1. IOSCO Seminar Transition to IFRSs: Challenges for Supervisors
The Implications of Sarbanes-Oxley Act
Len Jui
Associate Chief Accountant
US Securities and Exchange Commission
October 17, 2007 – Madrid, Spain

2. Disclaimer
The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. Therefore, the views expressed today are my own, and do not necessarily reflect the views of the Commission or the other members of the staff of the Commission.

3. The Sarbanes-Oxley Act of 2002

4. Sarbanes-Oxley Act of 2002 Overview
2001 – 2002 news was dominated by corporate scandals and financial reporting restatements
Several Congressional committees held hearings on Enron and other corporate misdeeds
Culminated in the Sarbanes-Oxley Act of 2002
Signed into law on July 30, 2002 by President Bush
Required significant rule making activities on the part of the Commission
Most sweeping securities laws since the Exchange Acts of 33 and 34
Enron trials are going on now. Trials of Jeff Skilling and Ken Lay, former CEOs.
The law affects all marketplace participants

5. Sarbanes-Oxley Act of 2002 Components of the Sarbanes-Oxley Act
Title I – Public Company Accounting Oversight Board (PCAOB)
Title II – Auditor Independence
Non-audit services
Mandatory audit partner rotation
Auditor reports to the audit committee
The Act has 11 parts, or titles.
Prior to SOX, the accounting industry was self regulated and disciplinary matters were handled by the Public Oversight Board. This was deemed insufficient and the Act created the PCAOB.
PCAOB oversees auditors of U.S. public companies.
Registration
Auditing, Quality control and independence standards and rules
Inspection
Enforcement
Auditors used to report to management, typically the finance function. SOX gave the audit committee oversight responsibility, including hiring and firing.

6. Sarbanes-Oxley Act of 2002 Title III – Corporate Responsibility
Public company audit committees
Oversight of auditors
Members must be independent
Methods of handling complaints
Certifications (responsibility for financial statements)
Improper influence of auditors
Penalties for management
Insider trading during pension fund blackouts
Conduct standards for attorneys
Much of what led to SOX can be attributed to management fraud. Accordingly, several parts of the act are directed at corporate management.
302 certifications are filed with quarterly and annual reports. They are signed by the principal executive officer and the principal finance officer.

7. Sarbanes-Oxley Act of 2002 Components of the SOA – Continued
Title IV – Enhanced Financial Disclosures
Disclosures in periodic reports
Conflicts of interest
Reporting on internal controls
Code of ethics for senior auditors
Audit committee financial expert
Accelerated reporting deadlines
Title V – Analysts Conflict of Interest
Title VI – Commission Resources and Authority
Off-balance sheet transactions, special purpose entities

8. Sarbanes-Oxley Act of 2002 Components of the SOA – Continued
Title VII – Studies and Reports
Title VIII – Corporate and Criminal Fraud and Accountability
Title IX – White Collar Crime Penalty Enhancements
Title X – Corporate Tax Returns
Title XI – Corporate Fraud and Accountability

9. Internal Control Over Financial Reporting (ICFR) under the Sarbanes-Oxley Act

10. Sections 302 and 404 of the Sarbanes Oxley Act
Section 302 – Corporate Responsibility for Financial Reports
Requires periodic management certifications on disclosure controls (DCP) and procedures and internal controls over financial reporting (ICFR), and financial statements and related information are fairly stated
Section 404 – Management Assessment of Internal Control
Section 404 of the Sarbanes-Oxley Act requires management and auditors to issue an report regarding the effectiveness of internal controls over financial reporting (ICFR)
Substantial overlap between a company’s disclosure controls and procedures and its internal controls over financial reporting. However, certain elements of DCP are not ICFR and certain elements of ICFR are not DCP – for example, the safeguarding of assets is an element of ICFR but not DCP.
Registrants can address ICFR separate from, or together with, DCP.

11. Amended Compliance Dates –Adopted on December 15, 2006

12. Ineffective ICFR: Financial Statement Elements Involved
Year 1
Year 2
Year 3
Income taxes
33%
42%
31%
Revenue recognition
41%
26%
Liabilities and payables
28%
37%
23%
Accounts and loans receivable
27%
34%
21%
PPE/Fixed/Intangible Assets Valuation
20%
Foreign/Related/Affiliated/ Subsidiary Party Issues
15%
18%
Inventory and cost of sales
35%
17%

13. Ineffective ICFR: Selected Other Issues Identified
Year 1
Year 2
Year 3
Material and/or numerous auditor/YE
adjustments
55%
70%
68%
Restatement or nonreliance on company filings
51%
62%
24%
Est. % of restatement companies with MW’s (related to restatement)
58%
60%
28%

14. SEC’s New Interpretive Guidance for Management
Interpretive Guidance Proposed in
December 2006
Comment period ended February 26, 2007
Over 200 comment letters received
Final Interpretive Guidance Approved by Commission on May 23, 2007
Available on the SEC’s Website at :

15. SEC’s New Interpretive Guidance for Management
Key Attributes of the Guidance
Principles-based
Directs efforts to highest risks of material misstatement of financial statements
Allows evaluation processes tailored to facts and circumstances
Provides guidance on supporting evidence and documentation
Provides guidance for evaluating deficiencies
Does not replace control frameworks
Voluntary

16. SEC’s New Interpretive Guidance for Management - Overview
Overview of Guidance
Identifying Financial Reporting Risks and Controls
Identifying Financial Reporting Risks
Identifying Controls that Adequately Address Financial Reporting Risks
Supporting Evidence and Documentation
Evaluating Evidence of Operating Effectiveness of ICFR
Determining the Evidence Needed to Support the Assessment
Implementing Procedures to Evaluate Evidence of the Operation of ICFR
Reporting Considerations

