Sarbanes-Oxley Act
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Sarbanes-Oxley Act |
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Including some highlighted relevant passages
Below a summary of the Sarbanes-Oxley act on corporate governance with passages that are of particular interest to Value Based Management in bold.
Section 3:
Commission Rules and Enforcement.
A violation of Rules of the Public Company Accounting Oversight Board
("Board") is treated as a violation of the '34 Act, giving rise to the
same penalties that may be imposed for violations of that Act.
Sarbanes-Oxley act
Section 101: Establishment; Board Membership.
The Board will have five financially-literate members, appointed for
five-year terms. Two of the members must be or have been certified public
accountants, and the remaining three must not be and cannot have been
CPAs. The Chair may be held by one of the CPA members, provided that he or
she has not been engaged as a practicing CPA for five years.
The Board's members will serve on a full-time basis.
No member may, concurrent with service on the Board, "share in any of the
profits of, or receive payments from, a public accounting firm," other
than "fixed continuing payments," such as retirement payments.
Members of the Board are appointed by the Commission, "after consultation
with" the Chairman of the Federal Reserve Board and the Secretary of the
Treasury.
Members may be removed by the Commission "for good cause."
Section 101: Establishment; Duties Of The Board.
Section 103: Auditing, Quality Control, And Independence Standards And
Rules.
The Board shall:
(1) register public accounting firms;
(2) establish, or adopt, by rule, "auditing, quality control, ethics,
independence, and other standards relating to the preparation of audit
reports for issuers;"
(3) conduct inspections of accounting firms;
(4) conduct investigations and disciplinary proceedings, and impose
appropriate sanctions;
(5) perform such other duties or functions as necessary or appropriate;
(6) enforce compliance with the Act, the rules of the Board, professional
standards, and the securities laws relating to the preparation and
issuance of audit reports and the obligations and liabilities of
accountants with respect thereto;
(7) set the budget and manage the operations of the Board and the staff of
the Board.
Auditing standards. The Board would be required to "cooperate on an
on-going basis" with designated professional groups of accountants and any
advisory groups convened in connection with standard-setting, and although
the Board can "to the extent that it determines appropriate" adopt
standards proposed by those groups, the Board will have authority to
amend, modify, repeal, and reject any standards suggested by the groups.
The Board must report on its standard-setting activity to the Commission
on an annual basis.
The Board must require registered public accounting firms to "prepare, and
maintain for a period of not less than 7 years, audit work papers, and
other information related to any audit report, in sufficient detail to
support the conclusions reached in such report."
The Board must require a 2nd partner review and approval of audit reports
registered accounting firms must adopt quality control standards.
The Board must adopt an audit standard to implement the internal control
review required by section 404(b). This standard must require the auditor
evaluate whether the internal control structure and procedures include
records that accurately and fairly reflect the transactions of the issuer,
provide reasonable assurance that the transactions are recorded in a
manner that will permit the preparation of financial statements in
accordance with GAAP, and a description of any material weaknesses in the
internal controls.
Section 102(a): Mandatory Registration
Section 102(f): Registration And Annual Fees.
Section 109(d): Funding; Annual Accounting Support Fee For The Board.
In order to audit a public company, a public accounting firm must register
with the Board.The Board shall collect "a registration fee" and "an annual
fee" from each registered public accounting firm, in amounts that are
"sufficient" to recover the costs of processing and reviewing applications
and annual reports.
The Board shall also establish by rule a reasonable "annual accounting
support fee" as may be necessary or appropriate to maintain the Board.
This fee will be assessed on issuers only.
Section 104: Inspections of Registered Public Accounting Firms
Annual quality reviews (inspections) must be conducted for firms that
audit more than 100 issues, all others must be conducted every 3 years.
The SEC and/or the Board may order a special inspection of any firm at any
time.
Section 105(b)(5): Investigation And Disciplinary Proceedings;
Investigations; Use Of Documents.
Section 105(c)(2): Investigations And Disciplinary Proceedings;
Disciplinary Procedures; Public Hearings.
Section 105(c)(4): Investigations And Disciplinary Proceedings; Sanctions.
Section 105(d): Investigations And Disciplinary Proceedings; Reporting of
Sanctions.
All documents and information prepared or received by the Board shall be
"confidential and privileged as an evidentiary matter (and shall not be
subject to civil discovery other legal process) in any proceeding in any
Federal or State court or administrative agency, . . . unless and until
presented in connection with a public proceeding or [otherwise] released"
in connection with a disciplinary action. However, all such documents and
information can be made available to the SEC, the U.S. Attorney General,
and other federal and appropriate state agencies.
