Prepared By:Damneet Singh (111013)Jai Sehgal (111269)Sonal Gupta (111265)Aanchal Gaba (111153)Prachi Mittal (111321)

The Year of the“Perfect Storm” Unethical Behavior Fraudulent ActivityDownturn in the EconomyMassive Business FailuresAudit FailuresElection Year

Result: The most significant legislation affecting the accounting profession since 1934

Sarbanes-Oxley Act of 2002Enacted July 30, 2002 (nine months after first

announcement of Enron problems)Applicable to “Issuers” as defined in the SEC Act

of 1934 (approximately 15,000 public companies)Companies required to file periodic reports with

the SECCompanies with more than $1,000,000 in total

assets and at least 500 shareholdersCompanies who have registered securities with the

SECCompanies that are “in registration”

Sarbanes-Oxley Act of 2002Creates the Public Company Accounting

Oversight Board or PCAOB, funded by accounting firms and registrants

Revises corporate governance standardsAdds new disclosure requirementsCreates new federal crimes related to fraudSignificantly increases criminal penalties for

violations of the securities laws

Public Company Accounting Oversight Board5 members must be full-time and independent.

Requires 2 CPAs (but only 2) to serve.Responsible for:

Registering all auditors of public companiesConducting inspections of and discipline of those

auditorsEnforcing compliance with SEC Act of 1934Establishing and/or adopting auditing, quality

control, ethics, independence, and other standards relating to the preparation of audit reports for issuers

Public Company Accounting Oversight BoardBoard Inspections and Reports Regarding

Auditors:Requires PCAOB to inspect not less than once

every 3 years all auditors of public companies The inspection report becomes public

information after completion of an appeal period, except that any deficiencies that were resolved within 12 months are confidential

Public Company Accounting Oversight BoardBoard Investigations and Discipline

Requires PCAOB to investigate and discipline violations of the Act, Board rules, securities laws and professional standards

Requires disciplinary sanctions by the PCAOB to be reported to “any appropriate State Regulatory Authority”

Sarbanes-Oxley Act of 2002Mandates that the PCAOB establish Auditing

Standards to require: Workpaper retention for 5 and 7 years

Knowing violations of the workpaper retention rules carry penalties of up to 10 years in prison

CPA firms utilize a second-partner review and approval of audit reports

Testing of companies’ internal controls, including reporting of test results

Sarbanes-Oxley Act of 2002Auditor Independence

Prohibits accounting firms from performing certain non-audit services for audit clients

Auditor Partner RotationRequires audit partner and review partner

rotation every 5 yearsRequires a 1-year cooling off period

Audit firm cannot perform audit if CEO, CFO, controller, chief accounting officer, etc. was employed by and participated in the audit 1-year prior to the start of the audit

Sarbanes-Oxley Act of 2002Corporate Governance Standards

Audit committees must approve all services to be provided by the accounting firm

Required communications between auditor and audit committee

Mandatory adoption of a “code of ethics” for senior financial officers

Requires CEO and CFO to certify financial reports

Sarbanes-Oxley Act of 2002Corporate Governance Standards

Prohibits most director and officer loans from the company

New rules on director and officer trading of company stock (insider trading)

Requires attorney whistleblowing

Sarbanes-Oxley Act of 2002Implementation Schedule

Various requirements of the Act take effect over an extended period from July 30, 2002, to January 2004.

During this time, the SEC and PCAOB will be issuing numerous rules and regulations A number of key SEC rules have completed their comment

period as of the end of January and are now final. Several others are currently exposed for public comment

Numerous studies mandated by the Act to be completed by the GAO during this time

Once fully operational, the PCAOB will “put its stamp” on the implementation of the law.

Implications of Sarbanes-Oxley for ProfessionPotential for loss of audit standard

setting for public company auditsChanging role for SECPSDisciplinary tie-in to the inspection

processInspections/peer review coverage of

nonpublic companiesInternational compliance issues

Implications for ProfessionPotential for limitations on other non-audit

servicesNew relationship with audit committees and

managementFurther consolidation of public auditsCascade to non-public audits