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