Disciplinary hearings will be closed unless the Board orders that they be
public, for good cause, and with the consent of the parties.
Sanctions can be imposed by the Board of a firm if it fails to reasonably
supervise any associated person with regard to auditing or quality control
standards, or otherwise.
No sanctions report will be made available to the public unless and until
stays pending appeal have been lifted.
Section 106: Foreign Public Accounting Firms.
The bill would subject foreign accounting firms who audit a U.S. company
to registrations with the Board. This would include foreign firms that
perform some audit work, such as in a foreign subsidiary of a U.S.
company, that is relied on by the primary auditor.
Section 107(a): Commission Oversight Of The Board; General Oversight
Responsibility.
Section 107(b): Rules Of The Board.
Section 107(d): Censure Of The Board And Other Sanctions.
The SEC shall have "oversight and enforcement authority over the Board."
The SEC can, by rule or order, give the Board additional responsibilities.
The SEC may require the Board to keep certain records, and it has the
power to inspect the Board itself, in the same manner as it can with
regard to SROs such as the NASD.
The Board, in its rulemaking process, is to be treated "as if the Board
were a 'registered securities association'"-that is, a self-regulatory
organization. The Board is required to file proposed rules and proposed
rule changes with the SEC. The SEC may approve, reject, or amend such
rules.
The Board must notify the SEC of pending investigations involving
potential violations of the securities laws, and coordinate its
investigation with the SEC Division of Enforcement as necessary to protect
an ongoing SEC investigation.
The SEC may, by order, "censure or impose limitations upon the activities,
functions, and operations of the Board" if it finds that the Board has
violated the Act or the securities laws, or if the Board has failed to
ensure the compliance of accounting firms with applicable rules without
reasonable justification.
Section 107(c): Commission Review Of Disciplinary Action Taken By The
Board.
The Board must notify the SEC when it imposes "any final sanction" on any
accounting firm or associated person. The Board's findings and sanctions
are subject to review by the SEC.
The SEC may enhance, modify, cancel, reduce, or require remission of such
sanction.
Section 108: Accounting Standards.
The SEC is authorized to "recognize, as 'generally accepted'... any
accounting principles" that are established by a standard-setting body
that meets the bill's criteria, which include requirements that the body:
(1) be a private entity;
(2) be governed by a board of trustees (or equivalent body), the majority
of whom are not or have not been associated persons with a public
accounting firm for the past 2 years;
(3) be funded in a manner similar to the Board;
(4) have adopted procedures to ensure prompt consideration of changes to
accounting principles by a majority vote;
(5) consider, when adopting standards, the need to keep them current and
the extent to which international convergence of standards is necessary or
appropriate.
Sarbanes-Oxley act Section 201: Services Outside The Scope Of Practice Of Auditors;
Prohibited Activities.
It shall be "unlawful" for a registered public accounting firm to provide
any non-audit service to an issuer contemporaneously with the audit,
including: (1) bookkeeping or other services related to the accounting
records or financial statements of the audit client; (2) financial
information systems design and implementation; (3) appraisal or valuation
services, fairness opinions, or contribution-in-kind reports; (4)
actuarial services; (5) internal audit outsourcing services; (6)
management functions or human resources; (7) broker or dealer, investment
adviser, or investment banking services; (8) legal services and expert
services unrelated to the audit; (9) any other service that the Board
determines, by regulation, is impermissible. The Board may, on a
case-by-case basis, exempt from these prohibitions any person, issuer,
public accounting firm, or transaction, subject to review by the
Commission.
It will not be unlawful to provide other non-audit services if they are
pre-approved by the audit committee in the following manner. The bill
allows an accounting firm to "engage in any non-audit service, including
tax services," that is not listed above, only if the activity is
pre-approved by the audit committee of the issuer. The audit committee
will disclose to investors in periodic reports its decision to pre-approve
non-audit services. Statutory insurance company regulatory audits are
treated as an audit service, and thus do not require pre-approval.
The pre-approval requirement is waived with respect to the provision of
non-audit services for an issuer if the aggregate amount of all such
non-audit services provided to the issuer constitutes less than 5 % of the
total amount of revenues paid by the issuer to its auditor (calculated on
the basis of revenues paid by the issuer during the fiscal year when the
non-audit services are performed), such services were not recognized by
the issuer at the time of the engagement to be non-audit services; and
such services are promptly brought to the attention of the audit committee
and approved prior to completion of the audit.
