Sarbanes Oxley Act, 2002 - Final
Sarbanes Oxley Act, 2002 - Final
1. Priya Arora 14
2. Purnima Satija 15
3. Shivani Aggarwal 22
4. Shreya Sharda 23
5. Srishti Ranga 26
2
Plan of Study
Introduction
Corporate Scandals
Cost of Compliance
Future Impact
Conclusion
4
Introduction
8
Enron
By early 2001, Enron had morphed into the 7th largest U.S. company,
and the largest U.S. buyer/seller of natural gas and electricity.
10
Cont’d…
A Chronology of Events
1999 • Enron launched its broadband services unit & Enron online
Aug, 2001 • Skilling announced his departure & Lay resumed the post of CEO
Skillling pressured Enron executives to find new ways to hide its debt.
12
Cont’d…
Skillling pressured Enron executives to find new ways to hide its debt.
13
Cont’d…
Role of
Role of Credit
Role of Investment & Role of Law
Rating
Andersen Commercial Firms
Agencies
Bank
15
Cont’d…
Enron stands for the greatest company scandal in the history of the
US economy and has become a symbol of corruption for the whole
Western economic system.
Investors lost some 60 billion dollars within a few days; for many it
meant losing their old-age security.
18
Cont’d…
The BOD and Audit Committee did not appear to have had an
adequate understanding of the company and culture
Consequences:
CFO was fired, controller resigned, and the company filed for
bankruptcy.
Sullivan pleaded guilty & took the stand against Ebbers in exchange
for a more lenient sentence of 5 years.
22
Tyco
What happened: CEO and CFO stole million dollars and inflated
company income by $500 million.
They used the funds for their private purposes like $ 2 million
dollar birthday party for Koslowski’s wife in Italy
24
Cont’d…
How they got caught: During 2002, the Securities and Exchange
Commission began an investigation of Tyco's top executives that
uncovered questionable accounting practices, including large loans made
to Kozlowski & others, embezzlement of Tyco’s funds, etc.
Penalties:
Kozlowski and Swartz were sentenced to 8-25 years in prison.
25
History of Sarbanes Oxley Act, 2002
First wave of scandals initiated by Enron/Andersen in late 2001, followed quickly by ImClone,
Global Crossing, and similar stories.
Second wave of scandals, led by WorldCom & Adelphia in the summer of 2002
These scandals resulted in hundreds of billions of dollars in corporate and investor losses in the
United States which led to the erosion of investors confidence.
Corporate defaults and plunging stock prices were followed with stories of excessive executive
compensation, insider dealing, and systematic failures in management and board oversight
Sarbanes Oxley Act introduced in the House as "Corporate and Auditing Accountability,
Responsibility, and Transparency Act of 2002" by Mike Oxley on February 14, 2002
Passed the Senate as the "Public Company Accounting Reform and Investor Protection Act of
2002" on July 15, 2002
Reported by the joint conference committee on July 24, 2002; agreed to by the House on July 25,
2002 (423–3) and by the Senate on July 25, 2002 (99–0)
28
Cont’d…
Securities analysts’
Boardroom failures
conflicts of interest
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Objectives of Sarbanes Oxley Act, 2002
To re-establish investors
To prevent future corporate
confidence in the securities
frauds
market
Other objectives:
To enhance the accountability of corporate officers;
31
Provisions
Auditor’s Independence
Corporate Responsibility
34
Introduction
The PCAOB aims to identify risks that may have resulted in audit,
quality control, ethics or independence failures by registered firms.
The PCAOB also uses such analysis to identify weaknesses in, and
appropriate improvements to, its auditing and related professional
practice standards.
37
Sections
SEC 103 • Auditing, quality control, & independence standards and rules.
39
Cont’d…
States that the SEC shall have oversight and enforcement authority
over the PCAOB.
Section 108-Accounting standards
Amends Section 19 of the Securities Act of 1933 in that the SEC may
recognize under Section 13(b) of the Securities Act of 1934 as
"generally accepted" any accounting principles established by a
standard setting body that meets certain criteria as further specified in
the Act. 42
Cont’d…
Section 109-Funding
Provides for funding of the PCAOB pursuant to an amendment to
Section 19(b) of the Securities Act of 1933.
