1. Sarbanes-Oxley Act a.k.a. “SOX” Georgia CTAE Resource Network Curriculum Office, February 2009 To accompany curriculum for the Georgia Peach State Career Pathways February 2009, Kayla Calhoun & Dr. Frank Flanders

2. Enduring Understanding  The Sarbanes-Oxley Act was enacted to establish new or enhanced standards for U.S. public company boards, management, and public accounting firms.

3. Essential Questions  Why was the Sarbanes-Oxley Act needed?  How does the Sarbanes-Oxley Act protect stockholders and institutions?

4. Objectives  Describe the events that caused the passing of the Sarbanes-Oxley Act.  Relate the Sarbanes-Oxley Act to accounting.  Explain the goals of the Sarbanes-Oxley Act.  Describe each of the 11 titles of the Sarbanes-Oxley Act.

5. What is SOX?  Also known as the Public Company Accounting Reform and Investor Protection Act of 2002  Created by US Senator Paul Sarbanes (D-Maryland) and US Congressman Michael Oxley (R-Ohio)  Signed into law July 30, 2002  Most dynamic securities legislation since the Securities and Exchange Acts of 1933 and 1934

6. Purpose of SOX  Establish new or enhanced standards for U.S. public company boards, management, and public accounting firms

7. Relation to Accounting  Bad accounting procedures, both intentional and non-intentional, led to the collapse and subsequent investigation of several large companies  Public outrage led Congress to pass SOX to regulate audits of public company accounting procedures and hopefully prevent false financial reports

8. Relation to Accounting, continued…  Companies that do not follow standard accounting procedures may use methods that mislead investors about the financial health of the company.  These practices range from just unethical to illegal.

9. Why was SOX passed?  Failure of Boards of Directors and executives to double-check financial records  Intentional misrepresentation of financial status  Loans from major banks to risky companies hurt bank investors and encouraged others to make risky investments in those companies  Misrepresentation of company earnings caused stockholders to make seemingly good investments that cost them large sums of money

10. Why was SOX passed?, continued…  Auditor conflicts of interest  Some auditing firms provided consulting services to the companies they audited.  Proper auditing procedures, such as challenging a company’s accounting procedures, could damage the client relationship under the consulting agreement.  This caused bad accounting practices and misrepresentation of financial information to go unchecked, leading to the collapse of several companies, like Enron.

11. Goals of SOX  Regain public confidence in markets  Improve corporate governance  Increase executive accountability  Increase efforts to  Increase efforts to prevent, detect, investigate and remediate fraud and misconduct

12. Title I – Public Company Accounting Oversight Board  Created as a non-profit organization to oversee audits of public companies  Under the authority of the Securities Exchange Commission (SEC)  Comprised of 5 appointed members w/ a max of 2 CPA’s  Duties:  Register existing public accounting firms which prepare audits for publicly traded companies  Audit the auditors  Establish and amend rules and standards (in cooperation with other standard setters)  Try and penalize registered public accounting firms who fail to comply with the rules

13. Title II – Auditor Independence  Prohibits registered public accounting firms from performing non-audit services for companies they audit  Prevents conflicts of interest

14. Title III – Corporate Responsibility  CEOs and CFOs must certify accuracy  Forfeit bonuses and profits if information is misrepresented

15. Title IV – Enhanced Financial Disclosures  Forbids most personal loans to chief executives  Disclosure of code of ethics for senior financial officers  Disclosure of members of company audit committee  Should include at least one financial expert

16. Title V – Analyst Conflicts of Interest  Requires registered securities associations to adopt rules that prevent conflicts of interest  Ex: Recommendations of analysts in research reports

17. Title VI – Commission Resources and Authority  Increased SEC budget to $780 million  $98 million used to hire 200 employees to oversee auditors  SEC has the authority to investigate and punish violators of security law

18. Title VII – Studies and Reports  US Comptroller General to conduct a study about the consolidation of public accounting firms  Also conduct investigation of security law violations in the cases of Enron, WorldCom, etc.

19. Title VIII – Corporate and Criminal Fraud Accountability  To knowingly create, destroy, or manipulate documents or impede federal investigations is considered a felony  Punishment = Fines, maximum 20 years in prison, or both  Audit reports should be kept for 5 years  Whistleblower protection

20. Title IX – White-collar Crime Penalty Enhancements  CEOs and CFOs must certify that financial statements are accurate representations of the company’s condition  Punishment = Max $5 million fine and/or max 20 year sentence  SEC may ban anyone convicted of a security crime from holding an executive position at a public company

21. Title X – Corporate Tax Returns  Federal income tax returns must be signed by the Chief Executive Officer (CEO) of the company

22. Title XI – Corporate Fraud Accountability  Destroying/altering evidence or otherwise obstructing securities fraud proceedings may be punished with a fine and/or up to 20 years in prison  SEC may freeze payments to accused individuals  Any retaliation to whistleblowers is subject to fines and/or 10 years imprisonment

23. Summary  The Sarbanes-Oxley Act of 2002 was passed to regain public confidence in the stock market following a string of major accounting fraud cases involving public companies.  A plan to accomplish this objective is outlined in 11 titles, which:  Prohibit conflicts of interest  Increase corporate accountability  Increase accounting transparency  Form an oversight board to enforce the new rules