Building on
Our Core Values
The Sarbanes-Oxley Act
Public Law 107-204
(JFZ edited)
The “Perfect Storm”

Unethical Behavior

Fraudulent Activity (WorldCom, Enron, etc.)

Downturn in the Economy

Massive Business Failures

Audit Failures

Loss of Investor Faith in the Capital Markets
Result: The most significant legislation
affecting the accounting profession
since 1934
Building on Our Core Values
Sarbanes-Oxley Act

Law was enacted on July 30, 2002

Created the Public Company Accounting
Oversight Board (PCAOB), funded by accounting
firms and registrants

Revised “Corporate Governance” standards

Creates new federal crimes related to fraud

Significantly increases criminal penalties for
violations of the securities laws
Building on Our Core Values
Public Company Accounting Oversight Board

5 members must be full-time and independent.
Requires 2 CPAs (but only 2) to serve.

PCAOB is responsible for:
–
–
–
–
Oversight of the auditors of public companies
Conducting inspections of and discipline of those
auditors
Enforcing compliance with law
Establishing and/or adopting auditing, quality control,
ethics, independence, and other standards relating to
the preparation of audit reports for issuers
Building on Our Core Values
Corporate Governance Revisions w/ “Sarbox”

CEO & CFO must establish Internal Controls
–

Auditors must form an opinion as to the adequacy
of these internal controls (as established by mgmt)
CEO & CFO must “certify” financial statements
–
Potential $5mm fine and 20 years prison for fraud

Mgmt must establish a company Code of Ethics

Mgmt must establish a “hotline” or other
mechanism to allow anonymous (i.e.
“Whistleblower”) reporting of fraudulent activities.
Building on Our Core Values
Sarbanes-Oxley Act

Auditor Independence, Partner Rotation & Other
–
Prohibits accounting firms from performing certain nonaudit services for audit clients
– Requires audit partner and review partner rotation
every 5 years (8-2011 PCAOB proposal to rotate
auditor firms entirely)
– Audit firm cannot perform audit if CEO, CFO, controller,
chief accounting officer, etc. was employed by the
company 1-year prior to the start of the audit
– Prohibits most director and officer loans
Overall, the law applies to public firms, but represents
“best practices” that effectively impact private firms.
Building on Our Core Values
Building on
Our Core Values
The Sarbanes-Oxley Act
Public Law 107-204