The Sarbanes-Oxley Act
Sarbanes-Oxley Act
Contents Overview 3 Enron 3 Sarbanes-Oxley Act 3 11 Titles 4 Major Sections of SOX 5 Section 302 5 Section 404 6 Section 409 6 Section 902 7 Section 906 7 After SOX: What has Sarbanes-Oxley Accomplished & Issues that Remain 7 Conclusion 8
Overview
The Sarbanes-Oxley Act was signed into law in 2002 by President Bush. Sarbanes- Oxley came to be because of corporate level accounting scandals that had then, recently occurred. The most common of these scandals include: Adelphia, Enron, Peregrine Systems, Tyco and, WorldCom. This act “introduced major changes to the regulation of financial practice and corporate governance.”
Enron
The Enron Scandal is one of many that prompted the obvious …show more content…
need for reform of accounting practices. It began in November 1997 when the company bought stake in another company to create a sub company of Enron. The new company, Chewco, was run by an Enron officer who enabled Enron to run a series of transactions through Chewco and ultimately, funnel debt from one company to another, even though they were both Enron. By 2001 “CEO Jeffery Skilling resigns, becoming the sixth senior executive to leave in a year.” In October, Arthur Andersen’s legal counsel advised auditors of Enron to destroy “all but the most basic documents2.” So, the cover up began. Arthur Andersen was once amongst the “Big 5” accounting firms and the provided tax, audit and consulting services to corporations like Enron. Their reputation plummeted after they were admittedly aware of “possible illegal acts” committed by Enron and ultimately, Arthur Anderson was dissolved.
Sarbanes-Oxley Act
Enron and other scandals cost investors billions of dollars. Stock prices were at all time lows and the people were beginning to lose faith in corporate leaders. Something had to be done to restore faith and tighten standards. Sarbanes-Oxley was named after Senator Paul Sarbanes and Representative Michael Oxley. Oxley introduced the act to the House of Representatives calling it the “Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002” on February 14, 2002. With minor changes to the name at the Act itself occurring over the span of a few months, Sarbanes-Oxley was officially signed into law on July 30, 2002 by President George W. Bush. Bush called the legislation “the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt. The era of low standards and false profits is over; no boardroom in America is above or beyond the law.” The turnaround of this act was very quick. It was obvious that something needed to be done and it needed to occur quickly.
11 Titles
Sarbanes-Oxley is comprised of 11 Titles, each with subsidiary sections. The eleven titles each focus on one main topic and the changes that are implemented by Sarbanes-Oxley under their heading. The names of the titles are as follows: 1. Public Company Accounting Oversight Board (PCAOB) - this section establishes and provides the need for independent auditors. So now, a corporation could not solely publish audits that were conducted internally. 2. Auditor Independence – establishes the standards that need to be followed when conducting an external audit in order to eliminate conflicts of interest. 3. Corporate Responsibility – Title 3 states that senior executives must take individual responsibility for the lawfulness and correctness of their financial records. The hope here is that higher up executives will not turn the other way when fraudulent activity occurs for fear that they could be prosecuted on a personal level. 4. Enhanced Financial Disclosures – In this title, the new reporting requirements are laid out for corporations. The new requirements are much more thorough and leave little room for leaving out relevant information. 5. Analyst Conflicts of Interest – This is the shortest title of them all and aims to help restore investor confidence. It requires any conflicts of interest to be disclosed. 6. Commission Resources and Authority – The goal of this section is to try and restore confidence in securities analysts and states the SEC’s power to bar analysts from practice. 7. Studies and Reports – The Comptroller General and the SEC are required to conduct studies and then report their conclusions and findings. 8. Corporate and Criminal Fraud Accountability – This title gives specific penalties based on various crimes that may be committed and also provided protection for whistle-blowers. 9. White Collar Crime Penalty Enhancement – White-collar crime is punished more based on the law described here, stronger sentencing is key. 10. Corporate Tax Return – The basic requirement here, being only one section, is that the Chief Executive Officer signs the company return. This way, the CEO can’t claim that they didn’t see the tax return before it was filed. 11. Corporate Fraud Accountability – The SEC is granted the ability and authority to freeze an account where payments seem unusual. Looking for large or unusual transactions allows fraud to be more easily detected.
Major Sections of SOX
Each of the 11 titles mentioned above are comprised of sections. Some titles only have one section but some have up to nine. In this section I will attempt to summarize the five most important sections: 302, 404, 409, 902 and, 906.
