The Sarbanes-Oxley Act Polk, M 8/7/2018 6:01 AM The Sarbanes-Oxley Act © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02

Polk, M 8/7/2018 6:01 AM This presentation is intended for use in higher education for instructional purposes only, and is not for application in practice. Permission is granted to classroom instructors to photocopy this document for classroom teaching purposes only. All other rights are reserved. Copyright © 2003 by the American Institute of Certified Public Accountants, Inc., New York, New York. 13703 - Hispanic Townhall - 9-27-02

The Year of the“Perfect Storm” Polk, M 8/7/2018 6:01 AM The Year of the“Perfect Storm” Unethical Behavior Fraudulent Activity Downturn in the Economy Massive Business Failures Audit Failures Election Year Result: The most significant legislation affecting the accounting profession since 1934 © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02

Polk, M 8/7/2018 6:01 AM Sarbanes-Oxley Act of 2002 Enacted July 30, 2002 (nine months after first announcement of Enron problems) Applicable to “Issuers” as defined in the SEC Act of 1934 (approximately15,000 public companies) Companies required to file periodic reports with the SEC Companies with more than $1,000,000 in total assets and at least 500 shareholders Companies who have registered securities with the SEC Companies that are “in registration” © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02

Polk, M 8/7/2018 6:01 AM Sarbanes-Oxley Act of 2002 Creates the Public Company Accounting Oversight Board or PCAOB, funded by accounting firms and registrants Revises corporate governance standards Adds new disclosure requirements Creates new federal crimes related to fraud Significantly increases criminal penalties for violations of the securities laws © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02

Public Company Accounting Oversight Board Polk, M 8/7/2018 6:01 AM Public Company Accounting Oversight Board 5 members must be full-time and independent. Requires 2 CPAs (but only 2) to serve. Responsible for: Registering all auditors of public companies Conducting inspections of and discipline of those auditors Enforcing compliance with SEC Act of 1934 Establishing and/or adopting auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02

Public Company Accounting Oversight Board Polk, M 8/7/2018 6:01 AM Public Company Accounting Oversight Board Board Inspections and Reports Regarding Auditors: Requires PCAOB to inspect not less than once every 3 years all auditors of public companies The inspection report becomes public information after completion of an appeal period, except that any deficiencies that were resolved within 12 months are confidential © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02

Public Company Accounting Oversight Board Polk, M 8/7/2018 6:01 AM Public Company Accounting Oversight Board Board Investigations and Discipline Requires PCAOB to investigate and discipline violations of the Act, Board rules, securities laws and professional standards Requires disciplinary sanctions by the PCAOB to be reported to “any appropriate State Regulatory Authority” © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02

Polk, M 8/7/2018 6:01 AM Sarbanes-Oxley Act of 2002 Mandates that the PCAOB establish Auditing Standards to require: Workpaper retention for 5 and 7 years Knowing violations of the workpaper retention rules carry penalties of up to 10 years in prison CPA firms utilize a second-partner review and approval of audit reports Testing of companies’ internal controls, including reporting of test results © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02

Sarbanes-Oxley Act of 2002 Auditor Independence Polk, M 8/7/2018 6:01 AM Sarbanes-Oxley Act of 2002 Auditor Independence Prohibits accounting firms from performing certain non-audit services for audit clients Auditor Partner Rotation Requires audit partner and review partner rotation every 5 years Requires a 1-year cooling off period Audit firm cannot perform audit if CEO, CFO, controller, chief accounting officer, etc. was employed by and participated in the audit 1-year prior to the start of the audit © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02

Sarbanes-Oxley Act of 2002 Corporate Governance Standards Polk, M 8/7/2018 6:01 AM Sarbanes-Oxley Act of 2002 Corporate Governance Standards Audit committees must approve all services to be provided by the accounting firm Required communications between auditor and audit committee Mandatory adoption of a “code of ethics” for senior financial officers Requires CEO and CFO to certify financial reports © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02

Sarbanes-Oxley Act of 2002 Corporate Governance Standards Polk, M 8/7/2018 6:01 AM Sarbanes-Oxley Act of 2002 Corporate Governance Standards Prohibits most director and officer loans from the company New rules on director and officer trading of company stock (insider trading) Requires attorney whistleblowing © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02

Sarbanes-Oxley Act of 2002 Implementation Schedule Polk, M 8/7/2018 6:01 AM Sarbanes-Oxley Act of 2002 Implementation Schedule Various requirements of the Act take effect over an extended period from July 30, 2002, to January 2004. During this time, the SEC and PCAOB will be issuing numerous rules and regulations A number of key SEC rules have completed their comment period as of the end of January and are now final. Several others are currently exposed for public comment Numerous studies mandated by the Act to be completed by the GAO during this time Once fully operational, the PCAOB will “put its stamp” on the implementation of the law. © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02

SEC Proposals and AICPA Comment Letters Polk, M 8/7/2018 6:01 AM SEC Proposals and AICPA Comment Letters During the past few months, the SEC issued proposals on many of the SOA provisions. The AICPA reviewed all proposals to date and prepared comment letters on each, with special emphasis on protection of the public interest, as well as concerns of smaller firms. Comment letters posted to Sarbanes-Oxley Act/ PCAOB Implementation Central on AICPA.org: http://www.aicpa.org/sarbanes/index.asp © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02

Implications of Sarbanes-Oxley for Profession Polk, M 8/7/2018 6:01 AM Implications of Sarbanes-Oxley for Profession Potential for loss of audit standard setting for public company audits Changing role for SECPS Disciplinary tie-in to the inspection process Inspections/peer review coverage of nonpublic companies International compliance issues © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02

Implications for Profession Polk, M 8/7/2018 6:01 AM Implications for Profession Potential for limitations on other non-audit services New relationship with audit committees and management Further consolidation of public audits Cascade to non-public audits © 2003 by the AICPA 13703 - Hispanic Townhall - 9-27-02