Title Of The Sarbanes Oxley Act example essay topic

The Sarbanes-Oxley Act of 2002 was signed into law on July 30, 2002 by President Bush. The new law came after major corporate scandals involving Enron, Arthur Anderson, World Com. Its goals are to protect investors by improving accuracy of and reliability of corporate disclosures and to restore investor confidence. The law is considered the most important change in securities and corporate law since the New Deal.

The act is named after Senator Paul Sarbanes of Maryland and Representative Michael Oxley of Ohio (Wikipedia Online). Sarbanes-Oxley consisted of 11 different titles or sections. Title I is Public Company Accounting Oversight Board. It created a five member panel known as the Public Company Accounting Oversight Board, overseen and appointed by the Securities and Exchange Commission (Sarbanes-Oxley). The Board is to consist of two CPAs and three people that are not CPAs, but the chairman must be a CPA. The Board is to provide oversight of auditing of public companies while establishing auditing, quality control, independence, ethical standards (Areas 32-33).

Public accounting firms that work on audits must register with the Board and pay a fee. Title I also included new auditing rules. Auditors must now retain paper work for seven years, have a second partner review and approval of audit reports, evaluate whether internal controls accurately show transactions as well as sales of assets, and describe any weaknesses or noncompliant internal controls. Public accounting firms that issue auditing reports for more than 100 companies are to be inspected every year.

Accounting firms that issue audit reports for less than 100 companies must be inspected very three years. The Board can discipline or sanction accounting firms for what it deems to be negligent conduct (Conference of State Bankers Online). Title II of the Sarbanes-Oxley Act is Auditor Independence. It creates new rules that auditors must abide by in order to keep their objectivity and accuracy. Auditors are now banned from performing most non-audit related services like bookkeeping, actuary services, and management consulting.

An auditor may no longer be the lead auditor of a firm for more than five consecutive years. Auditors are now required to report all significant accounting policies and practices used in the audit, any different treatments of financial records and the consequences within generally accepted accounting principals, as well as all material communication between the auditor and management of the issuer. An accounting firm is also now banned from perform auditing services for one year on a company if the firm employs any former high-ranking executives. Title of the Sarbanes-Oxley Act is Corporate Responsibility. It creates many new obligations for CEOs, CFOs, and other senior executives. Title requires that CEOs and CFOs must certify that they have reviewed annual as well as quarterly reports and that they contain no untrue information, material omissions, or misleading information.

CEOs and CFOs are now responsible for establishing and maintaining internal controls, plus reviewing their effectiveness within 90 days prior to financial reports. They must disclose any deficiencies or possible fraud. The CEO and CFO are required to give back any bonuses or sale of company securities, if the company must restate financial statements due to material noncompliance or misconduct. High-ranking executives are also now banned from trading company securities during pension fund blackout periods. Lawyers are now required to report any evidence of violations of securities law or obligations to either the CEO of the company or chief legal counsel. If a person violates the law and their conduct demonstrates an unfitness to serve, he or she can be banned from being an executive of a company (Sarbanes-Oxley).

Title IV is Enhanced Financial Disclosures. This section of the law requires that all financial reports filed with the SEC be in accordance with generally accepted accounting principles and that all material correcting adjustments be identified. Companies are now also required to disclose all material off-balance sheet transactions and relationships. Annual reports are required to include a report on internal controls. The report must describe how management has established and maintained satisfactory internal controls and procedures for financial reporting. The report has to include a section containing an evaluation of the effectiveness of internal controls and financial reporting.

Companies must to declare if it has a code of ethics for its senior executives and whether it has of at least one person that is considered a financial expert on its auditing committee. Title IV also bans almost all loans from companies to executives and senior management. Title V is Analyst Conflict of Interest. This section aims to ensure that securities analysts provide objective and reliable information, and that there are no conflicts of interest. This section of the law requires that investment bankers be forbidden from approving research reports and that securities analysts are not supervised an investment banker. Securities analysts are given protection against from any retaliation or threats as a result of writing an unfavorable research report.