The authority to pre-approve services can be delegated to 1 or more
members of the audit committee, but any decision by the delegate must be
presented to the full audit committee.
Section 203: Audit Partner Rotation.
The lead audit or coordinating partner and the reviewing partner must
rotate off of the audit every 5 years.
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.
Section 206: Conflicts of Interest.
The CEO, Controller, CFO, Chief Accounting Officer or person in an
equivalent position cannot have been employed by the company's audit firm
during the 1-year period proceeding the audit.
Section 207: Study of Mandatory Rotation of Registered Public Accountants.
The GAO will do a study on the potential effects of requiring the
mandatory rotation of audit firms.
Section 209: Consideration by Appropriate State Regulatory Authorities.
State regulators are directed to make an independent determination as to
whether the Boards standards shall be applied to small and mid-size
non-registered accounting firms.
Sarbanes-Oxley act
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 SEC may make exemptions for certain individuals on a case-by-case
basis.
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 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 officer or director of an issuer 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.
Section 305: Officer And Director Bars And Penalties; Equitable Relief.
If an issuer is required to prepare a restatement due to "material
noncompliance" with financial reporting requirements, the chief executive
officer and the chief financial officer 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.
In any action brought by the SEC for violation of the securities laws,
federal courts are authorized to "grant any equitable relief that may be
appropriate or necessary for the benefit of investors."
Section 305: Officer And Director Bars And Penalties.
The SEC may issue an order to prohibit, conditionally or unconditionally,
permanently or temporarily, any person who has violated section 10(b) of
the 1934 Act from acting as an officer or director of an issuer if the SEC
has found that such person's conduct "demonstrates unfitness" to serve as
an officer or director of any such issuer.
Section 306: Insider Trades During Pension Fund Black-Out Periods
Prohibited.
Prohibits the purchase or sale of stock by officers and directors and
other insiders during blackout periods. Any profits resulting from sales
in violation of this section "shall inure to and be recoverable by the
issuer." If the issuer fails to bring suit or prosecute diligently, a suit
to recover such profit may be instituted by "the owner of any security of
the issuer."
Sarbanes-Oxley act
Section 401(a): Disclosures In Periodic Reports; Disclosures Required.
Each financial report that is required to be prepared in accordance with
GAAP shall "reflect all material correcting adjustments . . . that have
been identified by a registered accounting firm . . . ."
"Each annual and quarterly financial report . . . shall disclose all
material off-balance sheet transactions" and "other relationships" with
"unconsolidated entities" that may have a material current or future
effect on the financial condition of the issuer.
The SEC shall issue rules providing that pro forma financial information
must be presented so as not to "contain an untrue statement" or omit to
state a material fact necessary in order to make the pro forma financial
information not misleading.
Section 401 (c): Study and Report on Special Purpose Entities.
SEC shall study off-balance sheet disclosures to determine a) extent of
off-balance sheet transactions (including assets, liabilities, leases,
losses and the use of special purpose entities); and b) whether generally
accepted accounting rules result in financial statements of issuers
reflecting the economics of such off-balance sheet transactions to
investors in a transparent fashion and make a report containing
recommendations to the Congress.
Section 402(a): Prohibition on Personal Loans to Executives.
Generally, it will be unlawful for an issuer to extend credit to any
director or executive officer. Consumer credit companies may make home
improvement and consumer credit loans and issue credit cards to its
directors and executive officers if it is done in the ordinary course of
business on the same terms and conditions made to the general public.
Section 403: Disclosures Of Transactions Involving Management And
Principal Stockholders.
Directors, officers, and 10% owner must report designated transactions by
the end of the second business day following the day on which the
transaction was executed.
Section 404: Management Assessment Of Internal Controls.
Requires each annual report of an issuer to contain an "internal control
report", which shall:
(1) state the responsibility of management for establishing and
maintaining an adequate internal control structure and procedures for
financial reporting; and
(2) 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.
Each issuer's auditor shall attest to, and report on, the assessment made
by the management of the issuer. An attestation made under this section
shall be in accordance with standards for attestation engagements issued
or adopted by the Board. An attestation engagement shall not be the
subject of a separate engagement.
The language in the report of the Committee which accompanies the bill to
explain the legislative intent states, "--- the Committee does not intend
that the auditor's evaluation be the subject of a separate engagement or
the basis for increased charges or fees."
Directs the SEC to require each issuer to disclose whether it has adopted
a code of ethics for its senior financial officers and the contents of
that code.
