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• Sarbanes-oxley
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Corporate governance Sarbanes-Oxley Act of 2002
1 The Sarbanes-Oxley Act of 2002 was enacted in the wake of a series of high profile corporate scandals. It
established a series of requirements that affect corporate governance in the U.S. and influenced similar laws
in many other countries. The law required, along with many other
elements, that:
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Corporate governance Sarbanes-Oxley Act of 2002
1 The Public Company Accounting Oversight Board (PCAOB) be
established to regulate the auditing profession, which had been self-
regulated prior to the law. Auditors are responsible for reviewing the
financial statements of corporations and issuing an opinion as to their
reliability.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Corporate governance Sarbanes-Oxley Act of 2002
1 The Chief Executive Officer (CEO) and Chief Financial Officer (CFO)
attest to the financial statements. Prior to the law, CEO's had claimed in
court they hadn't reviewed the information as part of their defense.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Corporate governance Sarbanes-Oxley Act of 2002
1 Board audit committees have members that are independent and disclose whether or not at least one is a financial expert, or reasons why
no such expert is on the audit committee.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Corporate governance Sarbanes-Oxley Act of 2002
1 External audit firms cannot provide certain types of consulting services and must rotate their lead partner every 5 years. Further, an audit firm cannot audit a company if those in specified senior management roles worked for the auditor in the past year. Prior to the law, there was the real or perceived conflict
of interest between providing an independent opinion on the accuracy and reliability of
financial statements when the same firm was also providing lucrative consulting services.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
COBIT - COBIT and Sarbanes-Oxley
1 Companies that are publicly traded in the US are subject to the Sarbanes-Oxley Act of 2002. According to the
IIA, COBIT is one of the most commonly used frameworks to comply with Sarbanes-Oxley.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 SOX requires the chief executive and chief financial officers of public companies to
attest to the accuracy of financial reports (Section 302) and require public companies to establish adequate internal controls over financial reporting (Section 404). Passage of
SOX resulted in an increased focus on IT controls, as these support financial
processing and therefore fall into the scope of management's assessment of internal control
under Section 404 of SOX.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 The COBIT framework may be used to assist with SOX compliance,
although COBIT is considerably wider in scope
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 IT controls that typically fall under the scope of a SOX 404 assessment may include:
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 Specific application (transaction processing) control procedures that directly mitigate identified financial
reporting risks. There are typically a few such controls within major applications in each financial process, such as accounts payable, payroll, general ledger, etc. The
focus is on "key" controls (those that specifically address risks), not on the
entire application.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 IT general controls that support the assertions that programs function as
intended and that key financial reports are reliable, primarily change
control and security controls;
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Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 IT operations controls, which ensure that problems with processing are identified and
corrected.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 Specific activities that may occur to support the assessment of the key controls above
include:
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 Understanding the organization’s internal control program and its financial reporting
processes.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 Identifying the IT systems involved in the initiation, authorization,
processing, summarization and reporting of financial data;
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 Designing and implementing controls designed to mitigate the identified
risks and monitoring them for continued effectiveness;
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 Documenting and testing IT controls;
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 Ensuring that IT controls are updated and changed, as necessary, to
correspond with changes in internal control or financial reporting
processes; and
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 While there are many IT systems operating within an organization, Sarbanes-Oxley compliance only
focuses on those that are associated with a significant account or related
business process and mitigate specific material financial risks
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 302 Corporate Responsibility for Financial Reports Certifies that
financial statement accuracy and operational activities have been
documented and provided to the CEO and CFO for certification
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Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 404 Management Assessment of Internal Controls Operational processes are
documented and practiced demonstrating the origins of data within the balance sheet.
