Understanding Sarbanes-Oxley: June, July, August 2013

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Lessons from the First Five Years April The Evolution of Sustainability Reporting: Examining Its Key Features October Early Extinguishment of Debt: Rational Debt Management or Earnings Management? Disclosures on Derivatives and Hedging Transactions: A Review of Best Practices October Challenges and Opportunities in Social Accounting December Testing Goodwill for Impairment: Accounting for Servicing Assets: A Proposed Model December A Survey of Recent Research September An Issue Requiring Attention April Options for Public and Private Companies February Disclosure of the Engagement Partner in the Audit Report: Reporting Preferences under the Comprehensive Income Standard: Examining Its Use in Practice May Proposed Conceptual Changes in Financial Reporting: A Better Approach to Lease Accounting: Fixing the Shortcomings of the Proposed Rules September Accounting for Leases under the Forthcoming Exposure Draft: Will Businesses Welcome the Guidance?

Upward Revaluation of Nonfinancial Assets: Should It Be Available in U. Is Goodwill an Asset? Fair Value Changes Ahead January What Happened to the Importance of Matching?

Improved Judgment in Financial Accounting: A Principled Approach January Insight from the Accounting Profession November A Comparison of U. Converting Financial Statements from U. A Comprehensive Illustration January Restructuring the Accounting Rules for Restructuring Charges?: Stock Compensation Under U. Similarities and Differences February Loss Contingencies Face Controversy in Convergence: The Case of Israel March Some General Issues to Remember July Accounting for Small Businesses: A New Paradigm of Reporting: Exposure Draft on Management Commentary November Investigating the Expected Benefits March A Case of a Missed Liability.

Bridging the Government Pension Reporting Gap: Defined Benefit Pension Plans: Statement of Net Assets or Net Position? A Change in Presentation and Terminology October A Long and Winding Road: Derivative Measurement and Reporting for Governments November Using Financial Ratios and Benchmarks July Employee Benefit Plans and Audit Quality: Guest Editorial, Then and Now. In , Sarbanes—Oxley was named after bill sponsors U. Oxley R - OH. As a result of SOX, top management must individually certify the accuracy of financial information.

In addition, penalties for fraudulent financial activity are much more severe. Also, SOX increased the oversight role of boards of directors and the independence of the outside auditors who review the accuracy of corporate financial statements.

The bill, which contains eleven sections, was enacted as a reaction to a number of major corporate and accounting scandals , including those affecting Enron , Tyco International , Adelphia , Peregrine Systems , and WorldCom. These scandals cost investors billions of dollars when the share prices of affected companies collapsed, and shook public confidence in the US securities markets.

The act contains eleven titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission SEC to implement rulings on requirements to comply with the law. It created a new, quasi-public agency, the Public Company Accounting Oversight Board , or PCAOB, charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The act also covers issues such as auditor independence, corporate governance , internal control assessment, and enhanced financial disclosure.

The act was approved in the House by a vote of in favor, 3 opposed, and 8 abstaining and in the Senate with a vote of 99 in favor and 1 abstaining. Bush signed it into law, stating it included "the most far-reaching reforms of American business practices since the time of Franklin D. The era of low standards and false profits is over; no boardroom in America is above or beyond the law. In response to the perception that stricter financial governance laws are needed, SOX-type regulations were subsequently enacted in Canada , [3] Germany , South Africa , France , Australia , India , Japan , Italy , Israel, and Turkey.

Debates continued as of over the perceived benefits and costs of SOX. Opponents of the bill have claimed it has reduced America's international competitive edge against foreign financial service providers because it has introduced an overly complex regulatory environment into US financial markets.

Chuck Schumer , D-NY , cited this as one reason America's financial sector is losing market share to other financial centers worldwide. A variety of complex factors created the conditions and culture in which a series of large corporate frauds occurred between — The spectacular, highly publicized frauds at Enron , WorldCom , and Tyco exposed significant problems with conflicts of interest and incentive compensation practices. The analysis of their complex and contentious root causes contributed to the passage of SOX in The Senate Banking Committee undertook a series of hearings on the problems in the markets that had led to a loss of hundreds and hundreds of billions, indeed trillions of dollars in market value.

The hearings set out to lay the foundation for legislation. We scheduled 10 hearings over a six-week period, during which we brought in some of the best people in the country to testify The hearings produced remarkable consensus on the nature of the problems: The House passed Rep.

Bush and the SEC. Senator Sarbanes introduced Senate Bill to the full Senate that same day, and it passed 97—0 less than three weeks later on July 15, The conference committee relied heavily on S. The Committee approved the final conference bill on July 24, , and gave it the name "the Sarbanes—Oxley Act of ".

The next day, both houses of Congress voted on it without change, producing an overwhelming margin of victory: On July 30, , President George W. A significant body of academic research and opinion exists regarding the costs and benefits of SOX, with significant differences in conclusions.

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Conclusions from several of these studies and related criticism are summarized below:. Some have asserted that Sarbanes—Oxley legislation has helped displace business from New York to London, where the Financial Conduct Authority regulates the financial sector with a lighter touch. Roe, "Public Enforcement of Securities Laws: Preliminary Evidence" Working Paper January 16, London based Alternative Investment Market claims that its spectacular growth in listings almost entirely coincided with the Sarbanes Oxley legislation.

