R5 - big topic 2/3 - Ethics SOX

Question 1

SOX 2002 - Goal

Answer 1

to improve investors confidence in financial reporting.

4 different groups on improving investors’ confidence

1. Auditors
2. Audit Committee
3. Officers (CEO CFO)
4. Internal controls

Question 2

Title I - Public Company Accounting Oversight Board (PCAOB)

Answer 2

five members - 2 CPAs and 3 non

Duty -

1. register public accounting firms
2. establish rules relating to preparation of audit report
3. conduct inspections, investigations

Registration -
only registered public accounting firm can audit SEC issuers

Audit standards -
Keep Work papers for 7 years
provide second partner review
describe the scope of testing of the internal control structure and procedures

Inspections -
how often? 100+ audits/annual - annual inspection
less than 100 audits/annal - every 3 years

Investigations and Sanction (civil not criminal)

• suspension revocation of PCAOB registration
• civil penalty not criminal
• Censure
• additional training

Question 3

Title II - Auditor

Answer 3

Audit independent -
Tax services are permissible if pre-approved by Audit committee

Lead partner - must rotate off the audit every 5 years

registered firm must report to “Audit Committee”

• critical accounting policies
• alternative accounting treatments
• material written communications

Conflict of interests
audit firm cannot employ CEO CFO. must have 1 year period Grace period.

Question 4

Title III - Corp Responsibilities

Answer 4

Audit Committee
Directly responsible for the appointment, compensation, and oversight of the work of the public accounting firm
- auditor directly report to AC
- AC resolves dispute between auditor and management
- AC is independent

Corp responsibilities
CFO and CEO must Sign certain representation regarding reports to assert that:
1. they reviewed the report
2. the report does not contain untrue statement
3. financial statement fairly present in all material respects

CFO CEO must sign for internal controls

1. internal controls have been designed to ensure the material info has been made available
2. evaluated the effectiveness of IC 90 days prior to the report
3. conclusion as to the effectiveness of IC

CFO CEO sign Disclosure to auditors and AC

1. disclose all significant deficiencies in the design / op of ic
2. any fraud

CFO CEO sign report -> represent any significant changes to IC.

Accounting restatement due to material noncompliance
CEO and CFO must reimburse the issuer for
1. bonis
2. gain on sales of securities within 12 months

Question 5

Title IV - Enhanced Financial Disclosures

Answer 5

General - additional details regarding the financial statements, internal controls and operations of the audit committee.

1. Disclosure in periodic reports
   enhanced disclosure includes the following -
   all material correcting adjustments identified by the auditor
   all material off balance sheet transactions - Contingent obligations; unconsolidated subs
2. Conflict of interests provisions
   Issuers cannot make “personal laons” to directors or officers UNLESS:
   -the consumer credit loans are made in the ordinary course of the business
   -officer also made the similar loan available to the public
3. Disclosure of transaction involving management and principal stockholders
   10% + owner must be disclosed.
4. management assessment of IC
   10-k and 10-Q must include -
   a. MANAGEMENT is responsible for establishing and maintaining IC.
   b. auditor must attest to management’s assessment of IC
5. Code of ethics
   - if not, provide reason
   - code of ethics promote
   a. honest and ethical conduct
   b. full fair accurate and timely disclosure
   c. compliance with laws
6. Disclosure of AC financial experts
   - at least one; existence
   - if not, provide reason
   - education + experience as public accountant
   - financial expert must understand GAAP, apply GAAP, experience in preparing f/s, Experience with IC, understand AC function.
7. Enhanced review of periodic disclosures by issuers
   SEC will make regular and systematic review.
   Considering if issuer-
   a, made material restatement?
   b. experienced significant volatility in stock prices?
   c. largest market capitalization?
   d. emerging companies with disparities in P/E ratio?
   e. issuer’s operations will affect material sector of economy?

Question 6

Title VIII - Corp and criminal fraud Accountability

Answer 6

1. Altering documents
   auditor must keep for 7 years. failure to do so will be in fine, or jail for no more than 10 years

Whistle-blower protection -> compensatory damages

• reinstatement with same seniority status
• back pay with interests
• compensation for any special damages as results of the discrimination

Securities Fraud - 25 years in jail