BusinessAllstars.com 1 Sarbanes-Oxley Act of 2002 BusinessAllstarsPresents Copyright © 2004 by Gainbridge Associates All right reserved This material may not be used or reproduced without permission of Gainbridge Associates

BusinessAllstars.com 2 The Board of Directors Chief Executive Officer External Auditors

BusinessAllstars.com 3 External Auditor’s 3. Senior management of a company cannot have worked for the outside audit firm during the 1-year period proceeding the audit. 1. During the audit, the external auditor cannot provide non-audit services to the company. 2. The lead auditor, coordinating partner, and reviewing partner must rotate off the audit every 5 years.

BusinessAllstars.com 4 The Audit Committee 1. Must be independent and members of the board of directors. 2. Shall directly appoint, compensate, and oversee the audit work of external auditors.

BusinessAllstars.com 5 The Audit Committee 3. Shall handle all complaints regarding accounting, internal controls, and auditing. 4. Shall engage outside counsel/advisors as necessary.

BusinessAllstars.com 6 The Audit Committee 5. The company will provide appropriate funding. 6. At least 1 member must be a financial expert. CPA CFA PhD

BusinessAllstars.com 7 The final rules define an audit committee financial expert as a person who has the following attributes: An understanding of GAAP and financial statements; The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant's financial statements, or experience actively supervising one or more persons engaged in such activities; An understanding of internal controls and procedures for financial reporting; and An understanding of audit committee functions. Financial Expert Attributes

BusinessAllstars.com 8 Under the final rules, a person must have acquired such attributes through any one or more of the following: Education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions; Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions; Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or Other relevant experience. Financial Expert Background

BusinessAllstars.com 9 The final rules that we are adopting require companies to include the new disclosure in their annual reports on – –Form 10-K, – –Form 10-KSB, – –Form 20-F or – –Form 40-F. The requirement to provide the new audit committee disclosure item is included in Part III of Forms 10-K and 10-KSB, enabling a domestic company that voluntarily chooses to include this disclosure in its proxy or information statement to incorporate this information by reference into its Form 10-K or 10-KSB if it files the proxy or information statement with the Commission no later than 120 days after the end of the fiscal year covered by the Form 10-K or 10- KSB.3939http:// Financial Expert Disclosure

BusinessAllstars.com 10 The Audit Committee * Independent is defined as not receiving, other than for service on the board, any consulting, advisory, or other compensatory fee from the company, and is not an affiliated person of the company, or any subsidiary thereof.

BusinessAllstars.com 11 CEO and CFO 1. The CEO and CFO shall certify that the financial statements and related disclo- sures, in all material respects, fairly present the operations and financial condition of the company. 2. The Federal income tax return of a company will be signed by the CEO.

BusinessAllstars.com 12 CEO and CFO 3. It is unlawful to fraudulently influence, coerce, manipulate, or mislead any auditor that might make the financial statements materially misleading. 4. Violation must be knowing and intentional to give rise to liability.

BusinessAllstars.com 13 Officer And Director Penalties 1. The CEO and CFO shall "reimburse the company for any bonus or incentives received during the twelve months following the issuance/filing of a restatement of financial statements due to material noncompliance. 2. Any profits realized from the sale of securities of the company during that period shall also be reimbursed.

BusinessAllstars.com 14 Officer And Director Penalties 1. The SEC can temporarily freeze extraordinary payments to any director, officer, partner, controlling person, agent, or employee of a company during an investigation of possible violations of securities laws. 2. The purchase or sale of stock by officers and directors and other insiders during blackout periods is prohibited.

BusinessAllstars.com 15 Disclosures In Periodic Reports 1. Financial report must show all material correcting adjustments identified by outside auditors. 2. Any Pro forma financial information must not "contain an untrue statement" or omit material facts that would make financial information misleading.