Section 302
Section 302 outlines the Corporate Responsibility for Financial Reports. It is composed of steps that are taken by the company and specifically ensuring that the CEO is very involved and informed when it comes to the financial statement process. The CEO must sign off on the financial statements and the reports when they are complete. By making the CEO the final eye to see the statements SOX is attempting to ensure that the CEO cannot claim ignorance if a fraud is committed. When the major corporate scandals were occurring at places like Enron, CEO’s frequently claimed they had no idea what was going on in their company. This section aims to hold CEO’s responsible for their company reporting, a form of internal control.
Section 404 Section 404 is entitled: Management Assessment of Internal Controls. With the implementation of Section 404, companies are now required to include an additional report, an Internal Control Report. The purpose of this report is for management to take responsibility for a proper internal control structure and also for management to vouch for the usefulness and accuracy of this control. If the internal controls that are in place do not suffice, the faults are required to be reported as well.
Section 409 Section 409 addresses timeliness when reporting. “Companies are required to disclose on almost real-time basis information concerning material changes in its financial condition or operations.” This is a way, because of this legislation, for investors and people outside the company to be as informed as possible with changes inside the company. These changes may or may not be significant but, there is always a chance, from the perspective of an investor, that day to day decisions affect stock prices. Now, stockholders can be almost immediately aware of the changes taking place.
Section 902 Section 902 falls under the white collar crime title and describes the illegality of altering, destroying, manipulating or concealing documents.
The intent of the fraudster here would be to “impair the objects integrity or availability for use in an official proceeding.”
Section 906 Section 906 also falls under the white collar crime category and specifically, the penalties that will be endured to any person that certifies a misleading or fraudulent financial report. In this section, it is stated that penalties can be up to $5 million and 20 years in prison. I believe this section is put in to make it clear that CEO’s are going to be held responsible for “signing off” so, it is in their best interest to thoroughly look over statements and reports.
After SOX: What has Sarbanes-Oxley Accomplished & Issues that …show more content…
Remain
The Sarbanes-Oxley had good intentions. It’s goal was to restore faith in the public and to reduce company fraud. SOX has definitely restored public faith and perception. The titles and sections that SOX includes make it clear to companies and individuals outside the company that reporting standards have been increased. Because of this increase, and the penalties that are disclosed in this statute, it would be hard to believe that any person or company would risk committing a fraud. However, this only addresses the restoration or faith and confidence. Sarbanes-Oxley has not necessarily affected the inside the company policies and procedures. There are a number of people who scrutinize Sarbanes-Oxley for its shortcomings. “Sarbanes-Oxley was intended to restore faith in the integrity of corporations and executives, yet it hasn't really had a measurable impact on fraud.” The new rules that were implemented under SOX simply aim to increase the CEO’s awareness in what statements and reports are being published. However, when these documents are received, analyzed and signed off, there may or may not be an actual internal investigation going on to ensure the correctness of the documents. There is really no way to prove that the documents are fraud free when they reach the CEO.
Conclusion
The goal of this paper was to summarize the 2002 Sarbanes-Oxley legislation.
I discussed the titles that comprise SOX and further went into detail on the most important sections. I am not a critic of this act. I think as far as restoring public perception goes, Sarbanes-Oxley was extremely successful. Also, I think this legislation changed the views of the CEO’s. CEO’s were now explicitly aware of their accountability when it came to reporting. This was an extremely beneficial change as, CEO’s use to have the ability to claim ignorance and push the consequences down the corporate ladder. I am sure that if Congress would have taken more time when passing this legislation, it could have been improved upon, but, desperate times… the corporate world needed a drastic change to restore faith and help the economy. There is undoubtedly still fraud occurring and therefore this battle to end it will go
on.
--------------------------------------------
[ 1 ]. http://www.soxlaw.com/
[ 2 ]. http://www.time.com/time/specials/packages/article/0,28804,2021097_2023262,00.html
[ 3 ]. http://www.nytimes.com/2002/07/31/business/corporate-conduct-the-president-bush-signs-bill-aimed-at-fraud-in-corporations.html
[ 4 ]. http://c0403731.cdn.cloudfiles.rackspacecloud.com/collection/papers/1940/1940_SEC_Invst_Advisors_Act/X.pdf
[ 5 ]. http://www.sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm
[ 6 ]. http://www.soxlaw.com/s302.htm
[ 7 ]. http://www.sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm
[ 8 ]. http://www.sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm
[ 9 ]. http://www.sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm
[ 10 ]. http://www.sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm
[ 11 ]. http://www.allbusiness.com/professional-services/accounting-tax-auditing/5220240-1.html#ixzz2D3ZIFMye
Contents Overview 3 Enron 3 Sarbanes-Oxley Act 3 11 Titles 4 Major Sections of SOX 5 Section 302 5 Section 404 6 Section 409 6 Section 902 7 Section 906 7 After SOX: What has Sarbanes-Oxley Accomplished & Issues that Remain 7 Conclusion 8
Overview
The Sarbanes-Oxley Act was signed into law in 2002 by President Bush. Sarbanes- Oxley came to be because of corporate level accounting scandals that had then, recently occurred. The most common of these scandals include: Adelphia, Enron, Peregrine Systems, Tyco and, WorldCom. This act “introduced major changes to the regulation of financial practice and corporate governance.”
