The Sarbanes-Oxley Act (SOX) of 2002 refers to a bill that came to force due to corporate and accounting scandals. Within the senate, the SOX Act was known as the Public Company Accounting Reform and Investor protection Act while in the house it was known as the Corporate and Auditing Accountability and Responsibility Act. The Act is hailed as one of the important transition that the Security Exchange Act has undergone since 1934. The Act is named after Senator Paul Sarbanes and a U.S Representative Michael G. Oxley. The signing of the SOX Act was done after the former U.S president George W Bush had met with Sarbanes and other dignitaries in the Blue room within the White House (Recine, 2002).
When it was passed and the companies that were required to comply
The legislation took effect on July 30, 2002. This was after the failure of such high profile companies such as Enron and WorldCom. The main objective of this Act was to protect investors by ensuring that corporate maintained accurate and reliable records and they also gave necessary disclosures to the potential investors. It was also designed to ensure quality financial reporting, independent audits and the accounting services for public services. The Sox Act was applicable to all U.S public company boards, management firms and accounting firms but was not applicable to the privately held companies (Lander, 2002).
What SOX comprised of
The SOX Act was broken down into eleven titles but only sub-sections 302,401,404,409,802 and 906 were more concerned with compliance. The first sub-title (101) provided for the formation of a Public Company Accounting Oversight Board whose mandate was to oversee the audit of public companies. The board was to operate as a non-profit making corporate, had perpetual succession and could only be dissolved through an act of parliament.
The board had the responsibility of registering accounting firms that prepare audit reports and ensure that the required standards are adhered to in the preparation of the audit reports. Also it had the responsibility of conducting regular inspection in the audit firms and conduct investigations and disciplinary proceedings. It had the powers to impose sanctions where justified, ensure compliance with the Act as well as budgeting and managing the operations of the board. Foreign public accounting firms that operate under the United States were also subject to the Act and the regulations of the board (Romano, 2005). The board main source of fund was ascertained from the annual budgets.
The second title provided for the auditors independence. The title highlights that an auditor should not in anyway give non-audit service to a client. The title classifies such services as book-keeping, actuarial services and legal services among others as non-audit. Non-audit services such as tax services were to be given upon approval. The title also provided that the audit firms were to ensure that there is proper partner rotation within their operation. The Act provided that the Comptroller General is to conduct a study as well as review the potential effects requiring mandatory rotation of registered public accounting firms. Then, he was required to issue a report of his findings an year after the enactment of the SOX Act.
The third title was about corporate responsibility and subtitle 302 was the one more directed to compliance. The subtitle was about corporate responsibility for financial reports. Under this, the Principal Executive Officers of companies which were filing reports under section 13(a) or 15 (d) of the securities Exchange Act of 1934 were required to certify that the signing officer has reviewed the report. They were also to certify that the report does not have any untrue information and he should certify that all materials are fairly presented.
The officer was also required to certify that any significant changes in the internal control systems have been indicated in the report. Any significant deficiencies that can affect the issuers ability to record process or summarize financial data were also to be certified. The sub-title also provided that no application could be applied in reducing the illegal force. Even the foreign re-incorporation could not reduce the legal force of the Act (Romano, 2005). The rules were to start operation within 30 days after enactment of the SOX act.
The fourth title was about enhancing the financial disclosures. Under this title, subtitles 401,404,409 were the ones directed to compliance as stipulated by SOX Act.
Section 401 provided for the accuracy of financial reports and that financial statements be prepared in accordance with the generally accepted accounting principles. All material correcting were also to be disclosed in accordance with the accounting principles. Off- balance sheet transactions which can have material current effect or future effect on financial position were also to be disclosed in accordance with the Act.
The title required that all pro-forma information should be presented in a manner that it does not contain any untrue statement or no material information is omitted .The pro-forma statement was also required to reconcile with the financial condition and results of operations in accordance with accounting principles.
The Act provided that a study of fillings by issuers was to be adopted not later than one year after adoption of the off-balance sheet disclosure rules required by section 13 (j) of the Securities Exchange Act of 1934.Within six months after the study of the fillings, the President, Committee of Banking, housing and the committee of financial services are to be sufficed with a report of the findings. The report was expected to give the extent to which the special purposes entities are used to facilitate the off balance sheet transactions.
The report was also expected to highlight whether accepted accounting principles were used in the consolidation of special purpose entities (Recine, 2002). It was also expected to give an estimate of the off-balance sheet transactions. Finally, the report was supposed to give recommendations on how to improve on the transparency and the quality of reporting the off-balance transactions in the financial statements.
Subtitle 404 was concerned with management Assessment of internal controls. It required that every public accounting firm is to prepare an audit report which the issuer is to attest to and report on. The attestation was supposed to be in accordance with the standards for attestation engagements adopted by the board. The Act provided that such attestation is to be subjected to separate engagement.
