Sarbane-Oxley Act

CEOs and CFOs certification (Section 402)

CEOs and CFOs must certify that financial statements accurately and fairly represent the financial condition and operations of the company. If they fail at this task, they can face possible financial penalties or prison.

No loans to officers (Section 402)

Companies may not make loans to their executives or to members of their boards of directors.

Disclose substantial changes (Section 409)

Companies must disclose any substantial changes in their financial conditions in a timely manner.

Keep documents for 5 years (Section804)

Companies must keep audit-related records for a minimum of five years.

Main goal?

Increase transparency in accounting and reporting, many provisions also influence information security, data storage and exchange, and electronic communication.

No destroying, changing or hiding documents (Section 802)

It is a crime to destroy, change, or hide documents to prevent their use in official legal processes.

Auditor reports management's assertions (Section 404)

The external auditor must report on management's assertions about a company's financial system.

Public Company Accounting Oversight Board (PCAOB) (Section 101)

is established as a non-profit organization to draft auditing guidelines, train auditors to generate accurate, independent reports, and supervise auditors and auditing firms.

How many parts (titles)?

11

Report to company's audit committee (Section 301)

Auditors must report all critical accounting policies and practices to a company's audit committee.

Rotation of auditors (Section 203)

Auditors must rotate off a project every five years and avoid work on that project for another five years.

Conflict of interest (Section 201)

Public accounting firms who provide auditing services are prevented from providing bookkeeping or stock valuation services for the same company without pre-approval from the PCAOB.

Control system for audit processes (Section 302)

Public companies must implement an internal control system for tracking and auditing financial processes.

Whistleblower protection (Sections 806 and 11107)

The U.S. Department of Labor protects employees, so called whistleblowers, who provide evidence of fraud. Sarbanes-Oxley prescribes penalties of prison and fines for retaliation against whistleblowing employees.

Internal controls (Section 404)

To ensure and prove the accuracy and timeliness of financial data, a company must impose controls and validation on any financial systems it uses to prepare financial statements.

WHAT IS THE SARBANE-OXLEY ACT?

U.S. law that encourages transparency in financial reporting and corporate governance in public companies with the intention to protect investors and the public against corporate financial fraud and mismanagement.