Enron
The Enron Scandal is one of many that prompted the obvious …show more content…
need for reform of accounting practices. It began in November 1997 when the company bought stake in another company to create a sub company of Enron. The new company, Chewco, was run by an Enron officer who enabled Enron to run a series of transactions through Chewco and ultimately, funnel debt from one company to another, even though they were both Enron. By 2001 “CEO Jeffery Skilling resigns, becoming the sixth senior executive to leave in a year.” In October, Arthur Andersen’s legal counsel advised auditors of Enron to destroy “all but the most basic documents2.” So, the cover up began. Arthur Andersen was once amongst the “Big 5” accounting firms and the provided tax, audit and consulting services to corporations like Enron. Their reputation plummeted after they were admittedly aware of “possible illegal acts” committed by Enron and ultimately, Arthur Anderson was dissolved.
Sarbanes-Oxley Act
Enron and other scandals cost investors billions of dollars. Stock prices were at all time lows and the people were beginning to lose faith in corporate leaders. Something had to be done to restore faith and tighten standards. Sarbanes-Oxley was named after Senator Paul Sarbanes and Representative Michael Oxley. Oxley introduced the act to the House of Representatives calling it the “Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002” on February 14, 2002. With minor changes to the name at the Act itself occurring over the span of a few months, Sarbanes-Oxley was officially signed into law on July 30, 2002 by President George W. Bush. Bush called the legislation “the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt. The era of low standards and false profits is over; no boardroom in America is above or beyond the law.” The turnaround of this act was very quick. It was obvious that something needed to be done and it needed to occur quickly.
11 Titles
Sarbanes-Oxley is comprised of 11 Titles, each with subsidiary sections. The eleven titles each focus on one main topic and the changes that are implemented by Sarbanes-Oxley under their heading. The names of the titles are as follows: 1. Public Company Accounting Oversight Board (PCAOB) - this section establishes and provides the need for independent auditors. So now, a corporation could not solely publish audits that were conducted internally. 2. Auditor Independence – establishes the standards that need to be followed when conducting an external audit in order to eliminate conflicts of interest. 3. Corporate Responsibility – Title 3 states that senior executives must take individual responsibility for the lawfulness and correctness of their financial records. The hope here is that higher up executives will not turn the other way when fraudulent activity occurs for fear that they could be prosecuted on a personal level. 4. Enhanced Financial Disclosures – In this title, the new reporting requirements are laid out for corporations. The new requirements are much more thorough and leave little room for leaving out relevant information. 5. Analyst Conflicts of Interest – This is the shortest title of them all and aims to help restore investor confidence. It requires any conflicts of interest to be disclosed. 6. Commission Resources and Authority – The goal of this section is to try and restore confidence in securities analysts and states the SEC’s power to bar analysts from practice. 7. Studies and Reports – The Comptroller General and the SEC are required to conduct studies and then report their conclusions and findings. 8. Corporate and Criminal Fraud Accountability – This title gives specific penalties based on various crimes that may be committed and also provided protection for whistle-blowers. 9. White Collar Crime Penalty Enhancement – White-collar crime is punished more based on the law described here, stronger sentencing is key. 10. Corporate Tax Return – The basic requirement here, being only one section, is that the Chief Executive Officer signs the company return. This way, the CEO can’t claim that they didn’t see the tax return before it was filed. 11. Corporate Fraud Accountability – The SEC is granted the ability and authority to freeze an account where payments seem unusual. Looking for large or unusual transactions allows fraud to be more easily detected.
Major Sections of SOX
Each of the 11 titles mentioned above are comprised of sections. Some titles only have one section but some have up to nine. In this section I will attempt to summarize the five most important sections: 302, 404, 409, 902 and, 906.
