Transcript Document
Sarbanes-Oxley - 1
COMPLIANCE
& SOX
Sarbanes-Oxley - 2
SARBANES-OXLEY ACT
At Issue
If the governance of the modern corporation
isn’t completely broken, it is going through a
severe crisis of confidence. At risk is the very
integrity of capitalism.
Directors who fail to direct and CEOs who fail
at moral leadership are arguably the most
important challenge facing corporate America
today.
Business Week (May 6, 2002)
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SARBANES-OXLEY ACT
The Solution Starts At Home
The recent corporate collapses have involved many
breakdowns: in ethics, in trust, in common sense,
to name a few. But perhaps the most troubling
breakdown is in corporate oversight.
Directors, senior executives, and Wall Street
analysts all failed miserably by missing – or
concealing – danger signals until it was too late.
Regulators will no doubt have plenty to say on the
issue, but the most zealous reformers should be
the companies themselves.
Fortune (May 27, 2002)
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CORPORATE GOVERNANCE
STANDARDS
1900: NYSE requires distribution of annual reports
to stockholders
1909: NYSE requires annual stockholders’ meeting
1926: NYSE adopts “one share, one vote” standard
1929: Stock market crash
1932: Increased financial disclosure and
independent audits become mandatory
1934: SEC is formed
1955: Shareholder approval required for certain
corporate acquisitions
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CORPORATE GOVERNANCE
STANDARDS
1968: AMEX publishes first guide establishing
listing standards
1977: NYSE requires establishment of an audit
committee comprised of independent
directors
1985: NASDAQ initiates its first corporate
governance listing standards
1987: Treadway Commission (COSO) established
to define responsibilities of the auditor in
detecting and preventing fraud
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CORPORATE GOVERNANCE
STANDARDS
1999: NYSE/AMEX/NASD adopt new rules based
on Blue Ribbon Committee on Improving the
Effectiveness of Audit Committees
2002: Sarbanes-Oxley Act (July 30, 2002)
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SARBANES-OXLEY
Major Objectives
Improve corporate governance
Reform public accounting (auditing)
Reform Wall Street practices
Attack insider trading and obstruction of
justice (document retention)
“Restore confidence in capital markets”
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SARBANES-OXLEY ACT
Major Provisions
Title I:
Public Company Accounting
Oversight Board
Title II: Auditor Independence
Title III: Corporate Responsibility, Disclosure,
and Governance
Title IV: Enhanced Financial Disclosures
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SARBANES-OXLEY ACT
Other Provisions
Title V
Title VI
– Analyst Conflicts of Interest
– Commission (SEC) Resources
and Authority
Title VII – Studies and Reports
Title VIII – Corporate and Criminal
Fraud Accountability
Title IX – White-Collar Crime Penalty
Enhancements
Title X
– Corporate Tax Returns
Title XI - Corporate Fraud and Accountability
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PUBLIC COMPANY
ACCOUNTING OVERSIGHT BOARD
Established by Sarbanes-Oxley
Broad powers to regulate audits
and auditors of public companies
Appointed by the SEC
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PCAOB
Register public accounting firms
Establish auditing standards
Inspect registered public accounting
firms
Conduct investigations and disciplinary
proceedings – with ability to sanction
auditors and audit firms
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AUDITOR INDEPENDENCE
Prohibits certain “nonaudit services”
– Bookkeeping, financial systems design, appraisal or
valuation, actuarial, internal auditing outsourcing,
management or human resources, broker-dealer or
investment banking, others per PCAOB
Audit committee must pre-approve all
auditing and non-auditing services
Audit partner rotation
– Audit firm rotation was discussed
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AUDITOR INDEPENDENCE
Audit Committee is directly responsible for
oversight of external auditors
Auditor required to discuss
– All critical accounting policies and practices
– All alternative accounting and disclosure
treatments
– Other material written communications
“Cooling – off” period
– CEO, CFO, Controller, etc.
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CORPORATE RESPONSIBILITY &
GOVERNANCE
Audit Committee = independent directors
Audit Committee has responsibility to appoint,
compensate, and oversee public accounting firm
performing the audit
Audit Committee has responsibility to resolve
disagreements over financial reporting between
management and external auditors
Audit Committee must establish “whistle-blower”
procedures
– New penalties for retaliation against them
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CORPORATE RESPONSIBILITY &
GOVERNANCE
Requires executives and financial officers
(CEO & CFO) to certify financial reports are
accurate, complete and fairly presented
Also must certify the state of internal controls
Outlaws improperly influencing the auditor
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CORPORATE RESPONSIBILITY &
GOVERNANCE
Reimbursement of bonuses and profits if
public was misled
Removal of “substantial unfitness” standard
Prohibits trading during a pension “blackout”
period
Minimum standards for attorneys
– Both in-house and outside counsel
Any reimbursed funds from guilty parties be
added to a fund for the benefit of victims
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ENHANCED FINANCIAL
DISCLOSURES
Off-balance sheet arrangements and obligations
Prohibits loans to executives and directors
Insider trades within two business days
Adoption of code of ethics for senior financial officers
and requirements
Whether at least one member of the audit committee is
an “Audit Committee Financial Expert”
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ENHANCED FINANCIAL
DISCLOSURES
Reconciliation of non GAAP revenue to most
directly comparable GAAP measure
Requires management to establish and maintain
adequate internal controls and report annually
on:
– Management’s responsibility for such
– Effectiveness of such internal controls
Assessment of internal controls by management
is to be subject of an attestation report by the
external auditor
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PRIVATE COMPANIES
Who Should Adopt SOX
May soon go public
Contemplating a combination with a
public company
Large Not-for-profit entities
– Audit committees becoming common
Significant absentee owners
Creditors may require SOX
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PRIVATE COMPANIES
What parts of SOX?
More than internal controls
Independent audit committees
– “Financial expert”
– Compensation & funding of committee
– Approval of nonaudit services
Certification of financial statements
Codes of ethics
Whistle-blower procedures and
protections
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CORPORATE AMERICA
After SOX
Must have autonomous & vigorous audit committees
– “Take charge”
Financial information is inherently judgmental
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Financial statements are NOT precise
Users must appreciate this fact
FMV reporting will increase volatility
Non-financial disclosures will become more important
Auditors’ opinions on overall “fairness” of statements
Financial reporting should be as clear and concise as
possible
Committee for Economic Development
March 28, 2006
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CORPORATE AMERICA
After SOX
Give SOX (esp. 404) a chance to work
– PCAOB has issued new guidelines
– Learning curve effects
Excessive executive compensation can be
tamed by Compensation Committees
Directors must be selected and appraised by
independent nominating committees
– Issue of Non-Executive Chair
– Direct nomination by shareholders
Committee for Economic Development
March 28, 2006