The Sarbanes—Oxley Act's effect on non-U. On the other hand, the benefit of better credit rating also comes with listing on other stock exchanges such as the London Stock Exchange. Piotroski and Srinivasan examine a comprehensive sample of international companies that list onto U. Using a sample of all listing events onto U. In contrast, they find that the likelihood of a U. The negative effect among small firms is consistent with these companies being less able to absorb the incremental costs associated with SOX compliance.

The screening of smaller firms with weaker governance attributes from U. Under Sarbanes—Oxley, two separate sections came into effect—one civil and the other criminal. Section of the Act mandates a set of internal procedures designed to ensure accurate financial disclosure.

The signing officers must certify that they are "responsible for establishing and maintaining internal controls " and "have designed such internal controls to ensure that material information relating to the company and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared".

The officers must "have evaluated the effectiveness of the company 's internal controls as of a date within 90 days prior to the report" and "have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date". The SEC interpreted the intention of Sec. In it, the SEC defines the new term " disclosure controls and procedures," which are distinct from " internal controls over financial reporting ". External auditors are required to issue an opinion on whether effective internal control over financial reporting was maintained in all material respects by management.

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This is in addition to the financial statement opinion regarding the accuracy of the financial statements. The requirement to issue a third opinion regarding management's assessment was removed in It shall be unlawful, in contravention of such rules or regulations as the Commission shall prescribe as necessary and appropriate in the public interest or for the protection of investors, for any officer or director of an issuer, or any other person acting under the direction thereof, to take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial statements of that issuer for the purpose of rendering such financial statements materially misleading.

In any civil proceeding, the Commission shall have exclusive authority to enforce this section and any rule or regulation issued under this section. No Preemption of Other Law.

Sarbanes–Oxley Act

The provisions of subsection a shall be in addition to, and shall not supersede or preempt, any other provision of law or any rule or regulation issued thereunder. The bankruptcy of Enron drew attention to off-balance sheet instruments that were used fraudulently.

During , the court examiner's review of the Lehman Brothers bankruptcy also brought these instruments back into focus, as Lehman had used an instrument called "Repo " to allegedly move assets and debt off-balance sheet to make its financial position look more favorable to investors. Sarbanes-Oxley required the disclosure of all material off-balance sheet items.

It also required an SEC study and report to better understand the extent of usage of such instruments and whether accounting principles adequately addressed these instruments; the SEC report was issued June 15, The most contentious aspect of SOX is Section , which requires management and the external auditor to report on the adequacy of the company's internal control on financial reporting ICFR.

This is the most costly aspect of the legislation for companies to implement, as documenting and testing important financial manual and automated controls requires enormous effort. Under Section of the Act, management is required to produce an "internal control report" as part of each annual Exchange Act report. The report must affirm "the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting". The report must also "contain an assessment, as of the end of the most recent fiscal year of the Company , of the effectiveness of the internal control structure and procedures of the issuer for financial reporting".

To do this, managers are generally adopting an internal control framework such as that described in COSO. To help alleviate the high costs of compliance, guidance and practice have continued to evolve.

The SEC also released its interpretive guidance [44] on June 27, It is generally consistent with the PCAOB's guidance, but intended to provide guidance for management. Both management and the external auditor are responsible for performing their assessment in the context of a top-down risk assessment , which requires management to base both the scope of its assessment and evidence gathered on risk. This gives management wider discretion in its assessment approach. These two standards together require management to:.

SOX compliance costs represent a tax on inefficiency, encouraging companies to centralize and automate their financial reporting systems. This is apparent in the comparative costs of companies with decentralized operations and systems, versus those with centralized, more efficient systems.

The cost of complying with SOX impacts smaller companies disproportionately, as there is a significant fixed cost involved in completing the assessment. For example, during U. This disparity is a focal point of SEC and U. The SEC issued their guidance to management in June, Another extension was granted by the SEC for the outside auditor assessment until years ending after December 15, The reason for the timing disparity was to address the House Committee on Small Business concern that the cost of complying with Section of the Sarbanes—Oxley Act of was still unknown and could therefore be disproportionately high for smaller publicly held companies.

The SEC stated in their release that the extension was granted so that the SEC's Office of Economic Analysis could complete a study of whether additional guidance provided to company managers and auditors in was effective in reducing the costs of compliance. They also stated that there will be no further extensions in the future. On September 15, the SEC issued final rule the permanently exempts registrants that are neither accelerated nor large accelerated filers as defined by Rule 12b-2 of the Securities and Exchange Act of from Section b internal control audit requirement.

Section a of the SOX, 18 U. Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both. Section of the Sarbanes—Oxley Act, also known as the whistleblower-protection provision, prohibits any "officer, employee, contractor, subcontractor, or agent" of a publicly traded company from retaliating against "an employee" for disclosing reasonably perceived potential or actual violations of the six enumerated categories of protected conduct in Section securities fraud, shareholder fraud, bank fraud, a violation of any SEC rule or regulation, mail fraud, or wire fraud.

Remedies under Section include: A reinstatement with the same seniority status that the employee would have had, but for the discrimination;. C compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney fees. General Counsel who was terminated after reporting potential violations of the Foreign Corrupt Practices Act;.

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