Transcript Sarbanes Oxley Act (2002)

Sarbanes Oxley Act (2002)
A brief summary
What is Sarbanes-Oxley?
• Legislation intended to restore the public’s
confidence in investing and the securities
markets.
• Also known as Public Company Accounting
Reform and Investor Protection Act of 2002
• President Bush: “The most far-reaching
reforms of American business practices since
the time of FDR."
What drove the need for
Sarbanes-Oxley?
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Enron, Tyco, WorldCom scandals
Falling share prices
Internet bubble burst
Board conflicts of interest exposed
Auditor conflicts of interest exposed
Analysts/Investment Banker conflicts of interest exposed
Faulty commercial bank lending practices exposed
Excessive executive compensation schemes led to managing
earnings at expense of stockholders and employees
• Need to re-build public confidence by strengthening accounting
controls and reducing/eliminating perceived and actual conflicts of
interest.
Whom does SOX affect?
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Boards of Directors
Auditors and CPA Firms
Analysts
SEC
Top Management (CEOs, CFOs, etc.)
Investors
Credit Rating Agencies
How is SOX organized?
• 11 Titles
• Several Sections per Title
• Key Sections are: 302, 401, 404, 409, 802 and
906
• Enforceable under the Securities Exchange Act
of 1934.
• Auditors register with “the Board”
Title I - Public Company Accounting
Oversight Board (PCAOB)
• PCAOB provides independent oversight of
public accounting firms providing audit
services.
• Not an “arm” of the SEC, but under SEC
supervision
• Defines specific processes and procedures for
compliance audits, inspecting and policing
conduct and quality control, and enforcing
compliance with SOX mandates.
Title II - Auditor Independence
• Establishes standards for external auditor
independence to limit conflicts of interest
• Addresses new auditor approval requirements
• Addresses audit partner rotation policy
• * Restricts auditing companies from doing
non-audit business (i.e. consulting) with audit
clients.
Title III - Corporate Responsibility
• Senior executives take individual responsibility for
the accuracy and completeness of corporate
financial reports
• Defines the interaction of external auditors and
corporate audit committees
• Limits behaviors of corporate officers
• Describes specific forfeitures of benefits and civil
penalties for non-compliance
• Section 302: CEO and CFO should certify and
approve the integrity of their quarterly company
financial reports
Title IV - Enhanced Financial Disclosures
• enhanced reporting requirements for offbalance sheet transactions, pro-forma figures
and stock transactions of corporate officers
• requires internal controls for assuring the
accuracy of financial reports and disclosures
• requires timely reporting of material changes
in financial condition and specific enhanced
reviews by the SEC or its agents of corporate
reports
Title V - Analyst Conflicts of Interest
Title VI - Commission Resources and Authority
• defines practices to restore investor
confidence in securities analysts
• defines the codes of conduct for securities
analysts
• requires disclosure of knowable conflicts of
interest
• defines conditions under which a person can
be barred from practicing as a broker, adviser
or dealer
Title VII - Studies and Reports
• Outlines processes for conducting research for
enforcing actions against violations by the SEC
registrants (companies) and auditors
• Specific studies outlined:
– the effects of consolidation of public accounting firms
– the role of credit rating agencies in the operation of
securities markets
– securities violations and enforcement actions
– whether investment banks assisted Enron and others
in manipulating earnings and obfuscating true
financial conditions
Title VIII - Corporate and Criminal
Fraud Accountability
• Corporate and Criminal Fraud Act of 2002
• describes specific criminal penalties for fraud by
manipulation, destruction or alteration of
financial records or other interference with
investigations
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“Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry
in any record, document, or tangible object with the intent to impede, obstruct, or influence the
investigation or proper administration of any matter within the jurisdiction of any department or
agency of the United States or any case filed under title 11, or in relation to or contemplation of any
such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.”
• provides certain protections for whistle-blowers
• Whoever knowingly, with the intent to retaliate, takes any action harmful to any person,
including interference with the lawful employment or livelihood of any person, for providing to
a law enforcement officer any truthful information relating to the commission or possible
commission of any federal offence, shall be fined under this title, imprisoned not more than 10
years, or both.
Title IX - White Collar Crime Penalty
Enhancement
• White Collar Crime Penalty Enhancement Act
of 2002
• increases criminal penalties associated with
white-collar crimes and conspiracies
• recommends stronger sentencing guidelines
• * failure to certify corporate financial reports
is a criminal offense
Title X - Corporate Tax Returns
• CEO should sign the company tax return
• Meant to reduce tax fraud/evasion and
provide check on financial reporting
Title XI - Corporate Fraud Accountability
• Corporate Fraud Accountability Act of 2002
• corporate fraud and records tampering are
criminal offenses
• revises sentencing guidelines and strengthens
penalties for these offenses (i.e. large
payment freezes)
Is SOX working? PROs
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Institute of Internal Auditors (IIA): corporations have improved their internal
controls and financial statements are perceived to be more reliable.
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Skaife/Collins/Kinney/Lefond research: borrowing costs are lower for companies
that improved their internal control, by between 50 and 150 basis points
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Iliev research: SOX 404 indeed led to more conservative reported earnings, but
also reduced stock valuations of small firms.
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The Lord & Benoit research: SOX disproportionately benefitted companies whose
accounting was originally more conservative/less suspect. Did not help pre-SOX
“suspect” companies.
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S&P 500 index increased 6% the day the law passed in Congress
Is SOX working? CONs
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Stock market still in a slump
FEI Survey: 78% surveyed say costs have exceeded benefits
Who’s paying for SOX?
De-Listing (to UK, etc.) – Wharton: # of American companies deregistering
from public stock exchanges nearly tripled in year after SOX became law
• SOX 404 is killing smaller companies: disproportionate costs
• Ron Paul: “SOX was an unnecessary and costly government intrusion into
corporate management that places U.S. corporations at a competitive
disadvantage with foreign firms.”
THE END 