43
Title 2:- Auditor’s
Independence
44
Introduction
45
Responsibilities of audit committee
47
Sections
49
Cont’d…
The final rules contain new partner rotation requirements that apply
to audit partners. The term audit partner is defined “a partner who is
a member of the audit engagement team” and who:
50
Cont’d…
The rules amend SEC Regulation S-X to require auditors to report to the
client's audit committee, prior to the filing of the report with the SEC.
51
Cont’d…
54
Cont’d…
55
Title 3:-CORPORATE
RESPONSIBILITY
56
Introduction
57
Cont’d…
They must also certify that they take individual responsibility for
establishing and maintaining their company’s internal control, that
they have designed such controls and that they have recently evaluated
the effectiveness of the internal controls.
58
Sections
62
Cont’d…
63
Cont’d…
64
Cont’d…
65
Cont’d…
66
Cont’d…
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Title:-4 Enhanced financial
Disclosures
68
Introduction
The title includes the sections which defines that companies should
disclose information to the extent that it is necessary for an
understanding of its balance sheet and their material effects on financial
condition, changes in financial condition, revenues or expenses, results
of operations, liquidity, capital expenditures or capital resources.
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Sections
71
Cont’d…
72
Cont’d…
73
Cont’d…
States that nothing in Sections 401, 402 or 404, or the rules of the SEC
under those sections shall apply to any investment company registered
under Section 8 of the Investment Company Act of 1940.
75
Cont’d…
76
Cont’d…
It states that each issuer reporting under Section 13(a) or 15(d) shall
disclose to the public on a rapid and current basis such additional
information concerning material changes in the financial condition, or
operations of the issuer, in plain English, which may include trend
and qualitative information and graphic presentations, as the SEC
determines, by rule, is necessary or useful for the protection of
investors and in the public interest.
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Title:-5 Analysts conflict
of interest
79
Sections
80
Cont’d…
81
Title:-6 Commission
resources and authority
82
Sections
83
Cont’d…
85
Cont’d…
86
Title 7:-Studies and
Reports
87
Sections
91
Title 8:-Corporate Fraud and
Criminal Accountability
92
Introduction
This title created new crimes and increased the punishments for
violations of existing provisions.
It added new statutes relating to the alteration of documents,
increased the limitations period for lawsuits and called for a review of
the Federal Sentencing Guidelines.
It also inserted a provision designed to encourage and protect
whistleblowers.
93
Sections
This section has two provisions that address the destruction of corporate
documents.
The first addresses documents within a company:
Whoever knowingly alters, destroys, mutilates, conceals, or falsifies
records, documents or tangible objects with the intent to obstruct,
impede or influence a legal investigation, shall be subject to fines and or
up to 20 years of imprisonment.
95
Cont’d…
98
Cont’d…
100
Title 9:-White Collar Crime
Penalty Enhancements
101
Introduction
102
Sections
This section increased the penalties for mail and wire fraud from a
maximum imprisonment of five years to a 20-year maximum.
104
Cont’d…
105
Cont’d…
The written statements would certify that the reports ‘fairly present
in all material respects, the financial condition and results of
operations. ’
Under the act, those who provide a 906 certification knowing that
reports are not in compliance with the above criteria would be fined
up to $1 million or imprisoned for not more than 10 years, or both.
108
Sections
109
Cont’d…
This section stated that the Federal income tax return of a corporation
should be signed by the chief executive officer of such corporation.
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Title 11:-Corporate Fraud
Accountability
111
Sections
Section 1105 provides the SEC with the authority to prohibit a person
from serving as an officer or director of a public company.
114
Cont’d…
115
Similar Laws in Other
Countries
116
Similar Laws in other countries
India • Clause 49
Turkey • TC-SOX 11
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Impact in India
Indian SOX=Clause 49
With the coming of SOX in U.S., India also took new corporate
governance norms under Clause 49 of Listing Agreement which came
into effect from 31st December 2005 and is mandatory for all listed
companies.
119
Cont’d…
121
Significant Changes
124
Cont’d…
125
Benefits of Sarbanes
Oxley Act, 2002
126
Benefits of the Act
Michael Oxley: “How can you measure the value of knowing that
company books are sounder than they were before?”
