Sections Of The Sarbane Oxley Act example essay topic

This paper has been written as a guide to The Sarbane-Oxley Act (SOA). The use of the enclosed material may be used to introduce students to the legislation. Corporate governance is very important especially after the scandals U.S. businesses recently endured. Armed with the knowledge of SOA, the reader will be assisted with understanding the sections, compliance and some implications of the act. The student will then be able to conduct further study with this knowledge and assist their corporation in the methods of compliance through further research. Compliance of this Act is non-negotiable, all publicly traded companies will comply with the legislation by June 2004.

There are useful references given throughout the paper, this will assist the student in deriving a management plan and or choosing a vendor to provide the external controls that are required by SOA. Methods of retrieving information were derived from personal interviews with account managers at large corporations, (who asked not to be named), heavy use of the Securities Exchange Commission's web-site and a thorough review of the 89 pages of the Sarbane-Oxley legislation. The SOA should not be taken lightly, the prudent company will have already taken measures to comply with this important legislation. INTRODUCTION "The Public Company Accounting Reform and Investor Protection Act" was signed into law by President Bush on July 30, 2002. The law is now known as The Sarbane-Oxley Act (SOA). The SOA has eleven titles within the act and numerous sections, pertaining to ethics, accounting, financial reporting, responsibilities of officers, whistleblower protection, and increased criminal penalties built upon prior securities laws.

SOA is the most comprehensive securities legislation written since the 1940's. In the early part of the twentieth century companies did not have the sophistication and abilities of the modern company in regard to information technology, number of accountants, advisors and analysts. This legislation is a big step toward keeping U.S. law up to date with modern business practices. The Sarbane-Oxley Act was necessary to protect the U.S. economy and restore investor confidence after the many years of dishonest business practices by ENRON, WORLDCOM, TYCO and other companies. The practitioners of shady accounting and greed brought about a collapse in stock prices, shook investor confidence and hurt the credibility of all publicly traded companies. A mass "bail-out" by large stockholders ensued; however the average small investor held on, hoping that the stock would stabilize and believing the reassurances of companies, that claimed they were financially well-off when they were actually worth less than what they owed.

In the end, investors and lower-rung employees of these companies were devastated financially. The underhandedness and greed of these corporate officers had the potential to hurl the U.S. economy out of control. The small investors, who are registered voters demanded action. This paper will review the sections of The Sarbane-Oxley Act, highlight their broad implications and discuss compliance.

Compliance will cost all publicly traded companies a great deal of money. "Deloitte's Point of View" will be used to illustrate that compliance, when embraced properly and approached positively can bring rewards for companies in the long term. SECTIONS The sections that follow are a simplification of the Sarbane-Oxley legislation. There are many niches that will require attorneys, accountants and advisors. Keep in mind all prior SEC (securities exchange commission) legislation such as (The Securities Act of 1933, Securities Exchange Act of 1934, Public Utility Holding Company Act of 1935, Trust Indenture Act of 1939, Investment Company Act 1940, and The Investment Advisors Act of 1940) are all still in effect. All securities legislation can be found at: web Sections 302,304,306,402,403 and 406 are designed to improve the "Tone at the Top" of companies.

The sections are primarily geared towards the CFOs, CEOs and other company officers. An example is under section 302; the CEO and CFO need to personally certify financial documents pertaining to annual and quarterly reports. Section 304 forces management to return bonuses earned if the financial documents were inaccurate as a result of misconduct. Section 306 states company officers cannot trade during pension fund blackout periods.

Section 402 prohibits insider loans. Section 403 mandates electronic filing of insider transactions. In other words, if the CFO decides he should sell his stock, the immediacy of the sale would have to be reported or filed with the SEC. Section 406 forces a company to have a written code of ethics for the CEO, CFO and the staff. web Further scrutiny of the legislation also reveals that section 1106 allows increased criminal penalties under the Securities Exchange Act of 1934, this changes the maximum of 10 years to 20 years imprisonment and the $1,000,000.00 fine to a $5,000,000.00 fine.

The tone of leadership is important for the wellness of an organization. As stated, "Tone at the Top" is a start, the leaders must be ethical and act accordingly in order to run a well organized, disciplined business. The goal is for employees and customers to view the corporate executive not as a greedy, self-centered entity trying to cheat investors and employees out of their investments or pensions. Instead the intent of the SOA is to foster trust and confidence to ensure prosperity in American businesses; this cannot be done without the full compliance of a company's leadership.

The "Tone at the Top" sections are the behavioral components of the legislation. Take section 304, which monetarily hurts management if they break the law, however if management complies and acts honestly, they will be able to retain monetary rewards. Improving Disclosures and Financial Reporting are sections 401 (a), (b) 404 and 408. Section 401 requires a company to disclose all information from its balance sheets and governs use of non-GAAP (generally accepted accounting principles) financial measures. Section 408 requires that the SEC review Exchange Act reports at least once every three years. The Exchange act reports are the following: Requirement of Annual Reports, Special Financial Report, Reports for Depositary Shares Registered on Form F-6, Reporting by Form 40-F Registrants, Reporting by Successor Issuers Suspension of Duty to File Reports, Transition Reports, Current Reports on Form 8-K, Quarterly Reports on Form 10-Q, and Form 10-QB Certification Of Disclosure In Annual And Quarterly Reports, Controls and Procedures Reports of Foreign Private Issuers on Form 6-K. Improvements of the "Gatekeepers" sections are 301,407,307 and 501.

