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  • In Ayodhya Kand of Ramayana, Lord Rama explains the concept of Governance as “ to provide the maximum happiness for the maximum number of people for the maximum period, based as it is on the principles of Dharma –righteousness and moral values.”
  • Kautilya’s(Chanakya) Arthashastra is the oldest book (around 300 B.C) on Management available to the world This masterpiece covered a wide range of topics and also recommended that the king shall not consult with any advisor who had a vested interest in the outcome of a particular project. establishment of an ethical code of conduct —a topic which has received a great deal of attention now during the past few years after corporate scandals  the codification of accounting rules into one uniform system to prevent problems in translating financial data between disparate methods of accounting – a subject which  the international accounting community is dealing with in terms of the convergence of accounting standards. In the western world The East India Company introduced a Court of Directors, separating ownership and control (U.K., the Netherlands) in 1600s
  • The  Sarbanes–Oxley Act of 2002 also known as the 'Public Company Accounting Reform and Investor Protection Act' (in the Senate) and 'Corporate and Auditing Accountability and Responsibility Act' and commonly called  Sarbanes–Oxley ,  Sarbox  or  SOX , is a   United States federal law  enacted on July 30, 2002 , which 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. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the  Securities and Exchange Commission  (SEC) to implement rulings on requirements to comply with the new law Introduced as a way to restore investor confidence in the wake of corporate accounting scandals like those involving Enron and WorldCom. By creating a  Public Company Accounting Oversight Board(PCAOB), strengthening auditor independence, and increasing corporate management’s accountability for the quality of their organizations’ internal controls, SOX seeks to increase the transparency and rigor of all publicly owned companies’ fiscal management. The Sarbanes-Oxley Act is arranged into eleven 'titles'. As far as compliance is concerned, the most important sections within these eleven titles are usually considered to be 302, 401, 404, 409, 802 and 906. SOX was fully implemented in 2004. With a year’s experience under their belts, corporations report that complying with the act, and specifically Section 404, has proven more difficult than they anticipated. Estimates put the cost of compliance for U.S. companies in the range of $5 to $6 billion for 2004. 
  • Sox

    1. 1. The Sarbanes-Oxley Act SOX Its Effects & Implications Presented By: Ashish Makhija
    2. 2. Corporate Governance “ Satyam Vada Dharmam Chara” - Taittariya Upanishad “ Forever speak the truth and follow the dharma ”
    3. 3. Governance Concept in ‘Ramayana’ To provide “the maximum happiness for the maximum number of people for the maximum period, based on the principles of Dharma –righteousness and moral values.” - Ayodhya Kand
    4. 4. History of Corporate Governance <ul><li>In india; Kautilya’s(Chanakya) Arthashastra </li></ul><ul><li>In the western world The East India Company introduced a Court of Directors, separating ownership and control (U.K., the Netherlands) in 1600s </li></ul>
    5. 5. Corporate Governance What is Governance? <ul><li>“ Corporate Governance is the application of best management practices, Compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders”. </li></ul><ul><li>The Institute of Company Secretaries of India </li></ul>
    6. 6. Some Definitions <ul><li>“ Corporate Governance is the system by which companies are directed and controlled…” </li></ul><ul><ul><ul><ul><li>Cadbury Report (UK), 1992 </li></ul></ul></ul></ul><ul><li>“… to do with Power and Accountability: who exercises power, on behalf of whom, how the exercise of power is controlled.” </li></ul><ul><ul><ul><li>Sir Adrian Cadbury, in Reflections on Corporate Governance, Ernest Sykes Memorial Lecture, 1993 </li></ul></ul></ul>
    7. 7. An OECD Definition <ul><li>“ Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders ..also the structure through which objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.” </li></ul><ul><ul><ul><ul><li>Preamble to the OECD Principles of Corporate Governance, 2004 </li></ul></ul></ul></ul>
    8. 8. An Indian Definition <ul><li>“… fundamental objective of corporate governance is the ‘enhancement of the long-term shareholder value while at the same time protecting the interests of other stakeholders.” </li></ul><ul><ul><ul><ul><li>SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January, 2000 </li></ul></ul></ul></ul>
    9. 9. What is Corporate Governance? <ul><li>The Manner in which a Corporation is Run </li></ul><ul><ul><li>Achieving its Objectives </li></ul></ul><ul><ul><li>Transparency of its Operations </li></ul></ul><ul><ul><li>Accountability & Reporting </li></ul></ul><ul><ul><li>Good Corporate Citizenship </li></ul></ul><ul><li>The Processes & Operating Relationships that Best Achieve Organizational Goals </li></ul>
    10. 10. International scenario Year Name of Committee/Body Areas/Aspects Covered 1992 Sir Adrian Cadbury Committee, UK Financial Aspects of Corporate Governance 1994 Mervyn E . King’s Committee , South Africa Corporate Governance 1995 Greenbury Committee , UK Directors’ Remuneration 1998 Hampel Committee, UK Combine Code of Best Practices 1999 Blue Ribbon Committee, US Improving the Effectiveness of Corporate Audit Committees 1999 OECD Principles of Corporate Governance 1999 CACG Principles for Corporate Governance in Commonwealth 2002 Sarbanes-Oxley Act Introduced major changes to the regulation of corporate governance and financial practices. 2003 Derek Higgs Committee, UK Review of role of effectiveness of Non-executive Directors 2003 ASX Corporate Governance Council, Australia Principles of Good Corporate Governance and Best Practice Recommendations
