Sarbanes-Oxley Act

The Integrity of
Financial Reporting
 The Integrity of Financial Reporting

The Gatekeepers (Guardians) are:

 The U.S. Securities & Exchange Commission (SEC)

 The Public Company Accounting Oversight Board (PCAOB)
 The Independent Audit Firm
 The Audit Committee of the Corporate Board of Directors
 The Internal Audit Function
 The Internal Control System
 Corporate Governance &
Financial Reporting
U.S. Securities
& Exchange
Commission (SEC)

Public Company
Corporate Board
Accounting Oversight
Of Directors
Board (PCAOB)

Independent
Audit Committee CEO & CFO
Audit Firm

Internal Audit
Function

Internal Control
System
 The U.S. Securities & Exchange Commission
(SEC)
 The mission of the SEC is to protect investors,
maintain orderly and efficient financial markets, and
facilitate capital formation.
 The laws and rules governing the securities industry
derive from a straightforward concept: all investors,
large or small, should have access to certain basic
facts about an investment prior to buying it, and so
long as they hold it.
 Therefore the SEC requires public companies to
disclose meaningful financial and other information
to the public. This provides a common pool of
knowledge for all investors to judge for themselves
whether to buy, sell, or hold a particular security.
 For more visit: http://
www.sec.gov/about/whatwedo.shtml
Public Company Accounting Oversight Board (PCAOB)

 The PCAOB is a private, nonprofit corporation created by the Sarbanes-

Oxley Act of 2002, under the oversight of the SEC, to supervise the auditors
of public companies. The PCAOB was created to protect investors and the
public interest.

 The PCAOB Board consists of five members, appointed by the SEC

 All accounting firms that perform public company audits must register with,
and be regulated by, the PCAOB.

 The PCAOB performs regular inspections of the audit quality control systems
of registered audit firms.

 The PCAOB sets auditing standards and related rules for public company
audits, subject to SEC approval.

 The PCAOB has an enforcement division to discipline audit firms that do not
adhere to its auditing standards and related rules.

 For more visit: http://www.pcaobus.org/index.aspx

 Independent Audit Firms
 There are 1,867 audit firms registered with the PCAOB.

 But the vast majority of large public companies are audited by just one of
the “Big Four” audit firms.

 Sarbanes-Oxley (SOX) main provisions for audit firms:

– Section 204- Auditors must report all critical accounting
– policies and practices to the company’s audit committee.
– Section 203- The lead audit and reviewing partner must rotate off the
audit every 5 years.
– Section 201- Prohibits any public accounting firm from performing non-
audit services for public company audit clients.
– Section 303: Improper Influence on Conduct of Audits. It is unlawful for
any public company officer or director to fraudulently influence, coerce,
manipulate, or mislead any auditor for the purpose of rendering the
financial statements materially misleading.
– Section 404: The auditor shall attest to, and report on, the assessment
of internal control made by the management of the public company.

 For more visit:

http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/Summary+of+the+Provisions+of+the+Sarbanes-Oxley+Act+o
 Audit Committees
Section 301: Public Company Audit Committees.
 Each member of the audit committee shall be a member of the board of
directors of the issuer, and shall otherwise be independent.
 "Independent" is defined as not receiving, other than for service on the
board, any consulting, advisory, or other compensatory fee from the issuer,
and as not being an affiliated person of the issuer, or any subsidiary thereof.
 The audit committee of an issuer shall be directly responsible for the
appointment, compensation, and oversight of the work of any registered
public accounting firm employed by that issuer.
 The audit committee shall establish procedures for the "receipt, retention,
and treatment of complaints" received by the issuer regarding accounting,
internal controls, and auditing.
 Each audit committee shall have the authority to engage independent
counsel or other advisors, as it determines necessary to carry out its duties.
 Each issuer shall provide appropriate funding to the audit committee.

Section 204: Auditor Reports to Audit Committees.

 The accounting firm must report to the audit committee all "critical
accounting policies and practices to be used; all alternative treatments of
financial information within [GAAP] that have been discussed with
management, ramifications of the use of such alternative disclosures and
treatments, and the treatment preferred" by the firm.

 For more visit:

http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/Summary+of+the+Provision
 CEO & CFO
Section 302: Corporate Responsibility For Financial Reports.
 The CEO and CFO of each issuer shall prepare a statement to accompany the audit report
to certify the "appropriateness of the financial statements and disclosures contained in
the periodic report, and that those financial statements and disclosures fairly present, in
all material respects, the operations and financial condition of the issuer." A violation of
this section must be knowing and intentional to give rise to liability.

Section 303: Improper Influence on Conduct of Audits.

 It shall be unlawful for any public company officer or director to take any action to
fraudulently influence, coerce, manipulate, or mislead any auditor engaged in the
performance of an audit for the purpose of rendering the financial statements materially
misleading.

Section 304: Forfeiture of Certain Bonuses and Profits

 If an issuer is required to prepare a restatement due to "material noncompliance" with
financial reporting requirements, the CEO and the CFO shall "reimburse the issuer for any
bonus or other incentive-based or equity-based compensation received" during the
twelve months following the issuance or filing of the non-compliant document and "any
profits realized from the sale of securities of the issuer" during that period.

Section 404: Management Assessment Of Internal Controls.

 Requires each annual report of an issuer to contain an "internal control report", which
shall:
– state the responsibility of management for establishing and maintaining an
adequate internal control structure and procedures for financial reporting; and
– contain an assessment, as of the end of the issuer's fiscal year, of the effectiveness
of the internal control structure and procedures of the issuer for financial reporting.

 For more visit:

http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/Summary+of+the+Provisions+of+the+Sa
 Corporate Governance &
Financial Reporting
U.S. Securities
& Exchange
Commission (SEC)

Public Company
Corporate Board
Accounting Oversight
Of Directors
Board (PCAOB)

Independent
Audit Committee CEO & CFO
Audit Firm

Internal Audit
Function

Internal Control
System