Section 301 forces Self-Regulatory Organization (SRO) to list standards for audit committees. Section 407 requires disclosure of financial experts on the audit committee. Section 307 requires that attorneys have a standard of conduct if they practice or appear before the commission. Section 501 provides the authority for the SRO to govern research analyst conflicts of interest.

In other words the analyst cannot take money or compensation without disclosing, they must also certify their reports. "Enforcement Tools", rules and regulations mean nothing if there is no enforcement. Section 106 allows the SEC to audit foreign work papers. Section 305 sets standards for penalties.

Section 308 establishes that civil penalties can be added to a disgorgement fund for investors. Section 602 gives the SEC authority over professionals who appear or practice before the commission; this is an overlap of 307. Section 603 gives the federal courts the ability to bar practitioners from selling penny stock. Section 704 adds an aiding and abetting liability under federal securities laws.

Section 704 establishes enforcement actions that involve securities violations. Section 803 does not allow a company to hide debts behind bankruptcy if the debts were incurred as a result of fraud. Section 1103 allows the SEC to freeze payments made to violators. Section 1105 gives the SEC the authority to bar persons from serving as officers or directors. web An example of section 1105 in action would be The Martha Stewart's case. Ms. Stewart stepped down as CEO voluntarily, however the SEC could have barred her from serving as an officer in her company under SOA. COMPLIANCE The roots of compliance for SOA are people, technology, time and money.

The deadline for SOA is fast approaching, the first financial report after June 15, 2004. Foreign companies have until the first financial report after April 15, 2005. The people of an organization are essential to the success of SOA. Officers and employees who are tasked with compliance must embrace the change with a positive approach.

According to Deloitte, people are the most critical asset in the organizational change. The employees will need to receive the tools and positive approach from management. Some tools will include definitive timelines, training, follow-up by managers to ensure goals are being met and, sharing of ideas and information through a knowledge management system. Communication throughout the company should be lateral, vertical and horizontal. web node/0%2 C 2332%2 Csid%25253 D 5601%2 C 00. html Technology must also play a role. Update of information technology (IT) systems is most likely necessary at this point in time. The last major overhaul to IT was most likely December 1999 due to the Y 2 K scare; therefore, money must be spent and spent wisely.

Section 404 requires CEOs and CFOs to test and attest to "internal controls and external controls". Compliance of internal controls may be both manual or automated, most companies already have the controls built into the IT system, according to Worthen. A key issue is money when we discuss IT, Worthen also believes that IT solutions software companies are attempting to use SOA to sell software that already exists and in some cases will equate to high costs and little return to profitability. web Beware of software companies selling a quick solution to SOA. The money aspect to compliance varies from one company to the next. It is estimated by PricewaterhouseCoopers that "76% of the cost for compliance will be for internal resources and 24% for external resources". web The costs are associated mostly with the gathering, organizing and certifying documentation under section 404. External resources may include training from outsourced programs through various vendors.

The good news is that companies are expected to have initial start-up costs but the costs will be minimal thereafter. The time aspect is a non-negotiable; companies will comply by June of 2004. Therefore, companies would be prudent to have been planning from July 2002 to meet the deadline. According to Deloitte, time for compliance is critical but not the endgame. "The endgame is a re-energized company, strong ethics, corporate governance and reassured investors". web node/0%2 C 2332%2 Csid%25253 D 5601%2 C 00. html DISCUSSION History repeats itself every now and then.

Take note of when the last sweeping legislation took place, in the 1930's and 1940's. The legislation was an answer to the greed, speculation and fraudulent corporate behavior that led to the crash of 1929. The stock market crashed in 1987, not to the extent of 1929, but for many of the same reasons. It might have been wise to enact SOA in 1988. We have discussed some key sections of The Sarbane-Oxley Act of 2002. Compliance of this act is crucial to insure investor confidence by means of corporate governance and high ethical standards.

There is no silver bullet or magic pill to bring each and every public company into compliance overnight. Companies must have been planning and implementing the necessary controls for compliance since it was signed into law. The basic components of the implementation are leadership; leaders must embrace change and convey a positive attitude towards compliance or "tone at the top". Information Technology (IT) solutions such as an enterprise software can provide "real time" communications to all actions within the company. Internal and external controls of all financial transactions, accounting and comportment of the officers appear to be the critical issues within the law.

IT can assist, but is not the be all and end all solution; some manual controls must also be in place. Enforcement of the law will be essential to the confidence of investors. There are currently laws on the books, however the penalties are not as stiff as SOA, are not modern and have not been stringently enforced in the past. The threat of severe jail sentences and fines may suppress white-collar criminals from pursuing greed. The Sarbane-Oxley Act is the vehicle to deliver corporate governance and ethical behavior in order for public companies to secure the U. S economy.

Bibliography

Deloitte & Touche LLP. (2003).
Deloitte's Point of View, Sarbanes-Oxley Compliance. (Online). 8 Pages. Retrieved January 16, 2003 from: web node/0%2 C 2332%2 Csid%25253 D 5601%2 C 00.
html PriceWaterhouseCoopers. (2003).
Key Elements of Anti fraud Programs and Controls, A White Paper. 29 Pages (Online). Retrieved January 16, 2003 from: web and Exchange Commission.
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Proposed Rule: Certification of Disclosure in Companies' Quarterly and Annual Reports. 6 Pages (Online). Retrieved January 17, 2003 from: web Securities and Exchange Commission.
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The Laws That Govern the Securities Industry. 5 Pages, (Online). Summary of SEC Actions. 3 Pages, (Online). Retrieved January 17, 2003 from: web Worthen B.
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A Funny Thing Happened on the Way to Compliance. CIO Magazine, Retrieved January 15, 2003 from: web.