SOX Section 404 (Sarbanes-Oxley Act Section 404) mandates that all publicly
traded companies must establish internal controls and procedures for financial
reporting and must document, test and maintain those controls and procedures to
ensure their effectiveness.https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 409 Real-time Issuer DisclosuresPublic companies must disclose
changes in their financial condition or operations in real time to protect
investors from delayed reporting of material events
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 802 Criminal Penalties for Altering Documents Requires public companies and their public
accounting firms to retain records, including electronic records that impact the company’s assets or
performance.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Information technology controls - IT controls and the Sarbanes-Oxley Act (SOX)
1 Fines and imprisonment for those who knowingly and willfully violate
this section with respect to (1) destruction, alteration, or falsification
of records in federal investigations and bankruptcy and (2) destruction
of corporate audit records.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Statement on Auditing Standards No. 70: Service Organizations - SAS 70 and Sarbanes-Oxley Act of 2002
1 With the introduction of the Sarbanes–Oxley Act of 2002 (SOX), SAS 70 took on increased
importance
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Enterprise risk management - Sarbanes-Oxley Act requirements
1 Section 404 of the Sarbanes-Oxley Act of 2002 required U.S
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley
1 The 'Sarbanes–Oxley Act of 2002' (), also known as the 'Public Company Accounting Reform and Investor Protection Act' (in the
United States Senate|Senate) and 'Corporate and Auditing Accountability and
Responsibility Act' (in the United States House of Representatives|House) and more commonly called 'Sarbanes–Oxley', 'Sarbox' or 'SOX', is a United States federal law that set new or enhanced standards for all U.S
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley
1 The bill was enacted as a reaction to a number of major accounting scandals|
corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia Communications Corporation|
Adelphia, Peregrine Systems and WorldCom. These scandals, which cost investors billions of dollars when the share prices of affected
companies collapsed, shook public confidence in the US capital market|
securities markets.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley
1 The act contains 11 titles, or sections, ranging from additional
corporate board responsibilities to criminal penalties, and requires the
United States Securities and Exchange Commission|Securities and
Exchange Commission (SEC) to implement rulings on requirements
to comply with the law
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley
1 The act was approved by the United States House of Representatives|House by a vote of and by the United States Senate|Senate with a vote of. President George W. Bush signed it into law, stating it included the most far-reaching reforms of American
business practices since the time of Franklin D. Roosevelt. The era of low standards and
false profits is over; no boardroom in America is above or beyond the law.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley
1 In response to the perception that stricter financial governance laws are
needed, SOX-type laws have been subsequently enacted in Japan,
Germany, France, Italy, Australia, Israel, India, South Africa, and Turkey.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley
1 Debate continues over the perceived benefits and costs of
SOX
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 # 'Public Company Accounting
Oversight Board (PCAOB)'
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 #:Title I consists of nine sections and establishes the Public Company Accounting
Oversight Board, to provide independent oversight of public accounting firms providing
audit services (auditors). It also creates a central oversight board tasked with
registering auditors, defining the specific processes and procedures for compliance
audits, inspecting and policing conduct and quality control, and enforcing compliance
with the specific mandates of SOX.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 # 'Auditor Independence'
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 #:Title II consists of nine sections and establishes standards for
external auditor independence, to limit conflicts of interest. It also addresses new auditor approval
requirements, audit partner rotation, and auditor reporting requirements. It restricts auditing companies from providing non-audit services (e.g., consulting) for the same clients.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 #:Title III consists of eight sections and mandates that senior executives take 'individual responsibility' for the
accuracy and completeness of corporate financial reports
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 # 'Enhanced Financial
Disclosures'
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 #:Title IV consists of nine sections
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 #:Title V consists of only one section, which includes measures designed to
help restore investor confidence in the reporting of securities analysts. It
defines the codes of conduct for securities analysts and requires
disclosure of knowable conflicts of interest.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 # 'Commission Resources and
Authority'
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 #:Title VI consists of four sections and defines practices to restore investor confidence in securities analysts. It also defines the SEC's
authority to censure or bar securities professionals from practice and
defines conditions under which a person can be barred from practicing
as a broker, advisor, or dealer.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 # 'Studies and Reports'
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 #:Title VII consists of five sections and requires the Comptroller General
