Sarbanes-Oxley Act a.k.a. “SOX” Georgia CTAE Resource Network Curriculum Office, February 2009 To accompany curriculum for the Georgia Peach State Career.

Sarbanes-Oxley ActSarbanes-Oxley Acta.k.a. a.k.a.

“SOX”“SOX”Georgia CTAE Resource Network Curriculum Office, Georgia CTAE Resource Network Curriculum Office, February 2009 February 2009 To accompany curriculum for the Georgia Peach State To accompany curriculum for the Georgia Peach State Career Pathways Career Pathways February 2009, Kayla Calhoun & Dr. Frank FlandersFebruary 2009, Kayla Calhoun & Dr. Frank Flanders

Enduring UnderstandingEnduring Understanding

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

Essential QuestionsEssential Questions

Why was the Sarbanes-Oxley Act Why was the Sarbanes-Oxley Act needed?needed?

How does the Sarbanes-Oxley Act How does the Sarbanes-Oxley Act protect stockholders and institutions?protect stockholders and institutions?

ObjectivesObjectives

Describe the events that caused the Describe the events that caused the passing of the Sarbanes-Oxley Act.passing of the Sarbanes-Oxley Act.

Relate the Sarbanes-Oxley Act to Relate the Sarbanes-Oxley Act to accounting.accounting.

Explain the goals of the Sarbanes-Oxley Explain the goals of the Sarbanes-Oxley Act.Act.

Describe each of the 11 titles of the Describe each of the 11 titles of the Sarbanes-Oxley Act.Sarbanes-Oxley Act.

What is SOX?What is SOX?

Also known as the Public Company Also known as the Public Company Accounting Reform and Investor Protection Accounting Reform and Investor Protection Act of 2002Act of 2002

Created by US Senator Paul Sarbanes (D-Created by US Senator Paul Sarbanes (D-Maryland) and US Congressman Michael Maryland) and US Congressman Michael Oxley (R-Ohio) Oxley (R-Ohio)

Signed into law July 30, 2002Signed into law July 30, 2002 Most dynamic securities legislation since the Most dynamic securities legislation since the

Securities and Exchange Acts of 1933 and Securities and Exchange Acts of 1933 and

19341934

Purpose of SOXPurpose of SOX

Establish new or enhanced Establish new or enhanced standards for U.S. public company standards for U.S. public company boards, management, and public boards, management, and public accounting firmsaccounting firms

Relation to AccountingRelation to Accounting

Bad accounting procedures, both Bad accounting procedures, both intentional and non-intentional, led to the intentional and non-intentional, led to the collapse and subsequent investigation of collapse and subsequent investigation of several large companiesseveral large companies

Public outrage led Congress to pass Public outrage led Congress to pass SOX to regulate audits of public company SOX to regulate audits of public company accounting procedures and hopefully accounting procedures and hopefully prevent false financial reportsprevent false financial reports

Relation to Accounting, Relation to Accounting, continued…continued…

Companies that do not follow standard Companies that do not follow standard accounting procedures may use methods accounting procedures may use methods that mislead investors about the financial that mislead investors about the financial health of the company. health of the company.

These practices range from just unethical These practices range from just unethical to illegal. to illegal.

Why was SOX passed?Why was SOX passed?

Failure of Boards of Directors and executives Failure of Boards of Directors and executives to double-check financial recordsto double-check financial records

Intentional misrepresentation of financial statusIntentional misrepresentation of financial status Loans from major banks to risky companies Loans from major banks to risky companies

hurt bank investors and encouraged others to hurt bank investors and encouraged others to make risky investments in those companiesmake risky investments in those companies

Misrepresentation of company earnings Misrepresentation of company earnings caused stockholders to make seemingly good caused stockholders to make seemingly good investments that cost them large sums of investments that cost them large sums of moneymoney

Why was SOX passed?, Why was SOX passed?, continued…continued…

Auditor conflicts of interestAuditor conflicts of interest Some auditing firms provided consulting services to Some auditing firms provided consulting services to

the companies they audited. the companies they audited. Proper auditing procedures, such as challenging a Proper auditing procedures, such as challenging a

company’s accounting procedures, could damage company’s accounting procedures, could damage the client relationship under the consulting the client relationship under the consulting agreement. agreement.

