1. Dr. Donald K. McConnell Jr.
Sarbanes-Oxley Act of 2002
Dr. Donald K. McConnell Jr.
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2. 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
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3. 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
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4. 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
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5. 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!
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6. 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
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7. 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
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8. 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
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9. 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
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10. 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
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11. 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
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12. 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
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13. 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
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14. 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]
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15. 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
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