of the United States|Comptroller General and the SEC to perform various studies and report their
findings
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 # 'Corporate and Criminal Fraud Accountability'
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 #:Title VIII consists of seven sections and is also referred to as the Corporate and Criminal Fraud Accountability Act of 2002. It
describes specific criminal penalties for manipulation, destruction or alteration of financial records or
other interference with investigations, while providing certain protections for whistle-
blowers.https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 #:Title IX consists of six sections. This section is also called the White Collar Crime Penalty Enhancement Act of 2002. This section increases the criminal penalties associated
with white-collar crimes and conspiracies. It recommends stronger
sentencing guidelines and specifically adds failure to certify corporate financial reports as a
criminal offense.https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 #:Title X consists of one section. Section 1001 states that the Chief Executive Officer should sign the
company tax return.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 # 'Corporate Fraud Accountability'
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Major elements
1 #:Title XI consists of seven sections. Section 1101 recommends a name for this title as
Corporate Fraud Accountability Act of 2002. It identifies corporate fraud and records tampering as criminal offenses and joins
those offenses to specific penalties. It also revises sentencing guidelines and
strengthens their penalties. This enables the SEC to resort to temporarily freezing transactions or payments that have been
deemed large or unusual.https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - History and context: events contributing to the adoption of Sarbanes–Oxley
1 A variety of complex factors created the conditions and culture in which a
series of large corporate frauds occurred between 2000–2002
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - History and context: events contributing to the adoption of Sarbanes–Oxley
1 *'Auditor conflicts of interest': Prior to SOX, auditing firms, the primary financial watchdogs for investors,
were self-regulated
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - History and context: events contributing to the adoption of Sarbanes–Oxley
1 *'Boardroom failures': Boards of Directors, specifically Audit Committees, are charged with establishing oversight mechanisms for
financial reporting in U.S. corporations on the behalf of investors. These scandals identified Board members who either did not exercise
their responsibilities or did not have the expertise to understand the complexities of
the businesses. In many cases, Audit Committee members were not truly
independent of management.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - History and context: events contributing to the adoption of Sarbanes–Oxley
1 *'Securities analysts' conflicts of interest': The roles of securities analysts, who make buy and sell recommendations on company stocks and
bonds, and investment bankers, who help provide companies loans or handle mergers and acquisitions, provide opportunities for conflicts. Similar to the auditor conflict,
issuing a buy or sell recommendation on a stock while providing lucrative investment
banking services creates at least the appearance of a conflict of interest.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - History and context: events contributing to the adoption of Sarbanes–Oxley
1 *'Inadequate funding of the SEC': The SEC budget has steadily
increased to nearly double the pre-SOX level. In the interview cited above, Sarbanes indicated that
enforcement and rule-making are more effective post-SOX.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - History and context: events contributing to the adoption of Sarbanes–Oxley
1 *'Banking practices': Lending to a firm sends signals to investors regarding the firm's risk
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - History and context: events contributing to the adoption of Sarbanes–Oxley
1 *'Internet bubble': Investors had been stung in 2000 by the sharp
declines in technology stocks and to a lesser extent, by declines in the
overall market. Certain mutual fund managers were alleged to have
advocated the purchasing of particular technology stocks, while
quietly selling them. The losses sustained also helped create a
general anger among investors.https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - History and context: events contributing to the adoption of Sarbanes–Oxley
1 *'Executive compensation': Stock option and bonus practices,
combined with volatility in stock prices for even small earnings
misses, resulted in pressures to manage earnings. Stock options were
not treated as compensation expense by companies, encouraging
this form of compensation. With a large stock-based bonus at risk,
managers were pressured to meet their targets.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Timeline and passage of Sarbanes–Oxley
1 The House passed Rep
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Timeline and passage of Sarbanes–Oxley
1 Senator Sarbanes's bill passed the Senate Banking Committee on June 18, 2002, by a
vote of 17 to 4. On June 25, 2002, MCI WorldCom|WorldCom revealed it had
overstated its earnings by more than $3.8 billion during the past five Fiscal year|
quarters (15 months), primarily by improperly accounting for its operating costs. Sen.
Sarbanes introduced Senate Bill 2673 to the full Senate that same day, and it passed 97–0 less than three weeks later on July 15, 2002.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Timeline and passage of Sarbanes–Oxley
1 The House and the Senate formed a United States Congress Conference
committee|Conference Committee to reconcile the differences between Sen. Sarbanes's bill (S. 2673) and Rep. Oxley's bill (H.R. 3763). The
conference committee relied heavily on S. 2673 and most changes made
by the conference committee strengthened the prescriptions of S. 2673 or added new prescriptions. (John T. Bostelman, The Sarbanes–
Oxley Deskbook § 2–31.)
