Sarbanes oxley act overview-v4-final v1

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Sarbanes Oxley Act, 2002- An Overview

Vijay Kumar C.A.

Copyright © 2012 Accenture. All rights reserved. 2

1. Corporate frauds leading to SOX

2. Objectives and applicability

3. Contents in detail:1. Established independent oversight of public company audits

2. Strengthened audit committees and corporate governance

3. Transparency, Accountability and Investor protection

4. Internal controls over financial reporting(S.404)

5. Enhanced auditor independence

4. Is SOX compliance mandatory in India?

5. Questions

Contents

Enron- Manipulation of books of accounts to indicate favorable performance-wrong revenue recognition- Bankruptcy-Investors lost > $74 bn-4000 job loss-24year imprisonment

WorldCom- Wrong classification of expenses-

corporate loan to CEO-fraudulent book entries $11 bn

- CEO sentenced to 25 years-17,000 job loss, investors lost-$180 bn

Peregrine Systems- Inflated the company's revenue and stock price- Shareholders lost $4 billion. CEO imprisoned for 8 years

AdelphiaMisappropriation of funds $1bn –

Falsification of booksBankruptcy- Executives imprisoned

for 15 years

Impact> $500 bn.


Sarbanes-Oxley aims to enhance corporate governance and strengthen corporate accountability

Objectives and applicability

• Privately held companies • All public companies in the U.S.

• International companies registered equity or debt securities with SEC

• Accounting firms providing auditing services to the above

The Act applies toDoesn’t apply to


1. Established independent oversight of public company audits

SOX forged a new era for the US Audit profession

Till 2002, Auditing profession was self-regulated by the Auditing institutions

PCAOB (Public Company Accounting Oversight Board) was established to regulate audit firms

PCAOB regulates by setting ethical standards, audit quality inspections, investigations etc…

It suggests corrections. Has the authority to trial the wrongdoers


2. Strengthened audit committees and corporate governance

Audit Committee: SOX require companies to establish audit committees

Independent Members: Requires the AC members be “independent”

External Auditors: AC, not management, are directly responsible for the appointment, compensation and oversight of the work of external auditors

Financial Expert: AC to have at least one member who is a “financial expert”

Whistleblower Policy (S.1107): AC to establish procedures for receiving whistleblower complaints regarding accounting, auditing and internal control irregularities

Confidentiality of whistleblower (S.1107): Entity should ensure confidentiality and anonymity and shall not retaliate against whistleblower else criminal punishment and imprisonment up to 10 years


3. Transparency, Accountability and Investor protection

CEO and CFO certification of Financials – One of the core elements of SOX

Certification for each annual and quarterly report (S.302):

– They have reviewed the reports

– The information is fairly presented

– No omission material facts that would make the financial statements misleading

– They acknowledge their responsibility for establishing and maintaining internal controls. Also, have evaluated the effectiveness of Internal controls

If above certifications misleading or false, will result in heavy fines and imprisonment


4.Internal controls over financial reporting(S.404):

Management’s responsibility to:

Evaluate Internal Controls effectiveness annually

Vouch for the effectiveness of internal controls

Disclose any prevailing weakness which may result in material misstatement

And further, the Auditors have to attest the same

Ethical requirements to the Board


5. Enhanced auditor independence

• Sarbanes-Oxley strengthened auditor independence.

• If any other non-audit services are to be performed, the Audit Committee must pre-approve the same.


Criticisms:

• SOX imposed additional duties and costs

• Act per se may not prevent fraud and abuse

• More Board time devoted

• SOX Revolutionized the attitude and cultural change

• No Enron or a WorldCom blowup post SOX

• Proactive Senior management involvement

• Better transparency, reporting and investor confidence


Is SOX compliance mandatory in India?

• No, domestic company which is incorporated in India need not comply with SOX.

• Yes, company incorporated and listed outside India which has a mandate to comply with SOX and has an establishment in India.

• Though the SOX provisions are not mandatory for domestic companies, similar provisions are covered in SEBI guidelines under clause 49 of the listing agreement.


Questions

Vijay Kumar C.A.


Thank You

Business

Sarbanes oxley act overview-v4-final v1