Sarbanes-Oxley Act AnalysisACC 628Michael Shane JonesInstructor Edward HartmannApril 13, 2015

Sarbanes Oxley Act of 2002

Introduced by Definition: Passed by Congress in 2002

Introduced by Paul Sarbanes, a United States Democratic Senator from Maryland, and Michael Oxley  a United States Republican Congressman from Ohio

Strict reforms were mandated disclosing financial reporting

Enacted to prevent fraudulently reporting financial information

Responded to financial scandals such as Enron, WorldCom, and Tyco

Overhaul of reporting standards

Investopedia, 2015

SOX of 2002ExplanationAmend existing legislation

Two key provisions

Section 302 upper management required to certify financial reports accuracy

Section 404 Internal controls to be established by executive management and internal auditors

Costly implementation established for financial trading corporation incorporating internal controls.

SOX of 2002Explanation

Section 401 Requiring financial statements to be accurate by issuers which shall include material off balance sheet liabilities, obligations or transactions

Section 409 Issuers of financial statements required disclose to general public on urgent basis any changes in financial conditions are operation changes

Section 802 Penalties imposed shall be fines or up to 20 years in prison for altering, destroying, mutilating, falsifying records and documents or record with intent obstruct or impeded federal investigations.

SOX of 2002 Explanation

Section 806 Whistleblower protection-

Protection for those who reveal fraud and unethical business practices from retaliation

Section 807 Penalties-Fraud

Before SOX

Financial reporting was more lax

Companies were under the radar after being apt to fraudulent financial reporting

No strict enforcement of rules and regulations

Clark, 2012

Scandal

Enron: Rocked the financial sectors between 2001 and 2002 internal fraud revealed

Enron History

Created in 1985 merger between Houston Natural Gas and Inter North

Merger caused Enron saddled with enormous debt

Kenneth Lay, CEO of Enron, hired Jeffrey Skilling of McKinsey and Corporation implement Enron’s business plan

Created gas bank gas purchases would be made various client and distributed to system clients leading to the hiring of Jeffrey Skilling

Clark, 2012

Enron Scandal Andrew Fastow was hired by Skilling in 1990 become a protégé who later became CFO in 1998

Prior to Fastow being appointed CFO Skilling was appointed CFO in 1996 leading to more greed and unethical business decisions.

Enron Online was created in 1999, an online trading website enabled Enron to witness every business transaction being made. Increased Enron’s credit rating

Invested millions internet broadband very little increase in profits boosted investor confidence high stock price masking real financial condition of Enron. Executives management less concerned profitable business deals

Enron became hedge fund instead public traded corporation

2001 Enron files for bankruptcy

Bankruptcy led to disclosing financial practices leading to Enron’s demise

Clark, 2012

Public Company Accounting Oversight Board & Audit responsibilities

Title I PCAOB non profit private sector corporation created by SOX protect investor interest oversee audits of public trading companies

Audit responsibilities

DISSEMINATE INTERNAL CONTROLS KNOWLEDGE

ENSURE THAT OBJECTIVITY IS MAINTAINED

CLARIFY EXPECTATIONS AND SECURE SUPPORT ACCORDINGLY

SECURE APPROPRIATE SKILL SETS AND RESOURCES TO ADAPT TO ACCOUNTING AND DISCLOSURE REQUIREMENTS AND TO MAINTAIN THE LEVEL OF INTERNAL AUDITING FOR NON-FINANCIAL REPORTING REVIEWS

Patilis, 2004

Corporate responsibilityEnhanced financial disclosures

Title III Sect of SOX Corporate responsibility

Section 301, 302, 303, 304, 305, 306, 307, and 308

Title IV Enhanced Financial Disclosures of SOX

Section 401

Analyst Conflicts of InterestCommission Resources and Authority

Analyst Conflicts of Interest

Title V

Section 501 Treatment of securities analysts by registered securities associations and national securities exchanges.

Commission Resources and Authority

Title VI

Section 601 Authorization of appropriations

Section 602 Appearance and practice before the Commission.

Section 603 Federal court authority to impose penny stock bars.

Section 604 Qualifications of associated persons of brokers and dealers

SEC.Gov

Studies and reportsCorporate and criminal fraud accountability

Title VII Studies and reports

Section 701 GAO study and report regarding consolidation of public accounting firms

Section 702 Commission study and report regarding credit rating agencies

Section 703 Study and report on violators and violations Sec. 704. Study of enforcement actions

Section 705 Study of investment banks

Corporate and criminal fraud accountability

Title VIII Corporate and criminal fraud accountability

Section 801 Short title.

Section 802 Criminal penalties for altering documents

Section 803 Debts non-dischargeable if incurred in violation of securities fraud laws

Section 804 Statute of limitations for securities fraud

Section 805 Review of Federal Sentencing Guidelines for obstruction of justice and extensive criminal fraud

Section 806 Protection for employees of publicly traded companies who provide evidence of fraud

Section 807 Criminal penalties for defrauding shareholders of publicly traded companies

SEC, Gov

White-collar crime penalty enhancementsCorporate tax returns

Title IX White-collar crime penalty enhancements Sec 901 Short title Sec 902 Attempts and conspiracies to commit criminal fraud offenses Sec 903 Criminal penalties for mail and wire fraud Sec 904 Criminal penalties for violations of the Employee Retirement Income Security Act of 1974 Sec 905 Amendment to sentencing guidelines relating to certain white-collar offenses Section 906 Corporate responsibility for financial reportsTitle X Corporate tax returns Sec 1001 Sense of the Senate regarding the signing of corporate tax returns by chief executive officers SEC.gov

Corporate fraud & Accountability

Title X Corporate fraud and Accountability Sect 1101 Short title

Sec 1102 Tampering with a record or otherwise impeding an official proceeding

Sec 1103 Temporary freeze authority for the Securities and Exchange Commission

Sec 1104 Amendment to the Federal Sentencing Guidelines

Sec 1105 Authority of the Commission to prohibit persons from serving as officers or directors

Sec 1106 Increased criminal penalties under Securities Exchange Act of 1934.

Sec 1107 Retaliation against informantsSEC.gov