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Timeline and passage of Sarbanes–Oxley
1 The Committee approved the final conference bill on July 24, 2002, and gave it the name the Sarbanes–Oxley Act of 2002. The next
day, both houses of United States Congress|Congress voted on it without change,
producing an overwhelming margin of victory: in the House and in the Senate. On July 30,
2002, President George W. Bush signed it into law, stating it included the most far-reaching reforms of American business practices since
the time of Franklin D. Roosevelt.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Analyzing the cost-benefits of Sarbanes–Oxley
1 A significant body of academic research and opinion exists regarding
the costs and benefits of SOX, with significant differences in conclusions
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Compliance costs
1 * FEI Survey (Annual): Finance Executives International (FEI)
provides an annual survey on SOX Section 404 costs
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Compliance costs
1 * Foley Lardner Survey (2007): This annual study focused on changes in
the total costs of being a U.S
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Compliance costs
1 * Butler/Ribstein (2006): Their book proposed a comprehensive overhaul
or repeal of SOX and a variety of other reforms
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Compliance costs
1 * A 2011 SEC study found that Section 404(b) compliance costs
have continued to decline, especially after 2007 accounting guidance..
Securities and Exchange Commission, April 2011
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Benefits to firms and investors
1 * Arping/Sautner (2010): This research paper analyzes whether
SOX enhanced corporate transparency. Looking at foreign
firms that are cross-listed in the US, the paper indicates that, relative to a control sample of comparable firms that are not subject to SOX, cross-listed firms became significantly more transparent following SOX.
Corporate transparency is measured based on the dispersion and accuracy of analyst earnings
forecasts.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Benefits to firms and investors
1 * Iliev (2007): This research paper indicated that SOX 404 indeed led to conservative reported earnings, but also reduced—rightly or wrongly—
stock valuations of small firms. Lower earnings often cause the share
price to decrease.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Benefits to firms and investors
1 * Lord Benoit Report (2006): Do the Benefits of 404 Exceed the Cost? A study of a population of
nearly 2,500 companies indicated that those with no material weaknesses in their internal
controls, or companies that corrected them in a timely manner, experienced much greater
increases in share prices than companies that did not. The report indicated that the benefits to a compliant company in share price (10% above Russell 3000 index) were greater than their SOX
Section 404 costs.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Benefits to firms and investors
1 * Institute of Internal Auditors (2005): The research paper indicates that corporations have improved their internal controls and that financial
statements are perceived to be more reliable.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Effects on exchange listing choice of non-U.S. companies
1 Some have asserted that Sarbanes–Oxley legislation has helped displace business from New York to London,
where the Financial Services Authority regulates the financial
sector with a lighter touch
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Effects on exchange listing choice of non-U.S. companies
1 The Sarbanes–Oxley Act's effect on non-
U.S
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Effects on exchange listing choice of non-U.S. companies
1 Piotroski and Srinivasan (2008) examine a comprehensive sample of international companies that list onto
U.S
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Sarbanes-Oxley - Sarbanes–Oxley Section 302: Disclosure controls
1 Under Sarbanes–Oxley, two separate sections came into effect—one civil and the other criminal. (Section
302) (civil provision); (Section 906) (criminal provision).
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 302: Disclosure controls
1 Section 302 of the Act mandates a set of internal procedures designed
to ensure accurate financial disclosure
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 302: Disclosure controls
1 The SEC interpreted the intention of Sec. 302 in Final Rule 33–8124. In it,
the SEC defines the new term Corporation#Financial disclosure|
disclosure controls and procedures, which are distinct from internal
controls over financial reporting. Under both Section 302 and Section 404, Congress directed the SEC to promulgate regulations enforcing
these provisions.https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 302: Disclosure controls
1 External auditors are required to issue an opinion on whether effective
internal control over financial reporting was maintained in all
material respects by management. This is in addition to the financial statement opinion regarding the
accuracy of the financial statements. The requirement to issue a third opinion regarding management's
assessment was removed in 2007.https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 303: Improper Influence on Conduct of Audits
1 a.Rules To Prohibit
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 401: Disclosures in periodic reports (Off-balance sheet items)
1 Sarbanes-Oxley required the disclosure of all material off-balance sheet items
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 404: Assessment of internal control
1 The most contentious aspect of SOX is Section 404, which requires management and the external
auditor to report on the adequacy of the company's internal control on
financial reporting (ICFR). This is the most costly aspect of the legislation
for companies to implement, as documenting and testing important
