Sarbanes-Oxley Act
2002
USA 2001-2002
Bernie Ebbers Jeffrey Skilling Dennis Kozlowski
• Introduced in the House as “Corporate and Auditing Accountability,
Responsibility, and Transparency Act of 2002” by Rep. Michael
Oxley.
• Passed the Senate as the “Public Company Accounting Reform and
Investor Protection Act of 2002” by Sen. Paul Sarbanes.
• July 24, 2002, US Congress approves and renames the bill as
“Sarbanes-Oxley Act of 2002”.
• July 30, 2002, Signed into law by President George W. Bush on .
Why SOX?
To protect the investors by improving accuracy and reliability of
corporate disclosures.
Titles
I. Public Company Accounting Oversight Board (PCAOB)
[Sec. 101-109]
• Non Profit corporation
• 5-member board as created by SEC for a term of 5 years
Role of the PCAOB-
• Register the audit companies
• Set auditing standards
• Monitor and Oversee the audit firms
II. Auditor Independence [Sec. 201-209]
• Rotation of Auditing partner
• Prohibition from non-audit practices
• Auditing clients internal controls
III. Corporate Responsibility [Sec. 301-308]
• Corporate Responsibility- CEO and CFO must certify the financial statements
• Interaction of External Auditors & Audit Committee
• Penalties for Non-Compliance
IV. Enhanced Financial Disclosures [Sec. 401-409]
• Management assessment of internal control tests with Internal Control
Reports
• Disclosures of periodic reports
• Code of ethics for senior financial officers
V. Analyst Conflicts of Interest [Sec. 501]
• Codes of Conduct for securities analysts and requires disclosure of knowable
conflicts of interest
VI. Commission Resources and Authority
[Sec. 601-604]
• Authority of the SEC
• Authority over qualifications of associated persons of brokers and dealers
VII. Studies and Reports [Sec. 701-705]
• Study of consolidation of public accounting firms
• Study of the role of credit rating agencies
• Study of securities violations and violators
• Study of enforcement actions
VIII. Corporate and Criminal Fraud Accountability
[Sec. 801-807]
• Violations of accounting norms, violation of securities fraud laws
• Manipulation or Destruction of records
• Investigation interference
• Protection of Employees
IX. White-Collar Crime Penalty Enhancements
[Sec. 901-906]
• Mail and Wire Fraud
• Criminal Frauds
X. Corporate Tax Returns [Sec. 1001]
• CEO must sign the company tax return file
XI. Corporate Fraud Accountability [Sec. 1101-1107]
• Freezing unusual or large transactions
• Corporate Frauds and Record Tampering
• Prohibit persons from serving as officers or directors
• Increased Penalties
Aftermath of SOX
Title 1 Creation of PCAOB
Title 2 Independence Auditors
Section 302 Requires CEOs and CFOs to evaluate and certify the financial disclosures
Section 401 Disclosure of Off Balance Sheet Items
Section 404 Disclosures of Internal Control and auditors audit the internal controls
Section 802 Criminal Penalties
SOX in India
• Companies listed or traded in the U.S.
• Subsidiaries of U.S Companies in India.
• Compliance expected by U.S Companies from business partners in India
(implications for BPO sector).
• Clause 49
Pros and Cons
Pros
• Emphasises the need for internal controls
• Discloses crucial information to shareholders
• Hold the board responsible for frauds
Cons
• Expensive
• Increased audit fees
• Small companies face burden
THANK
YOU
