties:– Workpaper __________

– Document __________

• Securities fraud penalties are increased

• Fraud discovery _________________ increased

• Loans to _____________ and insider trading during ____________ periods

• ___________protections

• Management assessment of ICS– SOX 404—This is the most significant

provision of the Act

• What does SOX 404 require?

• To whom is it applicable? • What does it require of management?• What does it require of auditors?

• CEO and CFO ______________– Another major provision of the act– trickle down

• Codes of ________ and disclosure of __________ for executives

• Ban on _________ to executives• Increased disclosure of _____________

compensation

• Pro-forma financial statements

• Form 8-K disclosures--changes to financial position

• Off-Balance Sheet Arrangements--explained in section of MD&A