Subtitle 409 was concerned with real time issuer disclosures where each issuer reporting under section 13 (a) or 15 (d) was required to disclose on a rapid basis about any material changes in the financial condition. The real time disclosure was expected to be in plain English and inclusion of trend and graphic presentation was also acceptable.
The sixth title was concerned with the resources of the commission. The title required that the funds appropriated to the commission were to be utilized in delivering its duties and powers it was estimated that for a fiscal year the commission would use at least 776,000,000.
Penalties for non-compliance
The eighth title was concerned with the corporate and criminal fraud accountability. Subtitle 802 was concerned with compliance and is more specifically directed to the criminal penalties associated with altering documents. It state that, any individual who knowingly destroys, alters conceals or make false entry in the financial transactions with the intention to impede or obstruct investigation or proper administration within United States or under any case under title 11 then, the individual shall be fined under the title or shall be imprisoned for not more than 20 years, or shall be subjected to both the penalties (Lander, 2004).
Another offence which was punishable under the SOX Act was the destruction of corporate audit records. The Act provided that any accountant shall maintain the audit and review work papers for a period of five years from the end of the fiscal year within which the audit was completed. This was valid if the accountant had performed audit of an issuer of securities which are covered under section 10A (a) of the Securities Exchange Act of 1934. The Act also provided that, if one knowingly and willingly violate subsection (a) (1), or any rule that is publicly declared by the Securities and Exchange Commission under subsection (a)(2) then the person shall be liable for a fine under this title or imprisoned for a period not exceeding five years or will be subjected to both. Under the SOX Act, nothing would be used to relieve any obligation which has been imposed by the Federal law to maintain or refrain from destroying any document.
Title number nine was concerned with the white collar penalty enhancements and section 906 was specifically concerned with corporate responsibility for financial reports. The section required that each periodic report having financial statements filed by an issuer with the Securities Exchange Commission pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 shall be accompanied by a written statement from the chief executive officer or his representative (Romano, 2005). The section also provided that, the written statement should certify the periodic report containing the financial statements fully complies with the stipulations as provided by section 13(a0 or 15(d) of the Securities Exchange Act of 1934.It also required that the information provided in the periodic reports were fairly presented in all material aspects.
Penalties associated with certifying a statement which does not conform to the required standards were either a fine of not more than 1,000,000 or imprisonment for a period not exceeding 10 years and one may also be subjected to both penalties.
The other offence under this title is the willful certification of a statement stated in subsection (a) and (b) when it is not in conformity with the set standards. If one commits this offence then he was to be subjected either to a fine of at most 5,000,000 or he was imprisoned for a period not exceeding 20 years. He could risk being subjected to the two penalties.
When it was passed and the companies that were required to comply
The legislation took effect on July 30, 2002. This was after the failure of such high profile companies such as Enron and WorldCom. The main objective of this Act was to protect investors by ensuring that corporate maintained accurate and reliable records and they also gave necessary disclosures to the potential investors. It was also designed to ensure quality financial reporting, independent audits and the accounting services for public services. The Sox Act was applicable to all U.S public company boards, management firms and accounting firms but was not applicable to the privately held companies (Lander, 2002).
What SOX comprised of
The SOX Act was broken down into eleven titles but only sub-sections 302,401,404,409,802 and 906 were more concerned with compliance. The first sub-title (101) provided for the formation of a Public Company Accounting Oversight Board whose mandate was to oversee the audit of public companies. The board was to operate as a non-profit making corporate, had perpetual succession and could only be dissolved through an act of parliament.
The board had the responsibility of registering accounting firms that prepare audit reports and ensure that the required standards are adhered to in the preparation of the audit reports. Also it had the responsibility of conducting regular inspection in the audit firms and conduct investigations and disciplinary proceedings. It had the powers to impose sanctions where justified, ensure compliance with the Act as well as budgeting and managing the operations of the board. Foreign public accounting firms that operate under the United States were also subject to the Act and the regulations of the board (Romano, 2005). The board main source of fund was ascertained from the annual budgets.
The second title provided for the auditors independence. The title highlights that an auditor should not in anyway give non-audit service to a client. The title classifies such services as book-keeping, actuarial services and legal services among others as non-audit. Non-audit services such as tax services were to be given upon approval. The title also provided that the audit firms were to ensure that there is proper partner rotation within their operation. The Act provided that the Comptroller General is to conduct a study as well as review the potential effects requiring mandatory rotation of registered public accounting firms. Then, he was required to issue a report of his findings an year after the enactment of the SOX Act.
The third title was about corporate responsibility and subtitle 302 was the one more directed to compliance. The subtitle was about corporate responsibility for financial reports. Under this, the Principal Executive Officers of companies which were filing reports under section 13(a) or 15 (d) of the securities Exchange Act of 1934 were required to certify that the signing officer has reviewed the report. They were also to certify that the report does not have any untrue information and he should certify that all materials are fairly presented.