Directs the SEC to revise its regulations concerning prompt disclosure on
Form 8-K to require immediate disclosure "of any change in, or waiver of,"
an issuer's code of ethics.
Section 407: Disclosure of Audit Committee Financial Expert.
The SEC shall issue rules to require issuers to disclose whether at least
1 member of its audit committee is a "financial expert."
Section 409: Real Time Disclosure.
Issuers must disclose information on material changes in the financial
condition or operations of the issuer on a rapid and current basis.
Section 501: Treatment of Securities Analysts by Registered securities
Associations.
National Securities Exchanges and registered securities associations must
adopt conflict of interest rules for research analysts who recommend
equities in research reports.
Section 601: SEC Resources and Authority.
SEC appropriations for 2003 are increased to $776,000,000. $98 million of
the funds shall be used to hire an additional 200 employees to provide
enhanced oversight of auditors and audit services required by the Federal
securities laws.
Section 602(a): Appearance and Practice Before the Commission.
The SEC may censure any person, or temporarily bar or deny any person the
right to appear or practice before the SEC if the person does not possess
the requisite qualifications to represent others, lacks character or
integrity, or has willfully violated Federal securities laws.
Section 602(c): Study and Report.
SEC is to conduct a study of "securities professionals" (public
accountants, public accounting firms, investment bankers, investment
advisors, brokers, dealers, attorneys) who have been found to have aided
and abetted a violation of Federal securities laws.
Section 602(d): Rules of Professional Responsibility for Attorneys.
The SEC shall establish rules setting minimum standards for professional
conduct for attorneys practicing before it.
Sarbanes-Oxley act
Section 701: GAO Study and Report Regarding Consolidation of Public
Accounting Firms.
The GAO shall conduct a study regarding the consolidation of public
accounting firms since 1989, including the present and future impact of
the consolidation, and the solutions to any problems discovered.
Title VIII: Corporate and Criminal Fraud Accountability Act of 2002.
It is a felony to "knowingly" destroy or create documents to "impede,
obstruct or influence" any existing or contemplated federal investigation.
Auditors are required to maintain "all audit or review work papers" for
five years.
The statute of limitations on securities fraud claims is extended to the
earlier of five years from the fraud, or two years after the fraud was
discovered, from three years and one year, respectively.
Employees of issuers and accounting firms are extended "whistleblower
protection" that would prohibit the employer from taking certain actions
against employees who lawfully disclose private employer information to,
among others, parties in a judicial proceeding involving a fraud claim.
Whistle blowers are also granted a remedy of special damages and
attorney's fees.
A new crime for securities fraud that has penalties of fines and up to 10
years imprisonment.
Title IX: White Collar Crime Penalty Enhancements
Maximum penalty for mail and wire fraud increased from 5 to 10 years.
Creates a crime for tampering with a record or otherwise impeding any
official proceeding.
SEC given authority to seek court freeze of extraordinary payments to
directors, offices, partners, controlling persons, agents of employees.
US Sentencing Commission to review sentencing guidelines for securities
and accounting fraud.
SEC may prohibit anyone convicted of securities fraud from being an
officer or director of any publicly traded company.
Financial Statements filed with the SEC must be certified by the CEO and
CFO. The certification must state that the financial statements and
disclosures fully comply with provisions of the Securities Exchange Act
and that they fairly present, in all material respects, the operations and
financial condition of the issuer. Maximum penalties for willful and
knowing violations of this section are a fine of not more than $5,000,000
and/or imprisonment of up to 20 years.
Section 1001: Sense of Congress Regarding Corporate Tax Returns
It is the sense of Congress that the Federal income tax return of a
corporation should be signed by the chief executive officer of such
corporation.
Section 1102: Tampering With a Record or Otherwise Impeding an Official
Proceeding
Makes it a crime for any person to corruptly alter, destroy, mutilate, or
conceal any document with the intent to impair the object's integrity or
availability for use in an official proceeding or to otherwise obstruct,
influence or impede any official proceeding is liable for up to 20 years
in prison and a fine.
Section 1103: Temporary Freeze Authority
The SEC is authorized to freeze the payment of an extraordinary payment to
any director, officer, partner, controlling person, agent, or employee of
a company during an investigation of possible violations of securities
laws.
Section 1105: SEC Authority to Prohibit Persons from Serving as
Officers or Directors
The SEC may prohibit a person from serving as an officer or director of a
public company if the person has committed securities fraud.
End of Summary of Sarbanes-Oxley act.
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