financial manual and automated controls requires enormous effort.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 404: Assessment of internal control
1 Under Section 404 of the Act, management is required to produce an internal control report as part of each annual Exchange Act report
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 404: Assessment of internal control
1 To help alleviate the high costs of compliance, guidance and practice have continued to
evolve
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 404: Assessment of internal control
1 * Assess both the design and operating effectiveness of selected
internal controls related to significant accounts and relevant assertions, in the context of material misstatement
risks;
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 404: Assessment of internal control
1 * Understand the flow of transactions, including IT aspects, in sufficient detail to identify points at which a misstatement could arise;
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 404: Assessment of internal control
1 * Evaluate company-level (entity-level) controls, which correspond to
the components of the Committee of Sponsoring Organizations of the
Treadway Commission|COSO framework;
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 404: Assessment of internal control
1 * Perform a fraud risk assessment;
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 404: Assessment of internal control
1 * Evaluate controls designed to Fraud deterrence|prevent or detect fraud, including management override of
controls;
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 404: Assessment of internal control
1 * Evaluate controls over the period-end finance|
financial reporting process;
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 404: Assessment of internal control
1 * Rely on management's work based on factors such as competency, objectivity, and
risk;
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Sarbanes-Oxley - Sarbanes–Oxley Section 404: Assessment of internal control
1 * Conclude on the adequacy of internal control over financial
reporting.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley Section 404: Assessment of internal control
1 SOX 404 compliance costs represent a tax on inefficiency, encouraging
companies to centralize and automate their financial reporting
systems
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Sarbanes-Oxley - Sarbanes–Oxley 404 and smaller public companies
1 The cost of complying with SOX 404 impacts smaller companies
disproportionately, as there is a significant fixed cost involved in completing the assessment. For
example, during 2004 U.S. companies with revenues exceeding $5 billion spent 0.06% of revenue on
SOX compliance, while companies with less than $100 million in
revenue spent 2.55%.https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Sarbanes–Oxley 404 and smaller public companies
1 This disparity is a focal point of 2007 SEC and U.S. Senate action. The PCAOB intends to issue further
guidance to help companies scale their assessment based on company
size and complexity during 2007. The SEC issued their guidance to
management in June, 2007.
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Sarbanes-Oxley - Sarbanes–Oxley 404 and smaller public companies
1 After the SEC and PCAOB issued their guidance, the SEC required smaller public companies (non-accelerated filers) with fiscal years ending after December 15, 2007 to document a Management Assessment of their
Internal Controls over Financial Reporting (ICFR)
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Sarbanes-Oxley - Sarbanes–Oxley 404 and smaller public companies
1 On September 15, 2010 the SEC issued final rule 33-9142 the
permanently exempts registrants that are neither accelerated nor large accelerated filers as defined by Rule 12b-2 of the Securities and Exchange
Act of 1934 from Section 404(b) internal control audit requirement.
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Sarbanes-Oxley - Sarbanes–Oxley Section 906: Criminal Penalties for CEO/CFO financial statement certification
1 § 1350. Section 906 states: Failure of corporate officers to certify financial reports
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Sarbanes-Oxley - Sarbanes–Oxley Section 906: Criminal Penalties for CEO/CFO financial statement certification
1 (a) Certification of Periodic Financial Reports.— Each periodic report
containing financial statements filed by an issuer with the Securities
Exchange Commission pursuant to section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m (a) or 78o (d)) shall be
accompanied bySection 802(a) of the SOX a written statement by the chief executive officer and chief financial officer (or equivalent thereof) of the
issuer.
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Sarbanes-Oxley - Sarbanes–Oxley Section 906: Criminal Penalties for CEO/CFO financial statement certification
1 (b) Content.— The statement required under subsection (a) shall certify that the
periodic report containing the financial statements fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15
U.S.C. 78m or 78o (d)) and that information contained in the periodic report fairly presents, in all material respects, the
financial condition and results of operations of the issuer.
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Sarbanes-Oxley - Sarbanes–Oxley Section 906: Criminal Penalties for CEO/CFO financial statement certification
1 (1) certifies any statement as set forth in subsections (a) and (b) of this
section knowing that the periodic report accompanying the statement
does not comport with all the requirements set forth in this section
shall be fined not more than $1,000,000 or imprisoned not more
than 10 years, or both; or
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Sarbanes-Oxley - Sarbanes–Oxley Section 906: Criminal Penalties for CEO/CFO financial statement certification
1 (2) willfully certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement
does not comport with all the requirements set forth in this section
shall be fined not more than $5,000,000, or imprisoned not more
than 20 years, or both.
