Sarbanes-Oxley Act of 2002 Ernesto G. Rodriguez EC 521 Winter 2007

What SOX Regulates In summary In summary –The SOX Act mandates a federal oversight system, new guidelines regarding independence, harsh disclosure requirements with criminal penalties for violations, and new restrictions on loans and stock transactions involving corporate insiders.

What drove the passing of SOX ACT? Widely publicized Corporate and Accounting scandals Widely publicized Corporate and Accounting scandals –Audit “King”, Arthur Anderson –Enron, WorldCom, Adelphia The scandals created an environment where congress felt it had to “do something” to reverse the mistrust of Corporate America The scandals created an environment where congress felt it had to “do something” to reverse the mistrust of Corporate America

SOX Becomes Law The answer to the fears of the defrauded investors was an overhaul of the Corporate and Accounting Regulations The answer to the fears of the defrauded investors was an overhaul of the Corporate and Accounting Regulations The Sarbanes-Oxley Act of 2002 was signed into law on July 30, 2002 by President Bush The Sarbanes-Oxley Act of 2002 was signed into law on July 30, 2002 by President Bush

Major provisions of SOX The Public Accounts Oversight Board The Public Accounts Oversight Board –Register, oversee, investigate and discipline all accounting firms Restrictions on Auditors Restrictions on Auditors –An auditor is prohibited from providing a auditing client with specific types of consulting services Audit Committee Audit Committee –Must pre-approve numerous audit and non audit services

Major provisions of SOX (continues) Officers and Directors Officers and Directors –CEO’s and CFO’s are required to personally certify the accuracy of various financial reports Disclosure Requirements Disclosure Requirements –All material off-balance sheet transactions or special purpose entities must be disclosed in the annual and quarterly reports Criminal Penalties Criminal Penalties –Sentences for many existing federal crimes were enhanced

The Outcome These regulatory measures were successful in reaching its goal, but the future of the public confidence lies on the enforcement of the Act by the SEC. These regulatory measures were successful in reaching its goal, but the future of the public confidence lies on the enforcement of the Act by the SEC. Too much SEC control over the process is not necessarily a good idea. The creation of layer upon layer of bureaucracy could lead to inevitable inefficiencies in the end. Too much SEC control over the process is not necessarily a good idea. The creation of layer upon layer of bureaucracy could lead to inevitable inefficiencies in the end. We want to keep the U.S. competitive in the world markets while restoring balance at home. We want to keep the U.S. competitive in the world markets while restoring balance at home.