1. Overview of Sarbanes-Oxley Act
Corporate scandals resulted in numerous investigations by Congress and regulatory agencies
Congress responded with the Sarbanes-Oxley Act which some view as the most sweeping corporate reform legislation since the Securities Exchange Act of 1934
The Act was signed into law by President Bush on July 30, 2002
The SEC is responsible for implementation and will establish necessary rules in the coming months

2. Provisions of Sarbanes-Oxley Act
Creates Public Company Accounting Oversight Board (Meet the Board’s founding members)
Empowers audit committees to be the “client” and to oversee the audit function independent of management
Establishes new financial reporting requirements and criminal penalties for corporate misconduct
Requires financial statements to be certified by the CEO and CFO
Prohibits certain non-audit services

3. Prohibited Non-audit Services
The Securities Exchange Act of 1934 was amended to prohibit the following services most of which were previously prohibited by the SEC’s rule on auditor independence:
Bookkeeping or other services related to the accounting records or financial statements
Financial information systems design and implementation
Appraisal or valuation services, fairness opinions, or contribution-in-kind reports
Actuarial services
Internal audit outsourcing services
Management or human resources functions
Broker or dealer, investment adviser, or investment banking services
Legal and expert services unrelated to the audit
Any other service that the Public Company Accounting Oversight Board (Board) determines, by regulation, is impermissible

4. Provisions Affecting CPA Firms
Audit committees must approve audit and non-audit services
Firms must rotate the lead audit and review partners every five years
Audit documentation must be maintained for at least seven years
Firms may not audit a company if its CEO, CFO, controller, chief accounting officer, or person in a similar capacity worked for the firm during the one-year period prior to the initiation of the audit

5. Provisions Affecting CPA Firms
Auditors must describe their testing of internal control and report on their findings
Auditors must report to the audit committee:
All critical accounting policies and practices
All alternative treatments (and their implications) of financial information within GAAP discussed with management
Other material written communications between the firm and management (e.g., schedule of unadjusted differences and management letters)

6. Corporate Governance Changes
US stock exchanges have embraced requirements of Sarbanes-Oxley
Approved and proposed changes strengthen the integrity and independence of the BOD and its committees, especially the audit, nominating, and compensation committees
Read more about these changes at:

7. Corporate Governance Changes
NYSE
AMEX
NASDAQ
Shareholder approval required for stock option plans 
A majority of the BOD must be independent
Require financial sophistication of audit committee members
Audit committee must hire, retain and oversee auditors

8. Demise of Andersen
Andersen closed its audit practice and offices after the firm’s June 2002 conviction for obstruction of justice related to Enron
Firm is no longer allowed to audit public companies under SEC rules as a result of the verdict
Andersen still exists but very few employees remain at the firm
Andersen was fined $500,000 and placed on five years probation as a result of the Enron verdict

9. Disposition of Consulting Units
The Big 5 firms began disposing of their consulting practices well before Sarbanes-Oxley, partially to address concerns over independence and conflicts of interest
The last two remaining Big 5 consulting units were recently disposed of
PwC sold its consulting practice to IBM for $3.5 billion
Deloitte Consulting went private and was renamed Braxton
Earlier dispositions
Ernst & Young consulting sold to Cap Gemini in Feb. 2000
Andersen Consulting separated from Andersen in Aug. 2000, went public, and was renamed Accenture
KPMG Consulting went public in Feb. 2001, and was recently renamed BearingPoint

10. Current Look at the Big 4 Revenue (2) Prof. (2) Revenue %
Rank Firm $ million Staff A&A Tax MAS Other
PwC (1) , ,
Deloitte & Touche (1) 6, ,
Ernst & Young , ,
KPMG , ,
Source: Accounting Today: March 18- April 7, 2002 at
(1) Data include consulting practices sold or separated in 2002
(2) Revenue and staff figures do not reflect clients and staff gained after Andersen discontinued its audit practice

11. Corporate Scandals
2002 has seen numerous corporate scandals and shareholder value has declined by billions of dollars
Highly publicized scandals include:
 Tyco  Adelphia Communications
 WorldCom  Global Crossing
 Qwest  ImClone
Get updates on corporate scandals from CNN Money’s “Fraud.inc” web site

12. Corporate Scandals Primer
Tyco – CEO and CFO charged with looting the company of more than $600 million
WorldCom – Corporate officers charged with issuing fraudulently prepared financial statements, CEO and CFO are currently under investigation regarding capitalization of certain expenses
ImClone – CEO admitted to trading on “insider” information prior to the FDA’s announcement regarding its cancer fighting drug
Adelphia Communications – Members of the company’s founding family charged with unapproved “borrowing” from the company to cover personal investment losses

13. Enron Update
Arthur Andersen LLP was found guilty of obstruction of justice on June 15, Two days later, the firm relinquished its membership in the SEC Practice Section.
Michael Kopper, former assistant to Andy Fastow, pleaded guilty to money laundering and conspiracy to commit wire fraud. He is cooperating in the government’s ongoing investigation.
Andy Fastow, former Enron CFO, was arrested on October 2, 2002 and charged with securities, mail and wire fraud, as well as money laundering and conspiracy. On October 31, a Grand Jury indicted him on 78 additional counts.
David Duncan, former Andersen partner in charge of the Enron audit, pleaded guilty on April 6, 2002 and is awaiting sentencing on obstruction of justice charges.
Enron continues to operate and is pursuing a plan to restructure under Chapter 11 bankruptcy.

14. New Fraud Standard - SAS No. 99
New “brainstorming” meeting among audit engagement team about fraud risks and discussion about professional skepticism
Broader set of information gathered to assess fraud risks
Focus on the “fraud triangle”
Expand auditor responses to fraud risks
Mandate procedures in all audits to address ever-present risk of management override

15. Incentives/Pressures Attitudes/Rationalizations
The “Fraud Triangle”
Opportunities
Weak Board of Directors
Weak Internal Controls
Incentives/Pressures
Tight Debt Covenants
Unrealistic Analyst Expectations
Attitudes/Rationalizations
Lack of a Code of Conduct
Disregard for Financial Reporting

16. Information to Assess Fraud Risks
Analytical Procedures
Fraud Risk Factors
Other Information
Brainstorming
Inquiries
Identified Fraud Risks

17. Other New SASs
The ASB has issued two other new standards:
SAS No. 97, Amendment to SAS No. 50
SAS No. 98, Omnibus-2002
SAS No. 97 – auditors may not provide a written report on a hypothetical transaction
SAS No. 98 – omnibus standard that includes a number of amendments and revisions

18. “On the Horizon” Joint Risk Assessments Task Force
Joint effort between ASB and IAASB
Considering a revision of the current risk model
Exposure draft is to be issued in December 2002
Audit Committee Task Force
Consider impact of Sarbanes-Oxley Act on SASs
Modify establishment of understanding with client given that audit committees are now to be viewed as the “client”
Include additional required discussions in the communications with audit committees