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Sarbanes-Oxley - Sarbanes–Oxley Section 1107: Criminal penalties for retaliation against whistleblowers
1 Section 1107 of the SOX states:Stephen M. Kohn, Michael D.
Kohn, and David K. Colapinto (2004). Whistleblower Law: A Guide to Legal Protections for Corporate Employees.
Praeger Publishers. ISBN 0-275-98127-4
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Criticism
1 [http://paul.house.gov/index.php?option=com_contenttask=viewid=209Itemid=60 Repeal Sarbanes-Oxley!]
Ron Paul, April 14, 2005
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Sarbanes-Oxley - Criticism
1 A research study published by Joseph Piotroski of Stanford University and
Suraj Srinivasan of Harvard Business School titled Regulation and Bonding: Sarbanes Oxley Act and the Flow of
International Listings in the Journal of Accounting Research in 2008 found
that following the act's passage, smaller international companies were more likely to list in stock exchanges
in the U.K. rather than U.S. stock exchanges.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Criticism
1 During the financial crisis of 2007–2010, critics blamed Sarbanes–Oxley
for the low number of Initial Public Offerings (IPOs) on American stock
exchanges during 2008. In November 2008, Newt Gingrich and co-author
David W. Kralik called on Congress to repeal Sarbanes–Oxley.
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Sarbanes-Oxley - Criticism
1 A December 21, 2008 Wall St
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Sarbanes-Oxley - Criticism
1 The editorial concludes that: For all of this, we can first thank Sarbanes–Oxley. Cooked up in the wake of accounting scandals earlier this
decade, it has essentially killed the creation of new public companies in America, hamstrung
the NYSE and Nasdaq (while making the London Stock Exchange rich), and cost U.S. industry more than $200 billion by some estimates.
[http://online.wsj.com/article/SB122990472028925207.html Washington Is Killing Silicon Valley],
Wall St. Journal, December 21, 2008
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Sarbanes-Oxley - Criticism
1 However, the number of IPOs had declined to 87 in 2001, well down
from the highs, but before Sarbanes–Oxley was passed. In 2004, IPOs were up 195% from the previous
year to 233.[http://www.prnewswire.com/new
s-releases/number-of-ipos-in-2004-increased-by-195-ipo-activity-in-q4-2004-strongest-in-more-than-four-years-53844047.html Number of IPOs in 2004 Increased by 195%]
There were 196 IPOs in 2005, 205 in 2006 (with a sevenfold increase in deals over $1 billion) and 209 in
2007.
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Sarbanes-Oxley - Criticism
1 On that score it's getting harder for backers of the Sarbanes-Oxley
accounting law to explain away each disappointing year since its 2002
enactment as some kind of temporary or unrelated setback.
[http://online.wsj.com/article/SB100014240529702047202045771290523
17747614.html?mod=googlenews_wsj America as
Number Two], Wall Sthttps://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Praise
1 Former Federal Reserve Chairman Alan Greenspan praised the Sarbanes–Oxley Act: I am surprised that the Sarbanes–Oxley Act,
so rapidly developed and enacted, has functioned as well as it has...the act
importantly reinforced the principle that shareholders own our corporations and that corporate managers should be working on behalf of shareholders to allocate business
resources to their optimum use.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Praise
1 SOX has been praised by a cross-section of financial industry experts, citing improved investor confidence and more accurate, reliable financial
statements
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Sarbanes-Oxley - Praise
1 The Financial Executives International (FEI) 2007 study and research by the Institute of Internal Auditors (IIA) also indicate SOX
has improved investor confidence in financial reporting, a primary objective of
the legislation. The IIA study also indicated improvements in board, audit
committee, and senior management engagement in financial reporting and
improvements in financial controls.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Praise
1 Financial restatements increased significantly in the wake of the SOX
legislation, as companies cleaned up their books
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Praise
1 One fraud uncovered by the Securities and Exchange Commission
(SEC) in November 2009 may be directly credited to Sarbanes-Oxley
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Sarbanes-Oxley - Praise
1 Restitution totaling $34 million was placed in a fair fund and returned to the affected Value Line mutual fund
investors
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Sarbanes-Oxley - Praise
1 Sarbanes Oxley Act has been praised for nurturing an ethical culture as it
forces top management to be transparent and employees to be responsible for their acts and also
protects whistle blowers.