Section 302
Section 302 outlines the Corporate Responsibility for Financial Reports. It is composed of steps that are taken by the company and specifically ensuring that the CEO is very involved and informed when it comes to the financial statement process. The CEO must sign off on the financial statements and the reports when they are complete. By making the CEO the final eye to see the statements SOX is attempting to ensure that the CEO cannot claim ignorance if a fraud is committed. When the major corporate scandals were occurring at places like Enron, CEO’s frequently claimed they had no idea what was going on in their company. This section aims to hold CEO’s responsible for their company reporting, a form of internal control.
Section 404 Section 404 is entitled: Management Assessment of Internal Controls. With the implementation of Section 404, companies are now required to include an additional report, an Internal Control Report. The purpose of this report is for management to take responsibility for a proper internal control structure and also for management to vouch for the usefulness and accuracy of this control. If the internal controls that are in place do not suffice, the faults are required to be reported as well.
Section 409 Section 409 addresses timeliness when reporting. “Companies are required to disclose on almost real-time basis information concerning material changes in its financial condition or operations.” This is a way, because of this legislation, for investors and people outside the company to be as informed as possible with changes inside the company. These changes may or may not be significant but, there is always a chance, from the perspective of an investor, that day to day decisions affect stock prices. Now, stockholders can be almost immediately aware of the changes taking place.
Section 902 Section 902 falls under the white collar crime title and describes the illegality of altering, destroying, manipulating or concealing documents.
The intent of the fraudster here would be to “impair the objects integrity or availability for use in an official proceeding.”
Section 906 Section 906 also falls under the white collar crime category and specifically, the penalties that will be endured to any person that certifies a misleading or fraudulent financial report. In this section, it is stated that penalties can be up to $5 million and 20 years in prison. I believe this section is put in to make it clear that CEO’s are going to be held responsible for “signing off” so, it is in their best interest to thoroughly look over statements and reports.
After SOX: What has Sarbanes-Oxley Accomplished & Issues that …show more content…
Remain
The Sarbanes-Oxley had good intentions. It’s goal was to restore faith in the public and to reduce company fraud. SOX has definitely restored public faith and perception. The titles and sections that SOX includes make it clear to companies and individuals outside the company that reporting standards have been increased. Because of this increase, and the penalties that are disclosed in this statute, it would be hard to believe that any person or company would risk committing a fraud. However, this only addresses the restoration or faith and confidence. Sarbanes-Oxley has not necessarily affected the inside the company policies and procedures. There are a number of people who scrutinize Sarbanes-Oxley for its shortcomings. “Sarbanes-Oxley was intended to restore faith in the integrity of corporations and executives, yet it hasn't really had a measurable impact on fraud.” The new rules that were implemented under SOX simply aim to increase the CEO’s awareness in what statements and reports are being published. However, when these documents are received, analyzed and signed off, there may or may not be an actual internal investigation going on to ensure the correctness of the documents. There is really no way to prove that the documents are fraud free when they reach the CEO.
Conclusion
The goal of this paper was to summarize the 2002 Sarbanes-Oxley legislation.
I discussed the titles that comprise SOX and further went into detail on the most important sections. I am not a critic of this act. I think as far as restoring public perception goes, Sarbanes-Oxley was extremely successful. Also, I think this legislation changed the views of the CEO’s. CEO’s were now explicitly aware of their accountability when it came to reporting. This was an extremely beneficial change as, CEO’s use to have the ability to claim ignorance and push the consequences down the corporate ladder. I am sure that if Congress would have taken more time when passing this legislation, it could have been improved upon, but, desperate times… the corporate world needed a drastic change to restore faith and help the economy. There is undoubtedly still fraud occurring and therefore this battle to end it will go
on.
--------------------------------------------
[ 1 ]. http://www.soxlaw.com/
[ 2 ]. http://www.time.com/time/specials/packages/article/0,28804,2021097_2023262,00.html
[ 3 ]. http://www.nytimes.com/2002/07/31/business/corporate-conduct-the-president-bush-signs-bill-aimed-at-fraud-in-corporations.html
[ 4 ]. http://c0403731.cdn.cloudfiles.rackspacecloud.com/collection/papers/1940/1940_SEC_Invst_Advisors_Act/X.pdf
[ 5 ]. http://www.sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm
[ 6 ]. http://www.soxlaw.com/s302.htm
[ 7 ]. http://www.sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm
[ 8 ]. http://www.sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm
[ 9 ]. http://www.sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm
[ 10 ]. http://www.sarbanes-oxley-101.com/sarbanes-oxley-compliance.htm
[ 11 ]. http://www.allbusiness.com/professional-services/accounting-tax-auditing/5220240-1.html#ixzz2D3ZIFMye