SARBANES-OXLEY ACT OF 2002
by Corazon Rho'Dess
Accountant II, Board of Public Works/Office of AccountingThe Sarbanes-Oxley Act of 2002, was sponsored by US Senator Paul Sarbanes and Representative Michael Oxley. The bill was passed by Both House and Senate. On July 30, 2002, President Bush signed the Act and became public law. It was supported due to the following reasons:
A. To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.
B. To improve quality and transparency in financial reporting and independent audits and accounting services for public companies, to create a Public Company Accounting Oversight Board, to enhance the standard setting process for accounting practices, to strengthen the independence of securities analysts, to improve Securities and Exchange Commission resources and oversight, and for other purposes.Below are the major requirements by Sarbanes-Oxley Act of 2002 (Act) and the related Securities and Exchange Commission (SEC) rules and regulations:
Title1: Public Company Accounting Oversight Board (Board) to: (1) oversee the audit of public companies that are subject to the securities laws; (2) establish audit report standards and rules; (3) inspect, investigate, and enforce compliance on the part of registered public accounting firms, their associated persons, and certified public accountants.
Title II: Auditor Independence – Amends the Securities Exchange Act of 1934 to prohibit an auditor from performing specified non-audit services contemporaneously with an audit (auditor independence). Requires preapproval by the audit committee of the issuer for those non-audit services that are not expressly forbidden by this Act.
Title III: Corporate Responsibility – Confers responsibility upon audit committees of public companies for the appointment, compensation, and oversight of any registered public accounting firm employed to perform audit services. Requires an audit committee member of the board of directors of the issuer, and to be otherwise independent.
(Sec. 302) Instructs the SEC to promulgate requirements that the principal executive officer and principal financial officer certify the following in period financial reports: (1) the report does not contain untrue statements or material omissions; (2) the financial statements fairly present, in all material respects, the financial condition and results of operations’ and (3) such officers are responsible for internal controls designed to ensure that they receive material information regarding the issuer and consolidated subsidiaries.
Requires such senior corporate officers additionally to certify that they have disclosed to the auditors and audit committee of the board of directors; (1) significant internal control deficiencies; and (2) any fraud that involves staff which have a significant role in the issuer’s internal controls.
States that the rules governing corporate responsibility apply to issuers even if they have reincorporated or transferred their corporate domicile or offices from inside the United States to outside the United States.
(Sec. 306) Prohibits insider trades during pension fund blackout periods if the equity security was acquired in connection with services as either a director, or employment as an executive officer. States that profits realized from such trades shall inure to and be recoverable by the issuer irrespective of the intent of the parties to the transaction.
(Sec. 307) Directs the SEC to issue rules of professional responsibility for attorneys who practice before the Commission, including a rule requiring an attorney to report a material violation or breach of fiduciary duty to: (1) the chief legal counsel or chief executive officer of the company; and (2) the audit committee of the board of directors if such legal counsel or officer does not respond appropriately.
Title IV: Enhanced Financial Disclosures – Requires financial reports filed with the SEC to reflect all material correcting adjustments that have been identified by a registered public accounting firm in accordance with SEC rules and generally accepted accounting principles (GAAP).
(Sec. 401) Directs the SEC to report to Congress on: (1) the extent of off-balance sheet transactions and the use of special purpose entities; and (2) whether GAAP clearly conveys to investors the economics of off-balance sheet transactions; and (3) the extent to which special purpose entities are used to facilitate off-balance sheet transactions.
(Sec. 402) Prohibits personal loans extend by a corporation to its executives and directors.
(Sec. 404) Directs the SEC to require by rule that annual reports include an internal control report which: (1) avers management responsibility for maintaining adequate internal control mechanisms for financial reporting; and (2) evaluates the efficacy of such mechanisms. Requires the public accounting firm responsible for the audit report to attest to and report on the assessment made by the issuer.
Title V: Analyst Conflicts of Interest – Requires the SEC to adopt rules governing securities analysts’ potential conflicts of interest, including: (1) restricting the prepublication clearance or approval of research reports by persons either engaged in investment banking activities, or not directly responsible for investment research; (2) limiting the supervision and compensatory evaluation of securities analysts to officials who are not engaged in investment banking activities; (3) prohibiting a broker or dealer involved with investment banking activities from retaliating against a securities analyst as a result of an unfavorable research report that may adversely affect the investment banking relationship of the broker or dealer with the subject of the research report; and (4) establishing safeguards to assure that securities analysts are separated within the investment firm from the review, pressure, or oversight of those whose involvement in investment banking activities might potentially bias their judgment or supervision.
Directs the SEC to adopt rules requiring securities analysts and broker/dealers to disclose specified conflicts of interest.
Title VI: Commission Resources and Authority – Authorizes appropriations for FY 2003 to the SEC for: (1) additional staff compensation; (2) enhanced oversight of auditors and audit services; and (3) additional professional staff for fraud prevention, risk management, market regulation, and investment management.
Title VII: Studies and Reports – Mandates a GAO report to Congress on: (1) the factors leading to the consolidation of public accounting firms and the subsequent reduction in the number of firms providing audit services to businesses subject to the securities laws; and (2) the impact of such consolidation upon the capital formation and securities markets.
Title VIII: Corporate and Criminal Fraud Accountability –Corporate and Criminal Fraud Accountability Act of 2002 – Amends Federal criminal law to impose criminal penalties for: (1) knowingly destroying, altering, concealing, or falsifying records with intent to obstruct or influence either a Federal investigation or a matter in bankruptcy; and (2) auditor failure to maintain for a five-year period all audit or review work papers pertaining to an issuer of securities.
Title IX: White-Collar Crime Penalty Enhancements – White-Collar Crime Penalty Enhancement Act of 2002 – Amends Federal criminal law to: (1) establish criminal penalties for attempt and conspiracy to commit criminal fraud offenses; and (2) increase criminal penalties for mail and wire fraud.
(Sec. 906) Amends Federal criminal law to require senior corporate officers to certify in writing that financial statements and attendant disclosures comply with SEC disclosure requirements and fairly present in all material aspects the operations and financial condition of the issuer (corporate responsibility for financial reports).
Establishes a criminal liability for failure of corporate officers to certify financial reports, including maximum imprisonment for: (1) ten years for certifying while knowing that the periodic report does not comport with this Act; and (2) twenty years for willfully certifying a statement knowing it does not comport with this Act.
Title X: Corporate Tax Returns – Expresses the sense of the Senate that the Federal income tax return of a corporation should be signed by its chief executive officer.
Title XI: Corporate Fraud Accountability – Corporate Fraud Accountability Act of 2002 – Amends Federal criminal law to establish a maximum 20-year prison term for tampering with a record or otherwise impeding an official proceeding.
(Sec. 1105) Amends the Securities Exchange Act of 1934 and Securities Act of 1933 to authorize the SEC to prohibit a violator or rules governing manipulative, deceptive devices, and fraudulent interstate transactions, respectively, from serving as officer or director of a publicly trade corporation if the person’s conduct demonstrates unfitness to serve.