17. Staff FAQs on Section 404 of Sarbanes-Oxley Act
FAQs revised and updated on September 24, 2007
Total of 15 questions addressing issues encountered in practices
Questions 12 through 15 specifically address Foreign Private Issuers
Link on SEC Website:

18. Staff FAQs on Section 404 of Sarbanes-Oxley Act
Question 12:
Should a foreign private issuer that files financial statements prepared in accordance with home country generally accepted accounting principles (GAAP) or IFRS, with a reconciliation to U.S. GAAP, plan and conduct its evaluation process based on the primary financial statements, or the amounts disclosed in the reconciliation to U.S. GAAP?Staff FAQs on Section 404 of Sarbanes-Oxley Act

19. Staff FAQs on Section 404 of Sarbanes-Oxley Act
Question 13:
In evaluating the severity of identified deficiencies, how should a foreign private issuer apply the reference to "interim financial statements" in the definition of material weakness?

20. Staff FAQs on Section 404 of Sarbanes-Oxley Act
Question 14:
How should a registrant that is a foreign private issuer treat an entity that is accounted for differently in the primary financial statements (prepared in accordance with home country GAAP or IFRS) than in the reconciliation to U.S. GAAP (e.g. consolidated in primary financial statements, but accounted for under the equity method in reconciliation to U.S. GAAP) for purposes of management's evaluation of the effectiveness of internal control over financial reporting?

21. Staff FAQs on Section 404 of Sarbanes-Oxley Act
Question 15:
Some foreign private issuers, based on their home country GAAP requirements, account for certain entities on a proportionate consolidation basis. How should those entities be treated for purposes of management's report on the effectiveness of internal control over financial reporting?

22. PCAOB’s New Internal Control Auditing Standard
An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements (AS No. 5)
Approved by PCAOB May 24, 2007
Subject to Commission approval
Published for public comment by SEC with comment period ending July 12, 2007
SEC received 37 comment letters
SEC approved at Open Meeting on July 25, 2007

23. PCAOB’s New Internal Control Auditing Standard (AS 5)
Key Objectives of the New Auditing Standard
Simplify and shorten the standard by reducing detail and making less prescriptive
Focus auditor on matters most important to internal control
Eliminate procedures that are unnecessary to achieve the intended benefits
Make the audit clearly scalable to fit the size and complexity of any company

24. Role of Audit Committee

25. Audit Committee’s Role
The Sarbanes-Oxley Act provides that the role of the Audit Committee is central to ensuring the integrity of published financial statements on which investors rely, and which are central to the efficiency of our capital markets.

26. Sarbanes-Oxley Act – Section 301
The Audit Committee is Responsible for the:
Appointment,
Compensation and
Oversight of the registered public accounting firm

27. Auditor’s Independence
The company and the auditor share responsibility for preserving the auditor’s independence both in fact and in appearance.  It is not only the auditor’s responsibility to assess its independence from the company.

28. Rule 2-01 of Regulation S-X
Rule 2-01 of Regulation S-X, Qualification of Accountants addresses auditor independence.
General Standard
An auditor is not independent if his relationship or service with an audit client:
Creates a mutual or conflicting interest
Results in auditing its own work
Results in acting as management or employee
Places him/her in an advocate for the audit client position

29. Independence Rule Considerations
Rules specifically address financial relationships, employment relationships, business relationships, non-audit services, contingent fees, partner rotation, and audit committee administration of engagement
Prohibited non-audit services include:
Bookkeeping
Appraisal and valuation services, fairness opinions, or contribution-in-kind reports
Actuarial services
Internal audit outsourcing services
Management functions
Human resources
Broker-dealer, investment adviser, or investment banking services
Legal services
Financial information systems design and implementation
Expert services unrelated to the audit

30. FAQs on Auditor Independence
Updated and Issued on August 6, 2007
Partner Rotation-Transition Questions
Audit Partner and Partner Rotation
Financial Relationships
Prohibited and Non-audit Services
Other Matters
Audit Committee Pre-approval
Audit Committee Communications
Fee Disclosures
"Cooling Off" Period
Broker-Dealer and Investment Advisers
Link on SEC Website:

31. Hot Topics for Audit Committee
Monitoring the independence of the principal auditor.
Communications with the principal auditor.
Understanding of the internal control requirements of Section 404 of the Sarbanes-Oxley Act.

32. Auditor’s Independence
Auditor has to discuss its independence and provide an ISB Standard No. 1 letter to the AC that:
Discloses all relationships between the auditor and the audit client that in its judgment might bear on its independence;
Confirms that it is independent within the meaning of the SEC rules.

33. Audit Committee’s Communications with the auditor
Discuss critical accounting policies.
Policies that are most important to the portrayal of the company’s financial statements and require the most difficult, subjective or complex judgments and estimates
Discuss alternative treatments of financial information.
Accounting for significant or unusual transactions
Effect of controversial or emerging accounting guidance
Material and immaterial audit adjustments
Auditor’s judgment about the quality of the company’s accounting principles
Discuss material communications with management.
Auditor’s views about significant matters that were the subject of consultation between management and other accountants

34. Benefits of Sarbanes-Oxley Act
Higher Quality Financial Reporting
Increased Investor Confidence
Business Benefits from Improved Corporate Control
Better Information for Decision Maker

35. ? ? ? ? ? ? Transition to IFRSs: Challenges for Supervisors
Questions and Answers ? ? ? ? ? ?