BusinessAllstars.com 16 Disclosures In Periodic Reports Each annual and quarterly financial report must disclose any of the following that may have a material current or future effect on the financial condition of the issuer: 1. All material off-balance sheet transactions and An Off-balance sheet transaction might be an operating lease on a machine. The machine is never considered a Fixed Asset on the Balance Sheet even though the company may treat it as if it were owned.

BusinessAllstars.com 17 Disclosures In Periodic Reports Each annual and quarterly financial report must disclose any of the following that may have a material current or future effect on the financial condition of the issuer: 2. “Other relationships" with "unconsolidated entities" An Unconsolidated Entity is a business that a company has a financial interest in, but is never disclosed on the company’s books.

BusinessAllstars.com 18 Disclosures In Periodic Reports Each annual and quarterly financial report must disclose any of the following that may have a material current or future effect on the financial condition of the issuer: 3. Including special purpose entities. A Special Purpose Entity is a business interest formed solely in order to accomplish some specific task or tasks. A company can take assets and liabilities off its books that are placed into a SPE, but only if there is no residual liability.

BusinessAllstars.com 19 Insider Transactions 1. Generally, it will be unlawful for an issuer to extend credit or personal loans to any director or executive officer. 2. Directors, officers, and 10% owners must report selected equity transactions by the end of the second business day following the day the transaction was executed.

BusinessAllstars.com 20 Management Assessment Of Internal Controls – Internal Control Report Each annual report of a company must contain an "internal control report", which shall: 1. state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and 2. 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.

BusinessAllstars.com 21 Management Assessment Of Internal Controls – Auditor’s Evaluation A company's auditor shall attest to, and report on, the assessment made by management. The auditor’s attestation shall not be the subject of a separate engagement or the basis for increased charges or fees.

BusinessAllstars.com 22 Management Assessment Of Internal Controls - Code of Ethics The company must disclose if it has adopted a code of ethics for its senior officers and the contents of the code. There must be an immediate disclosure on Form 8-K of any change in, or waiver of, an issuer's code of ethics.

BusinessAllstars.com 23 Corporate and Criminal Fraud 1. Auditors are required to maintain "all audit or review work papers" for five years. 2. The statute of limitations on securities fraud claims is extended to the earlier of five years from the fraud, or two years after the fraud was discovered.

BusinessAllstars.com 24 Whistleblower Protection Employees of companies and accounting firms are extended "whistleblower protection" that would prohibit the employer from taking certain actions against employees who lawfully disclose private employer information to, among others, parties in a judicial proceeding involving a fraud claim. Whistle blowers are also granted a remedy of special damages and attorney's fees.

BusinessAllstars.com 25 U.S. Sentencing Commission’s Guidelines 1. Companies must establish compliance standards and procedures to be followed by all employees. 2. At least one "high-level" individual must be assigned overall responsibility for compliance. 3. Organizations must not delegate "substantial discretionary authority" to individuals who have engaged in illegal activities.

BusinessAllstars.com 26 U.S. Sentencing Commission’s Guidelines (continued) 4. Organizations must communicate standards and procedures to all employees. 5. Organizations must take "reasonable steps to achieve compliance" with their own standards. 6. Standards must be enforced consistently through disciplinary mechanisms. 7. Organizations must take "all reasonable steps" to respond appropriately to violations, and must act to prevent similar offenses.

BusinessAllstars.com 27 According to the courts Companies must have 1. an organizational culture that encourages a commitment to compliance with the law; 2. standards of conduct and internal control systems that are reasonably capable of "reducing the likelihood of violations of law" 3. governing authority and leadership demonstrating compliance and accountability. 4. resources and authority for individuals with the responsibility for implementation of the program 5. an objective requirement for determining if there is a "history of engaging in violations"

BusinessAllstars.com 28 According to the courts Companies must implement 6. a training and training materials and information within the definition of an "effective program" 7. a "periodic evaluation of the effectiveness of a program" for monitoring and auditing systems 8. a mechanism for anonymous reporting (a whistleblower system) 9. a system for employees not only to report actual violations, but a way to "seek guidance about potential" violations 10. an ongoing risk assessments as part of the implementation of an "effective program."