This caused bad accounting practices and This caused bad accounting practices and misrepresentation of financial information to go misrepresentation of financial information to go unchecked, leading to the collapse of several unchecked, leading to the collapse of several companies, like Enron.companies, like Enron.

Goals of SOXGoals of SOX

Regain public confidence in marketsRegain public confidence in markets Improve corporate governanceImprove corporate governance Increase executive accountability Increase executive accountability Increase efforts to Increase efforts to prevent, detect,

investigate and remediate fraud and misconduct

Title I – Public Company Title I – Public Company Accounting Oversight BoardAccounting Oversight Board

Created as a non-profit organization to oversee audits Created as a non-profit organization to oversee audits of public companiesof public companies

Under the authority of the Securities Exchange Under the authority of the Securities Exchange Commission (SEC)Commission (SEC)

Comprised of 5 appointed members w/ a max of 2 Comprised of 5 appointed members w/ a max of 2 CPA’sCPA’s

Duties:Duties: Register existing public accounting firms which Register existing public accounting firms which

prepare audits for publicly traded companies prepare audits for publicly traded companies Audit the auditors Audit the auditors Establish and amend rules and standards (in Establish and amend rules and standards (in

cooperation with other standard setters)cooperation with other standard setters) Try and penalize registered public accounting firms Try and penalize registered public accounting firms

who fail to comply with the ruleswho fail to comply with the rules

Title II – Auditor Title II – Auditor IndependenceIndependence

Prohibits registered public accounting Prohibits registered public accounting firms from performing non-audit services firms from performing non-audit services for companies they auditfor companies they audit

Prevents conflicts of interestPrevents conflicts of interest

Title III – Corporate Title III – Corporate ResponsibilityResponsibility

CEOs and CFOs must certify accuracyCEOs and CFOs must certify accuracy Forfeit bonuses and profits if information is Forfeit bonuses and profits if information is

misrepresentedmisrepresented

Title IV – Enhanced Title IV – Enhanced Financial DisclosuresFinancial Disclosures

Forbids most personal loans to chief Forbids most personal loans to chief executivesexecutives

Disclosure of code of ethics for senior Disclosure of code of ethics for senior financial officersfinancial officers

Disclosure of members of company audit Disclosure of members of company audit committeecommittee Should include at least one financial expertShould include at least one financial expert

Title V – Analyst Conflicts Title V – Analyst Conflicts of Interestof Interest

Requires registered securities Requires registered securities associations to adopt rules that prevent associations to adopt rules that prevent conflicts of interestconflicts of interest Ex: Recommendations of analysts in Ex: Recommendations of analysts in

research reportsresearch reports

Title VI – Commission Title VI – Commission Resources and AuthorityResources and Authority

Increased SEC budget to $780 millionIncreased SEC budget to $780 million $98 million used to hire 200 employees to $98 million used to hire 200 employees to

oversee auditorsoversee auditors

SEC has the authority to investigate and SEC has the authority to investigate and punish violators of security lawpunish violators of security law

Title VII – Studies and Title VII – Studies and ReportsReports

US Comptroller General to conduct a US Comptroller General to conduct a study about the consolidation of public study about the consolidation of public accounting firmsaccounting firms

Also conduct investigation of security law Also conduct investigation of security law violations in the cases of Enron, violations in the cases of Enron, WorldCom, etc. WorldCom, etc.

Title VIII – Corporate and Title VIII – Corporate and Criminal Fraud AccountabilityCriminal Fraud Accountability

To knowingly create, destroy, or To knowingly create, destroy, or manipulate documents or impede federal manipulate documents or impede federal investigations is considered a felonyinvestigations is considered a felony

Punishment = Fines, maximum 20 years Punishment = Fines, maximum 20 years in prison, or bothin prison, or both

Audit reports should be kept for 5 yearsAudit reports should be kept for 5 years Whistleblower protectionWhistleblower protection

Title IX – White-collar Crime Title IX – White-collar Crime Penalty EnhancementsPenalty Enhancements

CEOs and CFOs must certify that CEOs and CFOs must certify that financial statements are accurate financial statements are accurate representations of the company’s representations of the company’s conditioncondition

Punishment = Max $5 million fine and/or Punishment = Max $5 million fine and/or max 20 year sentencemax 20 year sentence

SEC may ban anyone convicted of a SEC may ban anyone convicted of a security crime from holding an executive security crime from holding an executive position at a public companyposition at a public company

