Sarbanes-Oxley Act 2002

Question 1

Why Sarbanes-Oxley?

Answer 1

Response to Enron, WorldCom and other corporate scandals

Question 2

What does it do?(4)

Answer 2

New rules on:
•Corporate governance
•Disclosure
•Audit
•Conflicts of interest

Question 3

Who does it affect? (7)

Answer 3

Issuers (companies)
•Directors
•Officers (e.g. CEO, CFO)
•Employees
•Attorneys
•Auditors
•Investment banks and analysts

Question 4

What does ift effect? (6)

Answer 4

New federal crimes
•Increased penalties for some existing crimes
•Studies to be conducted by SEC with a view to possible future legislation/regulation on
•Credit rating agencies
•SEC enforcement
•Investment banks

Question 5

Enhanced requirements on disclosure 3

Answer 5

Internal control report to be included in annual report
•Financial information must be reconciled to GAAP
•Financial information must reflect any material adjustment

Question 6

Implications for issuers CG 3

Answer 6

Audit committee
•All members must be independent
•Enhanced powers

Question 7

Implications for issuers ethics (2)

Answer 7

Improper influence on audits prohibited
•Code of ethics for CFO to be adopted

Question 8

Enhanced SEC review and enforcement (2)

Answer 8

Periodic reports to be reviewed at least every 3 years
•Power to freeze extraordinary payments by an issuer under investigation

Question 9

Certification of periodic reports by CEO/CFO
•Involving criminal penalties (2)

Answer 9

Full compliance with relevant law
•Fair presentation of financial condition and operation

Question 10

Implications for Directors and Officers

Certification of periodic reports by CEO/CFO

Penalties (2)

Answer 10

•$1million or 10 years or both for certification knowing that it does not comply
•$5million or 20 years or both for willful certification knowing that it does not comply

Question 11

Implications for Directors and Officers (2)
•Certification of periodic reports by CEO/CFO
•Involving civil penalties (5)

Answer 11

•That officer has reviewed report
•No untruth or omission re material fact based on officer’s knowledge
•Stringent requirements re internal control
•Disclosure of problems to auditor and audit committee
•Any changes potentially affecting internal control after date of evaluation

Question 12

Implications for Directors and Officers (3)
•Repayment of bonuses, etc. 2

Answer 12

Bonuses, other incentives or equity-based compensation from previous 12 months
•Whether involved in misconduct or not

Question 13

Implications for Directors and Officers
To do with loans / transactions (2)

Answer 13

Personal loans to directors and executive officers prohibited
•Reporting of share transactions speeded up (within 2 business days—previously within 10 days of end of month)
•NB these reports must be filed electronically and appear on issuer website to assist transparency

Question 14

Implications for Employees (3)

Answer 14

Protection for whistleblowers
•i.e. for those dismissed for disclosing breach of various federal laws, especially relating to fraud
•Any person who knowingly dismisses whistleblower as retaliation is subject to criminal penalties (fine or up to 10 years prison or both)

Question 15

Implications for Attorneys (2)

Answer 15

Must report evidence of breach of securities law or fiduciary duty or similar violation to issuer’s Chief Legal Counsel or CEO
•If they fail to respond appropriately, must report to Audit Committee or other independent committee or to the Board itself

Question 16

Implications for Auditors (10)

Answer 16

Public Company Accounting Oversight Board
•Replaces existing self-regulatory approach
•
Functions
•Register public accounting firms
•Establish standards for preparing audit reports
•Inspect public accounting firms
•Investigation and discipline of firms
•Enforce compliance
•
Subject to SEC oversight and control
•Rules must be approved by SEC

Question 17

Implications for Auditors
•Registration with the PCAOB (3)

Answer 17

Mandatory
•Includes consent to cooperate with the Board in any investigation
•Significant additional disclosure requirements

Question 18

PCAOB to develop standards on? (4)

Answer 18

Auditing
•Quality control
•Ethics
•Independence

Question 19

PCAOB has broad discretion, but Act sets some minimum requirements, for example? (3)

Answer 19

Retention of documents for at least 7 years
•Second partner must review audit
•Report on scope of testing, evaluation of internal control, description of weaknesses or non-compliance

Question 20

Inspection of firms by PCAOB? (3)

Answer 20

Annually if audit >100 issuers
•Less frequently if <100 issuers
•Results public (with exceptions)

Question 21

•Investigation at PCAOB’s discretion. (2)

Answer 21

May pass results to regulators
•May impose sanctions itself that it deems appropriate

Question 22

Foreign firms implication for auditors (3)

Answer 22

Foreign firms
•SEC previously held that foreign firms auditing US listed issuers subject to its jurisdiction
•Sarbanes-Oxley confirms this stance
•Such firms must register with Board and submit to its oversight

Question 23

Independence: services prohibited if contemporaneous with audit, including? (7)

Answer 23

Independence: services prohibited if contemporaneous with audit, including
•Book-keeping
•Financial information systems design
•Actuarial services
•Management or human resources services
•Investment services
•Legal and other expert services (if not related to audit)
•Others permitted if pre-approved by audit committee and disclosed

Question 24

Implications for Auditors - auditors (7)

Answer 24

•Rotation of audit partner (lead and review)
•After 5 consecutive years
•Auditor reports direct to audit committee
•Including alternative treatments under GAAP and their consequences and auditor’s preference
•No audit during cooling-off period
•That is, where CEO, CFO or CAO worked for auditor on issuer’s audit during previous 12 months
•Criminal penalties for knowing and willful failure to retain working papers for 5 years

Question 25

Implications for Investment Banks and Analysts (4)

Answer 25

Rules to deal with conflicts of interest between investment banks and analysts, for example
•To prevent retaliation against analyst for negative report which could damage existing or potential investment banking relationship
•To prevent publication of reports while bank is involved in public offering
•To ensure disclosure of conflicts of interest

Question 26

New Federal Crimes and Penalties (5)

Answer 26

Destruction of Records in Federal Investigations and Criminal Proceedings
•Securities Fraud involving a Public Company
•Any such penalties, damages, etc. are not discharged by bankruptcy
•Increased penalties for mail and wire fraud
•Increased penalties for willful violations of the Securities Exchange Act