Sarbanes-Oxley Act Research Paper

Sarbanes-Oxley Act of 2002

Karla Azcue

ACC 120-09

Mr. Donald Senior

The Sarbanes-Oxley Act of 2002 is one of the most important legislations passed in the 21st century effecting financial practice and corporate governance. This act was passed on July 30, 2002 thanks to Representative Michael Oxley a republican from Ohio and Senator Paul Sarbanes a democrat from Maryland. They both passed two different bills that pertain to the same problem which had to do with corporation's auditing accountability and financial fraud problems within corporations. One was bill (S. 2673) brought by Senator Sarbanes and the other bill (H. R. 3763) brought by Representative Oxley. Both bills where passed separately one by the house and the other by the senate but after WorldCom revealed to the public that they had overstated its earnings "by more than $72 billion dollars during the past five quarters." (en.wikipedia.org) the house and the senate decided to form a conference committee to bring both bills together to form a stronger one. The conference committee approved the final bill on July 24th, 2002, giving it the name of "the Sarbanes-Oxley Act of 2002" and on July 30th, 2002, President Bush signed it making it a law. (en.wikipedia.org)

The clear motive for this law is to fight against financial statements fraud in the United States, as personified by worldCom, Enron and many others. The Sarbanes-Oxley act is also referenced as the Public Company Accounting Reform and Investors Protection Act of 2002, SOX, or Sarbox. (en.wikipedia.org)

According to wikipedia.org an online encyclopedia, the major provisions of the act are these twelve:

Ð'* Creation of the Public Company Accounting Oversight Board (PCAOB)

Ð'* A requirement that public companies evaluate and disclose the effectiveness of their internal controls as they relate to financial reporting, and that independent auditors for such companies "attest" (i.e., agree, or qualify) to such disclosure

Ð'* Certification of financial reports by chief executive officers and chief financial officers

Ð'* Auditor independence, including outright bans on certain types of work for audit clients and pre-certification by the company's Audit Committee of all other non-audit work

Ð'* A requirement that companies listed on stock exchanges have fully independent audit committees that oversee the relationship between the company and its auditor

Ð'* Ban on most personal loans to any executive officer or director

Ð'* Accelerated reporting of insider trading

Ð'* Prohibition on insider trades during pension fund blackout periods

Ð'* Additional disclosure

Ð'* Enhanced criminal and civil penalties for violations of securities law

Ð'* Significantly longer maximum jail sentences and larger fines for corporate executives who knowingly and willfully misstate financial statements, although maximum sentences are largely irrelevant because judges generally follow the Federal Sentencing Guidelines in setting actual sentences.

Ð'* Employee protections allowing those corporate fraud whistleblowers who file complaints with OSHA within 90 days to win reinstatement, back pay and benefits, compensatory damages, abatement orders, and reasonable attorney fees and costs.

Furthermore, according to soxlaw.com an online guide to the Sarbanes-Oxley Act the major compliances to the act rest on 5 sections:

Ð'* The first one is the Sarbanes-Oxley section 302, which is found under Title III of the act, pertaining 'Corporate Responsibility for Financial Reports'.

This section asks for sporadic legal financial reports to include certifications from signing officers, making sure that the reports do not contain misleading information on any statement or material, as well that the financial statements and related information is fairly presented. The signing officers are responsible for internal controls asking for a list of all deficiencies in the internal controls and information on any fraud that involves employees within internal activities.

Ð'* The second is the Sarbanes-Oxley section 401, found under Title IV of the act, pertaining to 'Disclosures