At an April meeting at the SEC it was said that the Act had a “chilling”
effect on the relationship between managers and auditors. 127
Cont’d…
Improving Documentation
Standardised Processes
Reducing Complexities
Improving Documentation
Documentation took up a lot of workers’ time during the 1st year of SOX.
129
Cont’d…
Standardizing Processes
Several companies with different divisions realized they had different
processes for different tasks.
CFO of a large clothing manufacturer realized each division of AR
imposed different due and dunning date, late fees, and interest rates on
customers.
Another company found that each division had different billing
methods.
Reducing Complexity
Iron Mountain, a records and information management company had 132
Cont’d…
acquired more than 150 competitors.
Simplification was the game plan, as each company came with its own
organizational chart & Iron Mountain integrated the reporting
structure.
They also centralized all accounting activities since each company
brought its own system.
Strengthening Weak Links
Complexity arises from outsourcing, partnerships, & shared-services
arrangements, also known as extended enterprise.
Many firms’ clients are reevaluating their outsourcing arrangements & 133
Cont’d…
partnerships.
Minimizing Human Error
Many tasks have been made automated to reduce error.
One executive stated, “You need human judgment to determine
whether the override is reasonable or whether it needs to be
investigated.”
134
Cont’d…
137
Cost of Compliance
Cost of
Compliance
Indirect
Direct Costs
Costs
BOD &
Accounting Decision
Audit Going public Productivity
& Audit Fees Making
Committees
139
Cont’d…
Direct Costs
Accounting and Audit Fees
To manage this cost many companies are either outsourcing or co-
sourcing a number of audit functions.
Indirect Costs
Going Public
Cost expected to double as a result of compliance
Smaller, growing companies bear a larger burden of these costs
More and more companies are going private
Decision Making
Companies may become more risk adverse
Major decisions may take longer (and cost more) to implement
Productivity
Opportunity costs of revamping internal controls
Future Impact of
Sarbanes Oxley Act, 2002
143
Future Impact-SOX is likely to Grow
The results of SOX, both positive and negative, have led to several
discussions on expanding the scope of SOX.
Congress is reviewing options to expand to nonprofits to reduce
scandals like that of the United Way several years ago.
Congress is also examining the reporting of privately held
companies.
The Government Accounting Office is reviewing procedures for
government agencies.
Additional rules in support of SOX and auditing process are under
review or in draft form. 144
Cont’d…
“It’s so time consuming and laden with red tape that it’s like throwing buckets
of sand into the gears of the market economy”
-Scott McNealy, CEO Sun Microsystems
“As a general rule of thumb, any bill that passes the U.S. Senate 99-0 is
probably a horrible idea”
-Patrick Byrne, CEO Overstock.com
It’s like “chemotherapy” after removing the tumors of Enron and Worldcom
-Gary Smith, CEO Ciena
146
Conclusion
Miller, R., & Bredeson, D. (2010). Students Guide to the Sarbanes Oxley Act.
Cengage Learning.
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chronology_x.htm
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148
Cont’d…
http://gbr.pepperdine.edu/2010/08/reforming-corporate-america/
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issues-in-tyco-international-company-law-essay.php
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149
Cont’d…
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happened-and-how.html
http://pcaobus.org/About/Ops/Documents/Strategic Plans/2009-2013.pd
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4845-2a10-da81-
f37c12623055?QuickLink=index&overridelayout=true&17639430713653
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150
Cont’d…
www.sdn.sap.com/irj/scn/go/portal/prtroot/docs/library/uuid/b074fcfd-4845-
2a10-da81-
f37c12623055?QuickLink=index&overridelayout=true&17639430713653
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http://scholars.law.unlv.edu/cgi/viewcontent.cgi?article=1244&context=facpub
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http://www.global-ethic-now.de/gen-eng/0d_weltethos-und-wirtschaft/0d-01-
globale-wirtschaft/0d-01-203-enron-folgen.php
151
Cont’d…
http://www.whitecase.com/files/Publication/320de404-d9a0-4631-a640-
6c0eda4f93c4/Presentation/PublicationAttachment/5ab56984-6114-4511-9df1-
6c9e2ba8b047/memo_sarbanes_oxley_act_of_2002_summary_of_the_provision
s_02_12_2003.pdf
http://www.investopedia.com/articles/stocks/09/enron-collapse.asp
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7.pdf
https://www.hbr.org
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Thank
You…
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