Chapter 1 - Sarbanes Oxley Act Flashcards
Who doe SOX apply to?
- US publicly listed companies and their subsidiaries.
2. Foreign firms listed on US stock exchanges.
What is the objective of SOX?
To protect investors by improving the accuracy and reliability of corporate disclosures.
What does Section 404 of SOX stipulate?
Publicly listed firms to report annually on the operational effectiveness of their internal controls over financial reporting.
Which new body did SOX introduce to oversee auditors?
Public Company Accounting Oversight Board (PCAOB)
What are the key changes introduced by SOX with regard to auditors?
- Inspection and Enforcement - PCAOB to inspect large accounting firms (over 100 companies audited annually). PCAOB has the power to subpoena, compel testimony, fine and suspend accounting firms.
- Restrict non audit services - firms providing auditing services for a client cannot offer non-audit services unless approved by the firm’s audit committee.
- Auditors are to be appointed by the Board of Director’s Audit Committee not executive management.
- Lead accounting partner to be replaced every 5 years.
- An accounting firm cannot audit a company where senior executives previously worked for that company and participated in an audit in the previous year.
What is the penalty for not adhering to the SOX rules for auditors?
Up to 10 years in prison and/or a fine.
Under SOX which key individuals in a company should be made aware of the internal controls for financial reporting?
CEO and CFO
What are the requirements for the annual internal controls report?
- To be produced as part of the annual financial accounts.
- Must acknowledge management’s responsibility for establishing and maintaining adequate controls and procedures for financial reporting.
- It must contain an assessment of the effectiveness of the firm’s controls and procedures for the purposes of financial reporting.
What are the corporate governance requirements SOX places on US listed firms?
- Measures to prevent conflicts of interest between securities analysts and investment banks.
- CEO and CFO to personally attest to the accuracy of SEC reports.
- Disclosure of all non balance sheet transactions
- Whether a code of ethics has been adopted by the firms financial officers.
- Forbid personal loans to officers and directors.
- Protections for whistleblowers.
What are the crimes and penalties defined by SOX?
- CEO intentionally attesting to inaccurate financial reports - $5 million and 20 years in prison
- Retaliating against a whistleblower - 10 years in prison
- Defrauding investors - 25 years in prison
- Obstruction of justice by destroying documents - 20 years in prison and fines.
What is Section 302 of SOX?
Requirement for CEO and CFO to personally attest to the accuracy of financial reports.
What extra areas does Section 404 require firms to attest to the controls over?
The controls surrounding processes and areas that have an indirect impact on the finances e.g. for a bank, this could include account transfers, direct debits and cheque clearing.