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Sarbanes-Oxley - Legal challenges
1 A lawsuit (Free Enterprise Fund v
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Legal challenges
1 The lawsuit was dismissed from a District Court; the decision was
upheld by the Court of Appeals on August 22, 2008
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Sarbanes-Oxley - Legislative information
1 *United States House of Representatives|House: , H. Rept. 107–414, H. Rept. 107–610
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Timeline and passage of Sarbanes–Oxley
1 The Committee approved the final conference bill on July 24, 2002, and gave it the name the Sarbanes–Oxley
Act of 2002
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Sarbanes-Oxley - Compliance costs
1 * A 2011 SEC study found that Section 404(b) compliance costs
have continued to decline, especially after 2007 accounting guidance.
[http://sec.gov/news/studies/2011/404bfloat-study.pdf Study and
Recommendations on Section 404(b)]. Securities and Exchange
Commission, April 2011
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Benefits to firms and investors
1 * Skaife/Collins/Kinney/LaFond (2006): This research paper indicates
that borrowing costs are lower for companies that improved their
internal control, by between 50 and 150 basis points (.5 to 1.5
percentage points).[http://web.archive.org/web/20070809115641/http://www.wbur.org/news/local/icd/icd.pdf The Effect of Internal Control Deficiencies on Firm
Risk and Cost of Capital]
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Sarbanes-Oxley - Sarbanes–Oxley Section 404: Assessment of internal control
1 To help alleviate the high costs of compliance, guidance and practice have continued to
evolve
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Legal challenges
1 The lawsuit was dismissed from a District Court; the decision was
upheld by the Court of Appeals on August 22,
2008.[http://pcaobus.org/News/Releases/Pages/08222008_PCAOBStatement.aspx PCAOB News Release] Judge Kavanaugh, in his dissent, argued
strongly against the constitutionality of the law
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Sarbanes-Oxley - Similar laws in other countries
1 *Keeping the Promise for a Strong Economy Act (Budget Measures),
2002 — Ontario, Canada, equivalent of Sarbanes–Oxley Act
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Sarbanes-Oxley - Similar laws in other countries
1 *J-SOX — Japanese equivalent of Sarbanes–Oxley Act
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Similar laws in other countries
1 *:de:Deutscher Corporate Governance Kodex|German
Corporate Governance Code (at the German Wikipedia)
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Similar laws in other countries
1 *:nl:code-Tabaksblat — Dutch version, based on 'comply or explain' (at the Dutch
Wikipedia)
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Similar laws in other countries
1 *Corporate Law Economic Reform Program Act 2004|CLERP9 —
Australian corporate reporting and disclosure law
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Similar laws in other countries
1 *Financial Security Law of France (Loi sur la Sécurité Financière) — French equivalent of Sarbanes–Oxley Act
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Similar laws in other countries
1 *L262/2005 (Disposizioni per la tutela del risparmio e la disciplina dei
mercati finanziari) — Italian equivalent of Sarbanes–Oxley Act for
financial services institutions
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Sarbanes-Oxley - Similar laws in other countries
1 * King Report on Corporate Governance — South African corporate governance code
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Sarbanes-Oxley - Similar laws in other countries
1 * Clause 49 — Indian equivalent of SOX
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Sarbanes-Oxley - Similar laws in other countries
1 * TC-SOX 11 — Turkish equivalent of SOX
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Sarbanes-Oxley Act
1 The act was approved by the United States House of Representatives|House by a vote of[http://clerk.house.gov/evs/2002/roll348.