The officer was also required to certify that any significant changes in the internal control systems have been indicated in the report. Any significant deficiencies that can affect the issuers ability to record process or summarize financial data were also to be certified. The sub-title also provided that no application could be applied in reducing the illegal force. Even the foreign re-incorporation could not reduce the legal force of the Act (Romano, 2005). The rules were to start operation within 30 days after enactment of the SOX act.
The fourth title was about enhancing the financial disclosures. Under this title, subtitles 401,404,409 were the ones directed to compliance as stipulated by SOX Act.
Section 401 provided for the accuracy of financial reports and that financial statements be prepared in accordance with the generally accepted accounting principles. All material correcting were also to be disclosed in accordance with the accounting principles. Off- balance sheet transactions which can have material current effect or future effect on financial position were also to be disclosed in accordance with the Act.
The title required that all pro-forma information should be presented in a manner that it does not contain any untrue statement or no material information is omitted .The pro-forma statement was also required to reconcile with the financial condition and results of operations in accordance with accounting principles.
The Act provided that a study of fillings by issuers was to be adopted not later than one year after adoption of the off-balance sheet disclosure rules required by section 13 (j) of the Securities Exchange Act of 1934.Within six months after the study of the fillings, the President, Committee of Banking, housing and the committee of financial services are to be sufficed with a report of the findings. The report was expected to give the extent to which the special purposes entities are used to facilitate the off balance sheet transactions.
The report was also expected to highlight whether accepted accounting principles were used in the consolidation of special purpose entities (Recine, 2002). It was also expected to give an estimate of the off-balance sheet transactions. Finally, the report was supposed to give recommendations on how to improve on the transparency and the quality of reporting the off-balance transactions in the financial statements.
Subtitle 404 was concerned with management Assessment of internal controls. It required that every public accounting firm is to prepare an audit report which the issuer is to attest to and report on. The attestation was supposed to be in accordance with the standards for attestation engagements adopted by the board. The Act provided that such attestation is to be subjected to separate engagement.
Subtitle 409 was concerned with real time issuer disclosures where each issuer reporting under section 13 (a) or 15 (d) was required to disclose on a rapid basis about any material changes in the financial condition. The real time disclosure was expected to be in plain English and inclusion of trend and graphic presentation was also acceptable.
The sixth title was concerned with the resources of the commission. The title required that the funds appropriated to the commission were to be utilized in delivering its duties and powers it was estimated that for a fiscal year the commission would use at least 776,000,000.
Penalties for non-compliance
The eighth title was concerned with the corporate and criminal fraud accountability. Subtitle 802 was concerned with compliance and is more specifically directed to the criminal penalties associated with altering documents. It state that, any individual who knowingly destroys, alters conceals or make false entry in the financial transactions with the intention to impede or obstruct investigation or proper administration within United States or under any case under title 11 then, the individual shall be fined under the title or shall be imprisoned for not more than 20 years, or shall be subjected to both the penalties (Lander, 2004).
Another offence which was punishable under the SOX Act was the destruction of corporate audit records. The Act provided that any accountant shall maintain the audit and review work papers for a period of five years from the end of the fiscal year within which the audit was completed. This was valid if the accountant had performed audit of an issuer of securities which are covered under section 10A (a) of the Securities Exchange Act of 1934. The Act also provided that, if one knowingly and willingly violate subsection (a) (1), or any rule that is publicly declared by the Securities and Exchange Commission under subsection (a)(2) then the person shall be liable for a fine under this title or imprisoned for a period not exceeding five years or will be subjected to both. Under the SOX Act, nothing would be used to relieve any obligation which has been imposed by the Federal law to maintain or refrain from destroying any document.
Title number nine was concerned with the white collar penalty enhancements and section 906 was specifically concerned with corporate responsibility for financial reports. The section required that each periodic report having financial statements filed by an issuer with the Securities Exchange Commission pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 shall be accompanied by a written statement from the chief executive officer or his representative (Romano, 2005). The section also provided that, the written statement should certify the periodic report containing the financial statements fully complies with the stipulations as provided by section 13(a0 or 15(d) of the Securities Exchange Act of 1934.It also required that the information provided in the periodic reports were fairly presented in all material aspects.
Penalties associated with certifying a statement which does not conform to the required standards were either a fine of not more than 1,000,000 or imprisonment for a period not exceeding 10 years and one may also be subjected to both penalties.
The other offence under this title is the willful certification of a statement stated in subsection (a) and (b) when it is not in conformity with the set standards. If one commits this offence then he was to be subjected either to a fine of at most 5,000,000 or he was imprisoned for a period not exceeding 20 years. He could risk being subjected to the two penalties.
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