Sarbanes Oxley Act

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  • 1. Sarbanes-Oxley Act The Integrity of Financial Reporting
  • 2. The Integrity of Financial Reporting
    • The Gatekeepers (Guardians) are:
    • The U.S. Securities & Exchange Commission (SEC)
    • The Public Company Accounting Oversight Board (PCAOB)
    • The Independent Audit Firm
    • The Audit Committee of the Corporate Board of Directors
    • The Internal Audit Function
    • The Internal Control System
  • 3. Corporate Governance & Financial Reporting U.S. Securities & Exchange Commission (SEC ) Public Company Accounting Oversight Board (PCAOB) Corporate Board Of Directors Independent Audit Firm Audit Committee Internal Audit Function Internal Control System CEO & CFO
  • 4. The U.S. Securities & Exchange Commission (SEC)
    • The mission of the SEC is to protect investors, maintain orderly and efficient financial markets, and facilitate capital formation.
    • The laws and rules governing the securities industry derive from a straightforward concept: all investors, large or small, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it.
    • Therefore the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to judge for themselves whether to buy, sell, or hold a particular security.
    • For more visit: http:// www.sec.gov/about/whatwedo.shtml
  • 5. Public Company Accounting Oversight Board (PCAOB)
    • The PCAOB is a private, nonprofit corporation created by the Sarbanes-Oxley Act of 2002, under the oversight of the SEC, to supervise the auditors of public companies. The PCAOB was created to protect investors and the public interest.
    • The PCAOB Board consists of five members, appointed by the SEC
    • All accounting firms that perform public company audits must register with, and be regulated by, the PCAOB.
    • The PCAOB performs regular inspections of the audit quality control systems of registered audit firms.
    • The PCAOB sets auditing standards and related rules for public company audits, subject to SEC approval.
    • The PCAOB has an enforcement division to discipline audit firms that do not adhere to its auditing standards and related rules.
    • For more visit: http:// www.pcaobus.org/index.aspx
  • 6. Independent Audit Firms
    • There are 1,867 audit firms registered with the PCAOB.
    • But the vast majority of large public companies are audited by just one of the “Big Four” audit firms.
    • Sarbanes-Oxley (SOX) main provisions for audit firms:
      • Section 204- Auditors must report all critical accounting
      • policies and practices to the company’s audit committee.
      • Section 203- The lead audit and reviewing partner must rotate off the audit every 5 years.
      • Section 201- Prohibits any public accounting firm from performing non-audit services for public company audit clients.
      • Section 303: Improper Influence on Conduct of Audits. It is unlawful for any public company officer or director to fraudulently influence, coerce, manipulate, or mislead any auditor for the purpose of rendering the financial statements materially misleading.
      • Section 404: The auditor shall attest to, and report on, the assessment of internal control made by the management of the public company.
    • For more visit: http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/Summary+of+the+Provisions+of+the+Sarbanes-Oxley+Act+of+2002.htm
  • 7. Audit Committees
    • Section 301: Public Company Audit Committees.
    • Each member of the audit committee shall be a member of the board of directors of the issuer, and shall otherwise be independent.
    • "Independent" is defined as not receiving, other than for service on the board, any consulting, advisory, or other compensatory fee from the issuer, and as not being an affiliated person of the issuer, or any subsidiary thereof.
    • The audit committee of an issuer shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer.
    • The audit committee shall establish procedures for the "receipt, retention, and treatment of complaints" received by the issuer regarding accounting, internal controls, and auditing.
    • Each audit committee shall have the authority to engage independent counsel or other advisors, as it determines necessary to carry out its duties.
    • Each issuer shall provide appropriate funding to the audit committee.
    • Section 204: Auditor Reports to Audit Committees.
    • The accounting firm must report to the audit committee all "critical accounting policies and practices to be used; all alternative treatments of financial information within [GAAP] that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred" by the firm.
    • For more visit: http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/Summary+of+the+Provisions+of+the+Sarbanes-Oxley+Act+of+2002.htm
  • 8. CEO & CFO
    • Section 302: Corporate Responsibility For Financial Reports.
    • The CEO and CFO of each issuer shall prepare a statement to accompany the audit report to certify the "appropriateness of the financial statements and disclosures contained in the periodic report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer." A violation of this section must be knowing and intentional to give rise to liability.
    • Section 303: Improper Influence on Conduct of Audits.
    • It shall be unlawful for any public company officer or director to take any action to fraudulently influence, coerce, manipulate, or mislead any auditor engaged in the performance of an audit for the purpose of rendering the financial statements materially misleading.
    • Section 304: Forfeiture of Certain Bonuses and Profits
    • If an issuer is required to prepare a restatement due to "material noncompliance" with financial reporting requirements, the CEO and the CFO shall "reimburse the issuer for any bonus or other incentive-based or equity-based compensation received" during the twelve months following the issuance or filing of the non-compliant document and "any profits realized from the sale of securities of the issuer" during that period.
    • Section 404: Management Assessment Of Internal Controls.
    • Requires each annual report of an issuer to contain an "internal control report", which shall:
      • state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and
      • contain an assessment, as of the end of the issuer's fiscal year, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.
    • For more visit: http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/Summary+of+the+Provisions+of+the+Sarbanes-Oxley+Act+of+2002.htm
  • 9. Corporate Governance & Financial Reporting U.S. Securities & Exchange Commission (SEC ) Public Company Accounting Oversight Board (PCAOB) Corporate Board Of Directors Independent Audit Firm Audit Committee Internal Audit Function Internal Control System CEO & CFO