Title V also has new requirements for disclosing any potential conflicts of interest by analysts, brokers, and dealers that make public appearances or involved in research reporting. These people must declare if they own any securities in the companies they appear on or research, whether they are receiving type of compensation from the company, or if the company has been a client during the past year (Sarbanes-Oxley). Title VI of the Sarbanes-Oxley Act is Commission Resources and Authority. This section declares how some of the resources of the Securities and Exchange Commission must be spent. Money is to be spent on information technology, security improvement, in addition to $98 million specifically appropriated for the hiring of no less than 200 accountants to provide improved oversight of auditing services. Title VI also allows the courts to ban a person from participating in a penny stock offering if the person is being investigated for violating any security laws (Conference of State Bankers Online).

Title VII of the Sarbanes-Oxley Act is Reports and Studies. This part of requires that certain studies and reports that must be performed by the Securities and Exchange Commission and the General Accounting Office. The General Accounting Office must study the reasons for consolidation of accounting firms since 1989 and why there are few firms capable of performing audit services for major corporations. They are to focus on problems resulting from limited competition and ways to increase competition. The GAO is also required to study if investment bankers and financial advisors help public companies manipulate earnings and hide their true financial health. The study is to specifically analyze the Enron and Global Crossing scandals.

The SEC must study credit rating agencies and the role they play in the securities market. The SEC must also study and report on the number of people working in the securities industry during 1998-2001 that have aided and abetted security law violation, but have not been punished as a primary violator. The SEC is also required over the next five years to study the effects of Sarbanes-Oxley and identify any financial reporting that may still be subject to manipulation and fraud (Sarbanes-Oxley). Title V of Sarbanes-Oxley is Corporate and Criminal Fraud Accountability. This section imposes to tough new penalties on people that break the law. Any person that destroys, alters, or falsifies records involved in a federal investigation or bankruptcy can now get up to twenty years in prison.

Any accountant that fails to retain audit paper work for five years or destroys audit records is subject to a ten year prison sentence. Any person that knowing defrauds the investors of a publicly traded company can get up to 25 years in prison. Title V extends the statute of limitations to allow a private lawsuit for securities fraud no later than two years after its discovery or five years after the violation has occurred. Title V also provides whistle blower protection against any employee that assists a Federal investigation, Congress, or any proceedings involving defrauding shareholders (Sarbanes-Oxley). Title IX is White-Collar Crime Enhancement. This section of the law increases the punishments for people that break the law.

The penalties for mail and wire fraud have been increased from five years to twenty years in prison. The penalties for breaking the Employee Retirement Income Security Act are now a possible 10 year prison sentence and $500,000 fine. CEOs and CFOs that certify financial reports that do not comply with Sarbanes-Oxley can receive up to 10 years in prison and a $1,000,000 fine. A CEO or CFO that knowingly certifies a financial report that does not comply with Sarbanes-Oxley can get up to 20 years in prison and a $5,000,000 fine (Sarbanes-Oxley). Title X of Sarbanes-Oxley is Corporate Tax Returns.

Title X says that it is the Senate recommends that the Federal income tax returns of a corporation be signed by the CEO (Conference of State Bankers Online). Title XI is titled Corporate Fraud and Accountability. This section declares that a person who tampers with records or impedes a Federal investigation can receive up to twenty years in prison. The penalties under the Securities and Exchange Act of 1934 are increased to a maximum $25 million fine and 20 years in prison. Under Title XI, the SEC is also allowed to obtain an injunction to stop any extraordinary payments to people that are being investigated for breaking securities law (Sarbanes-Oxley). The Sarbanes-Oxley Act of 2002 has faced some criticism.

Companies claim that the costs of complying with the law are excessive and that it takes up a great deal of time. GE has said that new compliance costs are about $30 million. AIG has said that Sarbanes-Oxley is costing the company $300 million. Many European companies have also complained because they are forced to comply because they are on American stock exchanges.

Surveys have also found that many companies are even thinking about going private to avoid compliance Sarbanes-Oxley (Bartlett 1-3).

Bibliography

Arens, Alvin, Randal Elder and Mark Beasley. Auditing and Assurance Services: An Integrated Approach. Upper Saddle River, NJ: Pearson Prentice Hall, 2005.
Bartlett, Bruce. "The Crimes of Sarbanes-Oxley". National Review 25 May 2004.
web bartlett / bartlett 200405250811.
asp Conference of State Bankers Online. Executive Summary of the Sarbanes-Oxley Act of 2002.
10 February 2005.
web sar banes-ox ley summary. htm Sarbanes-Oxley Act of 2002.
107 Cong., 2nd ses's. 2004.