Title X – Corporate Tax Title X – Corporate Tax ReturnsReturns

Federal income tax returns must be Federal income tax returns must be signed by the Chief Executive Officer signed by the Chief Executive Officer (CEO) of the company(CEO) of the company

Title XI – Corporate Fraud Title XI – Corporate Fraud AccountabilityAccountability

Destroying/altering evidence or otherwise Destroying/altering evidence or otherwise obstructing securities fraud proceedings obstructing securities fraud proceedings may be punished with a fine and/or up to may be punished with a fine and/or up to 20 years in prison20 years in prison

SEC may freeze payments to accused SEC may freeze payments to accused individualsindividuals

Any retaliation to whistleblowers is Any retaliation to whistleblowers is subject to fines and/or 10 years subject to fines and/or 10 years imprisonmentimprisonment

SummarySummary

The Sarbanes-Oxley Act of 2002 was passed The Sarbanes-Oxley Act of 2002 was passed to regain public confidence in the stock market to regain public confidence in the stock market following a string of major accounting fraud following a string of major accounting fraud cases involving public companies. cases involving public companies.

A plan to accomplish this objective is outlined A plan to accomplish this objective is outlined in 11 titles, which:in 11 titles, which: Prohibit conflicts of interestProhibit conflicts of interest Increase corporate accountabilityIncrease corporate accountability Increase accounting transparencyIncrease accounting transparency Form an oversight board to enforce the new rulesForm an oversight board to enforce the new rules

Exam QuestionsExam Questions

1.1. The Sarbanes-Oxley Act was passed in:The Sarbanes-Oxley Act was passed in:a. 1935a. 1935b. 1974b. 1974c. 1999c. 1999d. 2002d. 2002

2.2. What events led to the passing of SOX?What events led to the passing of SOX?a. Collapse of the auto industrya. Collapse of the auto industry

b. A string of accounting scandals at public companieb. A string of accounting scandals at public companiessc. Great Depressionc. Great Depressiond. Discrimination in the accounting professiond. Discrimination in the accounting profession

Exam Questions, Exam Questions, continued…continued…

3.3. What government institution was established by SOX to oversee What government institution was established by SOX to oversee auditors?auditors?AnswerAnswer

4.4. The Public Company Accounting and Oversight Board is under The Public Company Accounting and Oversight Board is under the authority of:the authority of:a. North Atlantic Treaty Organization (NATO)a. North Atlantic Treaty Organization (NATO)b. Food and Drug Administration (FDA)b. Food and Drug Administration (FDA)c. Securities Exchange Commission (SEC)c. Securities Exchange Commission (SEC)d. US Treasuryd. US Treasury

5.5. Name 4 titles of the Sarbanes-Oxley Act.Name 4 titles of the Sarbanes-Oxley Act.AnswerAnswer

Exam Questions, Exam Questions, continued…continued…

6.6. According to Title X, who should sign the company tax return?According to Title X, who should sign the company tax return?a. Chief Executive Officer (CEO)a. Chief Executive Officer (CEO)b. President of External Accounting Firmb. President of External Accounting Firmc. Chief Financial Officer (CFO)c. Chief Financial Officer (CFO)d. Company’s Head of Accountingd. Company’s Head of Accounting

7.7. What events involving major public companies led to the What events involving major public companies led to the passing of SOX?passing of SOX?a. Intentional misrepresentation of company financial recordsa. Intentional misrepresentation of company financial recordsb. Auditor conflicts of interestb. Auditor conflicts of interestc. Risky loans from banks based on false earningsc. Risky loans from banks based on false earningsd. all of the aboved. all of the above

Exam Questions, Exam Questions, continued…continued…

8.8. What is the criminal penalty for violation of SOX?What is the criminal penalty for violation of SOX?a. life in prisona. life in prisonb. fines and/or maximum 20 years in prisonb. fines and/or maximum 20 years in prisonc. maximum 5 years in prisonc. maximum 5 years in prisond. tax increased. tax increase

9.9. TrueTrue//FalseFalse: Under SOX, auditors are not allowed to : Under SOX, auditors are not allowed to provide non-audit services (consulting) to the provide non-audit services (consulting) to the companies they audit.companies they audit.

10.10. TrueTrue//FalseFalse: SOX does not apply to privately held : SOX does not apply to privately held companies.companies.