    11. 11. Indian scenario Year Name of Committee/Body Areas/Aspects Covered 1998 Confederation of Indian Industry (CII) Desirable Corporate Governance – A Code 1999 Kumar Mangalam Birla Committee Corporate Governance 2002 Naresh Chandra Committee Corporate Audit & Governance 2003 N. R. Narayana Murthy Committee Corporate Governance
    12. 12. At A Glance <ul><li>On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002 into law . </li></ul><ul><li>Most significant overhaul to public accounting, corporate governance and financial reporting since 1930s. </li></ul><ul><li>It was passed in the wake of : </li></ul><ul><li>2001-2002 Arthur Andersen accounting scandal and </li></ul><ul><li>Collapse of Enron and WorldCom </li></ul>
    13. 13. SARBOX Or SOX <ul><li>The Sarbanes-Oxley Act, named after co-creators </li></ul><ul><li>Senator Paul Sarbanes of Maryland and </li></ul><ul><li>Representative Michael Oxley of Ohio. </li></ul><ul><li>Sarbanes-Oxley is the most important securities legislation affecting public companies, and thus, officers and directors of public companies, since the Securities and Exchange Commission (SEC) was formed in 1934 </li></ul>
    14. 14. <ul><li>In response to the Arthur Anderson, Enron and WorldCom debacle, the Sarbanes-Oxley Act seeks to: </li></ul><ul><ul><li>Restore the public confidence in both public accounting and publicly traded securities </li></ul></ul><ul><ul><li>Assure ethical business practices through heightened levels of executive awareness and accountability </li></ul></ul><ul><li>The Act first establishes the Public Company Accounting Oversight Board. </li></ul><ul><li>PCAOB established to oversee public accounting firms and to establish auditing standards </li></ul><ul><ul><li>Established regulatory rules for public accounting firms, auditing standards, and corporate governance. </li></ul></ul>
    15. 15. Section 2 <ul><li>Section two outlines the functions of auditors and clarifies their independence from their clients. </li></ul><ul><li>Subsection 201 details which functions cannot be performed by public accounting firms: </li></ul><ul><li>Investment management, </li></ul><ul><li>Human resources services, </li></ul><ul><li>Services related to bookkeeping and financial statements, </li></ul><ul><li>Actuarial services. </li></ul><ul><li>Subsection 206: States that the CEO, Controller, CFO, Chief Accounting Officer or similarly positioned employees cannot have been employed by the company’s audit firm for one year prior to the audit. </li></ul>
    16. 16. Section three defines corporate responsibility. <ul><li>Section 301 </li></ul><ul><li>Mandates that all audit committee members be independent </li></ul><ul><li>Section 302 </li></ul><ul><ul><li>Requires that the CEO and CFO certify quarterly and annual financial reports </li></ul></ul><ul><ul><li>SOX imposes criminal fines or jail time on violators </li></ul></ul>
    17. 17. <ul><li>Sections 304 and 305 </li></ul><ul><ul><li>Designed to eliminate or limit seemingly outrageous behavior </li></ul></ul><ul><ul><ul><ul><li>Earnings restatements may require CEO and CFO to return bonuses based on bogus numbers </li></ul></ul></ul></ul>
    18. 18. Section 4 <ul><li>Section four details disclosure and internal audit procedures. </li></ul><ul><li>It prohibits loans to executives and presents a timeline for disclosure of executive/owner transactions. </li></ul><ul><li>Section 404: </li></ul><ul><li>Which requires “each annual report of an issuer to contain an internal control report’’ </li></ul>
    19. 19. <ul><ul><li>Makes management responsible for acknowledging its responsibility for establishing and maintaining internal control </li></ul></ul><ul><ul><li>Makes management responsible for an annual assessment of internal controls </li></ul></ul><ul><li>This section has emerged as the most difficult and costly to implement </li></ul>
    20. 20. Section 8: Addressing criminal fraud and whistle-blower provisions <ul><li>It imposes criminal penalties (maximum 10 years in prison) for knowingly destroying, altering, concealing, or falsifying records. </li></ul><ul><li>With intent to obstruct or influence a federal investigation or bankruptcy matter. </li></ul><ul><li>Provides whistle-blower protection by prohibiting a publicly traded company from retaliating against an employee who assists in a fraud investigation. </li></ul><ul><li>Executives who target whistle-blowers are subject to fines or imprisonment of up to 25 years. </li></ul>
    21. 21. Effects of SOX Act on Public Companies <ul><li>SOX was a classic case of a knee-jerk government action that did lots of harm and very little good. </li></ul><ul><li>The goal was to reform public company accounting rules to avoid future scandals like those that played out at Enron, Tyco, Adelphia, Peregrine Systems and WorldCom. </li></ul><ul><li>But the practical effect was to kill the </li></ul><ul><li>initial public offering market in the U.S. </li></ul>
    22. 22. Problems created by the Act <ul><li>It didn’t prevent insolvencies and accounting shortfalls in companies such as Bear Sterns, Lehman Brothers, American International Group (AIG) and Merrill Lynch. </li></ul><ul><li>The average company will now take 12 years before it can successfully issue an initial public offering (IPO) (up from 5 years pre-SOX) </li></ul><ul><li>Because they do not have enough capital to cover the estimated $4.36 million hidden tax in yearly compliance costs (The initial estimate from the SEC was approximately $91,000). </li></ul><ul><li>Smaller public companies went private or merged. </li></ul><ul><li>U.S. companies are going public on foreign exchanges to avoid the Act </li></ul>
    23. 23. THANK YOU