xml 423 in favor, 3 opposed, and 8 abstaining] and by the United States
Senate|Senate with a vote of[http://www.senate.gov/legislative/LIS/roll
_call_lists/roll_call_vote_cfm.cfm?congress=107session=2vote=00192 99 in
favor, 1 abstaining]
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Sarbanes-Oxley Act - Clawbacks of executive compensation for misconduct
1 One of the highlights of the law was a provision that allowed the SEC to force a company's CEO or CFO to disgorgement (law)|disgorge any executive compensation (such as bonus pay or proceeds from stock
sales) earned within a year of misconduct that results in an
earnings restatement
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Sarbanes-Oxley Act - Criticism
1 A December 21, 2008 Wall Street Journal editorial stated, The new laws
and regulations have neither prevented frauds nor instituted
fairness
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Audit committee - Impact of the Sarbanes-Oxley Act of 2002
1 The Sarbanes-Oxley Act of 2002 increased audit committees’ responsibilities and
authority. It raised membership requirements and committee composition to
include more independent directors. Companies were required to disclose
whether or not a financial expert is on the Committee. Further, the Securities and
Exchange Commission and the stock exchanges proposed new regulations and
rules to strengthen audit committees.https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Certified Sarbanes-Oxley Professional
1 'Certified Sarbanes-Oxley Professional (CSOXP)' is a credential awarded by the governance, risk Regulatory compliance|compliance group ('The GRC Group'). The
CSOXP credential communicates that certified professionals have the knowledge
listed below:[http://www.grcg.com/why-become-certified-sox Official website of The GRC Group, Training Certification, Sarbanes-
Oxley (SOX), CSOXP/CSOXM: Certified Sarbanes-Oxley Professiona]
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Certified Sarbanes-Oxley Professional
1 * Industry-accepted Policy framework|frameworks and
principles
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Certified Sarbanes-Oxley Professional
1 * The role of audit committees
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
Certified Sarbanes-Oxley Professional
1 * Auditor independence
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Certified Sarbanes-Oxley Professional
1 * Conflicts of interest and codes of conduct
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Certified Sarbanes-Oxley Professional
1 * Whistleblower protection and corporate fraud
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Certified Sarbanes-Oxley Professional
1 * COSO Enterprise risk management|ERM components (internal
environment, objective setting, even identification, risk assessment, risk
response, control activities, information and communication, and
monitoring)
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Certified Sarbanes-Oxley Professional
1 * Section 404 internal control documentation
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Certified Sarbanes-Oxley Professional
1 * Entity-level and activity-level testing controls, techniques, effectiveness, and
documentation
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Certified Sarbanes-Oxley Professional
1 Also, the certified professionals must have 1,200 hours of related
experience (over the past three years).
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One share, one vote - Sarbanes-Oxley Act of 2002
1 * The Public Company Accounting Oversight Board (PCAOB) be
established to regulate the auditing profession, which had been self-
regulated prior to the law. Auditors are responsible for reviewing the
financial statements of corporations and issuing an opinion as to their
reliability.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
One share, one vote - Sarbanes-Oxley Act of 2002
1 * The Chief Executive Officer (CEO) and Chief Financial Officer (CFO)
attest to the financial statements. Prior to the law, CEO's had claimed in
court they hadn't reviewed the information as part of their defense.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
One share, one vote - Sarbanes-Oxley Act of 2002
1 * Board audit committees have members that are independent and disclose whether or not at least one is a financial expert, or reasons why
no such expert is on the audit committee.
https://store.theartofservice.com/the-sarbanes-oxley-toolkit.html
One share, one vote - Sarbanes-Oxley Act of 2002
1 Prior to the law, there was the real or perceived conflict of interest
between providing an independent opinion on the accuracy and
reliability of financial statements when the same firm was also providing lucrative consulting
services.[http://www.gpo.gov/fdsys/pkg/PLAW-107publ204/pdf/PLAW-
107publ204.pdf Text of the Sarbanes-Oxley Act of 2002]
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Wall Street reform - Sarbanes-Oxley Act of 2002
1 The Sarbanes-Oxley Act, by Sen. Paul S. Sarbanes (Democratic Party of the United States|D-Maryland|MD) and Rep. Michael
G. Oxley (Republican Party (United States)|R-Ohio|OH), was signed into law by George W. Bush in July 2002. The bill
was enacted as a reaction to a number of major accounting scandals|corporate and
accounting scandals including those affecting Enron and WorldCom.
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Economic policy of the George W. Bush administration - Sarbanes-Oxley Act
1 President Bush signed the Sarbanes-Oxley Act into law during July 2002,
which he called the most far-reaching reforms of American business
practices since the time of Franklin Delano Roosevelt
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Investor relations - The Sarbanes-Oxley Act
1 Similar to Sarbanes-Oxley are the Keeping the Promise for a Strong Economy Act (Budget Measures),
2002 in Canada, Financial Security Law of France in France, and J-SOX in
Japan
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