Sarbanes-Oxley Act

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What Is It?

• Act passed by Congress in response to the recent and continuing corporate scandals.

• Signed into law July 30, 2002.

• Established sweeping changes dealing with financial reporting, conflicts of interest, corporate ethics, and oversight of the accounting profession.

• Applies to public companies.

Key Provisions

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Sections 101, 102 and 104 – Public Company Accounting Oversight Board

• The act requires the establishment of a Public company Accounting Oversight Board:– All accounting firms that audit public companies must register

with the board.

– Board will establish rules governing substance and content of audits.

– Inspections of auditing firms will be conducted by the Board.

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Section 204 - Communications

• Auditor Communications with Audit Committees:– Increases communications between auditor and audit

committee on critical accounting policies and practices, alternative accounting treatments, and other material written communications with management.

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Section 301- Audit Committee Standards

• Makes audit committee directly responsible for the appointment, compensation, and oversight of auditors

• Limits audit committee membership to independent directors.

• Requires procedures for complaints from whistleblowers and others.

• Requires company to provide audit committee with funding for auditors and other advisors as audit committee deems necessary.

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Section 302 Certifications

• Certifications must include:– CEO and CFO have reviewed the periodic filing and to their

knowledge, information provided presents fairly the financial results of the company.

– CEO and CFO have established and maintain disclosure controls and procedures that ensure that all material information is made known to them.

– CEO and CFO have evaluated the effectiveness of the disclosure controls and procedures as of 90 days prior to the date of the periodic report and presented their conclusions in the report.

– CEO and CFO have disclosed all internal control deficiencies and any fraud, whether or not significant, that involves management or other employees who have a significant role in the companies internal controls.

– Statement of whether the company has established a Code of Ethics for senior financial officers.

– Other miscellaneous items.

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Section 304 – Forfeiture of Certain Bonuses and Profits

• Requires CEO and CFO to forfeit certain bonuses received and profits realized on the sale of securities following a financial report that is later restated due to material non-compliance with securities laws, as a result of misconduct.

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Section 402 – Executive Loans

• Prohibits personal loans to officers and directors.

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Section 403 – Accelerated Reporting

• Requires accelerated reporting of trades by insiders.

• Transactions must be reported via EDGAR by the end of the second business day following execution of a transaction.

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Section 404 Evaluating Internal Controls

• Requires a public company to document and evaluate the effectiveness of internal controls and procedures for financial reporting.

• Elements of internal control.– Internal control environment

– Risk assessment

– Control activities

– Information and communication

– Monitoring

• Effective internal controls provide reasonable assurance that risk is manageable.

• Effective internal controls provide clear definition of responsibilities and accountabilities.

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(Cont’d)

• Requires external auditor to attest to management’s assertions in the annual report.

• Annual report to include management’s assessment of the effectiveness of internal control over financial reporting.

• Effective for fiscal years ending after June 30, 2004.

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Section 409 – Real Time Issuer Disclosures

• “Rapid and current” disclosure of material changes in financial condition or operations.

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Section 906 Certifications

• Requires that each periodic report filed with the SEC (Securities and Exchange Commission) be accompanied by the certification of the CEO and CFO that:– The report fully complies with applicable Security Exchange

Act rules.– The information contained in the report fairly presents, in all

material respects, the financial condition and results of operations of the company.

• Fraudulent certifications carry penalties!– $1 million fine– Up to 10 years in prison– Willful falsification carries a steeper penalty

• $5 million fine• Up to 20 years in prison

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Sections 1102 & 802 - Penalties

• Record tampering or otherwise impeding an official proceeding and Criminal penalties for altering documents:

– Criminal penalties for corruptly altering or destroying documents or otherwise impeding an official proceeding.

– Expands criminal penalties for whoever alters documents, including audit reports, to obstruct an investigation.