Sarbanes-Oxley Act of 2002Sarbanes-Oxley Act of 2002

Paul SarbanesPaul Sarbanes

Maryland’s Democratic Senior SenatorMaryland’s Democratic Senior Senator

Chairman of the Senate Banking, Housing, Chairman of the Senate Banking, Housing, and Urban Affairs Committeeand Urban Affairs Committee

Pushed for the establishment of an Pushed for the establishment of an accounting oversight boardaccounting oversight board

Michael OxleyMichael Oxley

Congressman, Fourth Ohio DistrictCongressman, Fourth Ohio District

Chairman of the House Committee on Chairman of the House Committee on Financial ServicesFinancial Services

Oxley’s committee was the first to hold Oxley’s committee was the first to hold hearings on the fraud at Enron and hearings on the fraud at Enron and WorldComWorldCom

Purpose of the LegislationPurpose of the Legislation

To ensure auditor independenceTo ensure auditor independence

To provide higher levels of accuracy in To provide higher levels of accuracy in corporate financial reportingcorporate financial reporting

To promote responsible conduct on the To promote responsible conduct on the part of corporate officers and directors, part of corporate officers and directors, auditors, and securities analystsauditors, and securities analysts

Public Company Accounting Public Company Accounting Oversight BoardOversight Board

Appointed and overseen by the SECAppointed and overseen by the SEC

Made up of five, full-time membersMade up of five, full-time members

Only two of the members can be CPAsOnly two of the members can be CPAs

Funded by public companies through Funded by public companies through mandatory feesmandatory fees

Audit firms must register and pay annual Audit firms must register and pay annual feesfees

Setting the StandardsSetting the Standards

The Board will issue/adopt standards set The Board will issue/adopt standards set by other groups or organizationsby other groups or organizations– Quality controlQuality control– EthicsEthics– IndependenceIndependence– Standards “necessary” to protect the public Standards “necessary” to protect the public

interestinterest

The Accounting PoliceThe Accounting Police

The Board is empowered to regularly The Board is empowered to regularly inspect the operations of accounting firmsinspect the operations of accounting firms

Investigate potential violations of securities Investigate potential violations of securities laws, standards, competency and conductlaws, standards, competency and conduct

The Greater Role of the Audit The Greater Role of the Audit CommitteeCommittee

The Act requires auditors to be hired and The Act requires auditors to be hired and overseen by an audit committeeoverseen by an audit committeeMembers of the audit committee must be Members of the audit committee must be independent of the CEO and other independent of the CEO and other corporate executivescorporate executivesThe audit committee must approve all The audit committee must approve all services to be performed by the services to be performed by the accounting firmaccounting firm

The CEO & CFO MustThe CEO & CFO Must

Certify that the corporation’s financial Certify that the corporation’s financial reports fairly present the company’s reports fairly present the company’s operations and financial condition operations and financial condition

Divulge bonuses, other incentive based-Divulge bonuses, other incentive based-bonuses, and profits on stock salesbonuses, and profits on stock sales

The CEO & CFO Must NotThe CEO & CFO Must Not

Coerce auditors into creating misleading Coerce auditors into creating misleading financial statementsfinancial statements

Accept loans from the companyAccept loans from the company

The New Role of the Auditor The New Role of the Auditor

Lead audit partners must be rotated every Lead audit partners must be rotated every five yearsfive yearsA second auditor must provide a thorough A second auditor must provide a thorough second review of every audit reportsecond review of every audit reportCannot offer certain non-audit services to Cannot offer certain non-audit services to clientsclientsMust maintain audit workpapers for at Must maintain audit workpapers for at least five yearsleast five years

Non-Compliance: Ernst & Non-Compliance: Ernst & YoungYoung

Violated auditor independence rules by Violated auditor independence rules by working too closely with an audit clientworking too closely with an audit client

A judge barred E&Y from accepting new A judge barred E&Y from accepting new SEC-registered audit clients for six monthsSEC-registered audit clients for six months

Pay $1.7 million in disgorgementPay $1.7 million in disgorgement