Sarbanes-Oxley Act of 2002
Who does the public accounting firm auditors report to?
Audit committee NOT board of directors
CEO/CFO Disclosure to audit and audit committee
1) All significant deficiencies and material weakness in design or operation of IC that could adversely affect F/S 2) Any type of fraud 3) Any significant changes to IC
What are the material off-balance transaction that should be disclosed on F/S
Contingent obligations (lawsuits), operating leases, relationships with unconsolidated subsidiaries (equity method)
Retaliation against informants
Harmful action with intent to retaliate for person providing truthful information to SEC Fined and jailed no more than 10 years
Criminal Penalty for Auditors
Have to keep all audit and review WP for 7 years Fined, jail for no more than 10 years
Temporary freeze authority for the SEC
If company is under investigation for violating federal securities law, SEC can require company to escrow payment in an interest-bearing account for 45 days if deem likely to be punished
Forfeiture of Certain Bonuses and Profits
If had to restate F/S because of material non-compliance, then CEO CFO or director might have to reimburse bonus/compensation or gain on sale of securities during 12 month period
What items determined by the auditor should be reflected in the F/S?
Material correcting adjustments
What is the purpose of the Sarbanes Oxley Act of 2002
More financial reporting responsibility of public companies - expanded disclosures and specific representations required in published F/S
Statute of limitation for securities fraud
No later than earlier of 2 years after discovery or 5 years after violation
Improper influence on the conduct of audits
No one can fraudulent influence or manipulate auditor to make F/S misleading
Authority of the SEC to prohibit persons from serving as officers or directors
SEC can prohibit someone from serving as an officer or director of issue for a period or permanently If violated securities rules and regulations and deem unfit to serve
Criminal penalties for securities fraud
jailed for no more than 25 years, fined, or both
Management Assessment of Internal Controls
-All annual reports are required to contain an internal control report that *States management's responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting *Contains an assessment of the effectiveness of the internal control structure and procedures of the company for financial reporting Auditors attest management's assertion of IC
Responsibilities of the audit committee
1) The audit committee hire,compensate, and exercise oversight over the external auditor (public accounting firm) to audit the financial statements 2) Resolve disputes between management and auditor 3) Audit committees must also develop whistleblower procedures to ensure opportunities for communication of audit, accounting or internal control issues to the committee for evaluation and possible action. Procedures accommodate confidential, anonymous reports by employees of issue Procedures accommodate receipt and retention of complaints and method to address complaint
What are the two corporate and criminal fraud accountability?
1. Criminal penalties for altering documents 2. Criminal penalties for securities fraud
In the Sarbanes Oxley Act of 2002, what does corporate responsibility consist of?
1. Establishment of audit committee 2. CEO and CFO representations
When filing financial reports with the SEC, public companies have to have written statement saying:
1. Fully comply with Securities Exchange Act of 1934 2. Information in report fairly presents financial condition and operating results 3. Signed by CEO and CFO
Code of conduct for senior officers should be adopted, if not disclose why, but if adopted, what provisions should be included?
1. Honest and ethical conduct 2. Compliance with laws, rules, and regulations 3. Full, fair, accurate and timely disclosure in periodic financial statements
When does Securities Exchange Commission have a more enhanced review of periodic disclosures
1. Issuers with Significant volatility in price 2. Issuers with Operations that can significantly affect any material sector in economy 3. Issuers that have Issued material restatements 4. Issues with Large market capitalization
Characteristics of the audit committee
1. Part of the Board of Directors 2. Independent -May not be compensated by the issuing company for consulting or advisory services -May not be an affiliated person from the issuer (ability to influence financial decisions)
Criminal penalties for altering documents
Alter documents in order to influence investigation Fined, jail for no more than 20 years or both
Tampering with record or impeding an official proceeding
Alters document with intent to modify and its integrity or availability of document of an official proceeding Fined, jail for no more than 20 years or both
Attempt and Conspiracy
Any attempt is same as committing offense Mail and wire fraud: 5 years to 20 years ERISA went from $5,000 to $100,000 and 1 years to 10 years
Conflict of interest provision
Companies are prohibited from making personal loans to directors or executive officers UNLESS the consumer credit loan is made in the ordinary course of business or if the terms offered are similar to terms with no preferential treatment
Sarbanes-Oxley Act of 2002 pertain to what companies?
Public companies
CEO/CFO Representations about financial reporting
Regarding financial reports: CEO and CFO sign annual and quarterly financial reports asserting: 1. Reviewed report 2. Does not contain untrue/omit material information 3. F/S fairly represent financial condition and result of operation
CEO/CFO Representations about internal controls
Regarding internal controls: CEO and CFO assert that: 1. IC designed to ensure material information has been made available 2. IC has been evaluated for effectiveness as of date within 90 days prior to report 3. Includes their conclusion to effectiveness of IC based on their evaluation
Disclosure of transactions involving management and principal stockholders
Related parties - if ownership > 10% of equity security - disclose Statements filed - at time of registration, when person achieves 10% ownership and when change in ownership
Financial expert in audit committee
There should be one (disclose if there is), if there is not one - disclose why Criteria: Financial expert should understand GAAP and the application of GAAP, understand IC and audit committee functions, and know how to prepare or audit F/S Financial expert qualifies from education, past experience in a public accounting firm or past experience as controller/principal accounting officer but should have the above criteria
How are individual protected when presenting evidence of fraud?
Through whistle-blower protection - cannot be discharged, demoted, suspended, threatened - just discriminated in any way If discrimination does arise, can report to secretary of labor who can provide compensatory damages (reinstatement, back pay with interest, compensation for special damages like legal fees)
Amendment to Sentencing Guidelines Related to Certain White-Collar Offenses
US Sentencing Commission review and amends as needed the Federal Sentencing Guidelines