Dr. Donald K. McConnell Jr. Sarbanes-Oxley Act of 2002 Dr. Donald K. McConnell Jr. 11/18/2018

What It Does Effectively ends the accounting profession’s era of self-regulation Provides sweeping and, as of yet, not clearly defined powers regulating accountants, corporate management, boards of directors, and attorneys Applies to: Publicly held companies Auditors of public companies CPAs auditing or working for publicly traded companies 11/18/2018

Establishes the Public Company Accounting Oversight Board Appointed and overseen by SEC Board Powers: Authority to set and enforce audit, quality control, ethics, and independence standards for public company (issuer) audits Registration of public accounting firms auditing public companies Conduct regular inspections of public accounting firms Conduct investigations and disciplinary proceedings, imposing sanctions as appropriate 11/18/2018

Board Composition Board consists of five financially literate members appointed by SEC No more than two members can be or have been CPAs If chair is a CPA, cannot have practiced public accounting in five years Board members serve full-time five-year terms Funded by mandatory fees collected from public companies and auditors of public companies 11/18/2018

Effects on CPA Firms Must register with Board, and pay both registration fee and annual fees Also foreign accounting firms auditing U.S. companies must register Auditors of more than 100 issuers required to submit to an annual quality review or inspection Other issuer auditors inspected every three years Must retain audit documentation for seven years Auditors will report to audit committees, not management! 11/18/2018

CPA Firm Effects (con.) Accountants must obtain audit committee preapproval of all issuer services, including audit and tax services Required reporting to audit committees: Key accounting policies and practices used Existence of alternative GAAP, if any Disagreements between management and the auditor Engagement and concurring partner must be rotated every five years Requirement to issue attestation reports on the effectiveness of issuer internal controls over financial reporting 11/18/2018

Prohibited Non-Audit Issuer Services: Information systems [IT] design and implementation consulting Internal audit outsourcing Bookkeeping Management and HR services Appraisals or valuation services Actuarial services Broker-dealer and investment banking services Legal or expert services related to audits Other services the Board may deem impermissible 11/18/2018

Effects on Audit Committees Each committee member shall be an independent Board member At least one financially literate member Must preapprove all non-prohibited accounting firm services Preapproval of non-audit services can be delegated to a single member, but preapprovals must be reported to the entire audit committee 11/18/2018

Effects on Audit Committees (con.) Must establish procedures for receipt, retention, and treatment of complaints regarding accounting, internal controls, or auditing matters authority [and resources] to engage independent counsel, or other experts, as deemed necessary 11/18/2018

Effects on Management CEOs and CFOs required to certify their 10-K and 10-Q’s Penalties for knowingly and willfully misrepresenting and intentionally signing off: Civil charges to a maximum of $5,000,000, and/or Imprisonment of up to twenty years. Must communicate to auditors and audit committee: nature of significant deficiencies in design or operation of internal controls any fraud, whether or not material, involving management or other employees with significant controls roles 11/18/2018

Effects on Management (con.) Unlawful for officer or director to fraudulently influence, coerce, manipulate, or mislead auditors for the purpose of creating materially misstated financial statements Officer/director restitution of ill-gotten bonuses and profits officers, directors, and other insiders prohibited from purchasing or selling company stock during pension blackout periods 11/18/2018

Provisions Concerning Issuers Loans to officers/directors prohibited: Unless issuer a consumer credit company, but No “sweetheart” loans allowed Cannot hire a CEO, controller, CFO, chief accounting officer who had been employed by the issuer’s CPA firm in the one-year period prior to the audit Issuers must appropriately fund audit committees, to include hiring of experts or legal counsel as deemed necessary 11/18/2018

New Disclosure Requirements Clear disclosure of all material off-balance sheet transactions or other relationships with unconsolidated entities Timely disclosure “in plain English” of material changes in financial position or operations Required reconciliation of any pro forma disclosures with GAAP Management must issue internal control report acknowledging responsibility for establishing and maintaining adequate internal controls 11/18/2018

Potential Penalties Securities fraud conviction can result in fines, penalties, and up to 10 years of incarceration Statute of limitations for securities fraud extended to earlier of five years from occurrence of fraud or two years after discovery of fraud (those periods had been three years and one year) maximum penalties for mail and wire fraud increased from 5 to 10 years SEC authority to seek court seizure of “extraordinary” payments made to executives, directors, partners, controlling persons, or agents thereof [Material on this slide will not be tested] 11/18/2018

Optional Additional Sources Regarding SOX Following are some articles you might want to look at re: SOX “How Sarbanes-Oxley will Change the Audit Process,” Journal of Accountancy, Sept 2003. “Sarbanes-Oxley: Auditing the Auditors?” Oil, Gas, and Energy Quarterly, December 2003 11/18/2018