The Sarbanes Oxley Act

The past few years has remarkably changed the face of American business. Corporate scandals involving America's largest companies have shaken the confidence and trust that the public once had in big business. The desire to boost earnings has led some executives to commit crimes, in order to fatten their own pockets, at the expense of hard working employees, shareholders and stakeholders. The end result however, has proved disastrous. Workers have been laid off, thousands of people have lost their savings due to rapidly falling stock prices of their firm during rapidly imposed black out periods when employees were unable to pull their monies out. The collapses of Enron and WorldCom, as well as other well-publicized financial debacles, have led to an unprecedented level of attention paid to corporate governance, financial disclosure, and auditing issues. The ensuing Sarbanes-Oxley Act of 2002 has been described as the most important securities legislation since the original '33 and '34 Acts were passed. The SEC, NYSE, and NASD all have weighed in with their own rule changes. Corporate counsel, both in-house and outside, have needed to react to all of these developments rapidly, and often in a crisis environment.

Corporate greed and corruption has changed the face of American business forever. Consumer confidence has spiraled down and the bottom is unforeseen. Corporate greed was the primary factor in the downfall of Enron, Global Crossing and MCI WorldCom. The governing bodies, the Securities and Exchange Commission also known as the SEC, the Senate, NASD and other powers that be has decided that enough is enough. In 2002, the Senate introduced the Sarbanes-Oxley Act of 2002. This new law impacts CPA's, CPA firms auditing public firms, publicly traded firms and their employees, lawyers, brokers, dealers, investment bankers and financial analysts who work for or have as clients as publicly traded companies. This law has established a New Public Company Accounting Oversight Board (PCAOB), enforces stricter guidelines and well as criminal penalties for firms and individuals within those firms that violate federal law. CPA firms are now held to a higher level of accountability and must now ensure that ethical standards become best practices and they conflict of interests or too close relationships between the auditor and the firm being audited is avoided at all costs.

In reaction to corporate scandals that have occurred over the past few years, the Sarbanes Oxley Act of 2002 was born. On Tuesday, July 30, 2002 President Bush signed the act putting it into law. The Act was unanimously passed in the Senate and won in the House of Representatives by a margin of 423-3. The main purpose of this law is to increase corporate governance, financial disclosure and to toughen the auditing requirements.

What it does

The Sarbanes Oxley Act of 2002 creates the New Public Company Accounting Oversight Board (PCAOB). This board will consist of five SEC appointed financial literate members, only two of which can be CPA's. The board's primary duties will consist of registering public accounting firms that prepare audit reports; and establishing or adopting auditing, quality control, ethics and independence standards. Furthermore, the board also inspects, investigates and disciplines public accounting firms and enforces compliance with the act. In addition, the Board is also charged with the following significant duties:

1. Ensuring that all public accounting firms, foreign or domestic register with the Board. In addition, the Board also has the authority to retrieve annual dues, which will be used to process and review applications and annual reports.

2. The Board is also required to mandate that CPA firms prepare and maintain audit work papers and other information related to an audit for at least seven years

3. CPA firms that provide audit reports for 100 or more issuers will be inspected annually by the board; other firms can expect to be inspected at least once every three years.

4. The Board also has the authority to investigate firms who are perceived to be in violation of a certain act, rules or provision.

5. The New Public Company Accounting Oversight Board (PCAOB) will be required to cooperate with professional accountant groups and advisory groups to increase the effectiveness of the standards setting process.

In addition to the mandates outlined above, Sarbanes Oxley Act allows for additional provisions that seek to prevent conflicts of interests that can be a precursor to corporate corruption. The Act bans what is known as the "revolving door", prohibiting registered CPA firms from auditing any SEC registered client whose chief executive, CFO, controller