Sarbanes Oxley Act

WHY? Public Company Accounting Reform and Investor Protection Act of 2002 Public Company Accounting Reform and Investor Protection Act of 2002 Response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Peregrine Systems and WorldCom. Response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Peregrine Systems and WorldCom.corporate and accounting scandalsEnronTyco International Peregrine SystemsWorldComcorporate and accounting scandalsEnronTyco International Peregrine SystemsWorldCom Significant problems – conflict of interest and incentive compensation practices Significant problems – conflict of interest and incentive compensation practices Auditing firms – significant non-audit or consulting work – far more lucrative than auditing engagement Auditing firms – significant non-audit or consulting work – far more lucrative than auditing engagement

WHY? These scandals resulted in a decline of public trust in accounting and reporting practices. These scandals resulted in a decline of public trust in accounting and reporting practices.accounting Wide-ranging and establishes new or enhanced standards for all U.S. public company boards, management, and public accounting firms. Wide-ranging and establishes new or enhanced standards for all U.S. public company boards, management, and public accounting firms.public companypublic company

General Provisions of S/Ox To make rules governing audits of public companies To make rules governing audits of public companies To oversee audits and audit firms To oversee audits and audit firms Independent of Federal Government Independent of Federal Government Self-funded through fees assessed on CPA firms and publicly traded companies Self-funded through fees assessed on CPA firms and publicly traded companies Not applicable to NFP (not for profit) or foreign listed companies Not applicable to NFP (not for profit) or foreign listed companies

Governing Members Quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. Quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies.Public Company Accounting Oversight BoardPublic Company Accounting Oversight Board

PCAOB’s Duties Write audit standards, temporarily they have adopted the AICPA’s (American Institute of Certified Public Accountants) Write audit standards, temporarily they have adopted the AICPA’s (American Institute of Certified Public Accountants) Register public CPA firms to do audits Register public CPA firms to do audits Set Quality Control standards for audits Set Quality Control standards for audits Do peer reviews of CPA firms – at least every three years Do peer reviews of CPA firms – at least every three years Investigate and discipline Investigate and discipline CPE (Continuing Professional Education) CPE (Continuing Professional Education) Review company disclosures and financial statements at least every three years Review company disclosures and financial statements at least every three years

The Act also covers issues such as The Act also covers issues such as auditor independence – limit conflicts of interest, auditor independence – limit conflicts of interest, auditor corporate responsibility – senior executives take individual responsibility for accuracy and completeness, corporate responsibility – senior executives take individual responsibility for accuracy and completeness, internal control assessment, and internal control assessment, and internal control internal control enhanced financial disclosure – timely reporting of material changes enhanced financial disclosure – timely reporting of material changes Five Members, three of whom must NOT be CPAs Five Members, three of whom must NOT be CPAs If the chair is a CPA, that person must be out of the business of auditing for the prior 5 years If the chair is a CPA, that person must be out of the business of auditing for the prior 5 years

Provisions for CPA firms Maintain audit papers for 7 years Maintain audit papers for 7 years Managing Partner rotation every 5 yrs. Managing Partner rotation every 5 yrs. Second partner rotation every 5 yrs. Second partner rotation every 5 yrs. Audit manager rotation every 7 years Audit manager rotation every 7 years Reports to audit committee Reports to audit committee All material findings All material findings Disclose fees for all types of services in proxy statement Disclose fees for all types of services in proxy statement Review disclosures of firm Review disclosures of firm Attest to Internal Control of firm Attest to Internal Control of firm

Independence Rules Can’t do other types of work for clients, - Other work needs pre- approval by audit committee Can’t do other types of work for clients, - Other work needs pre- approval by audit committee Can’t do audit if CEO, CFO from their firm, 1 year wait period Can’t do audit if CEO, CFO from their firm, 1 year wait period

Audit Committee Reports Operating committee of a publicly held company. Committee members are normally drawn from members of the Company's board of directors. An audit committee of a publicly traded company in the United States is composed of independent or outside directors. Operating committee of a publicly held company. Committee members are normally drawn from members of the Company's board of directors. An audit committee of a publicly traded company in the United States is composed of independent or outside directors. companyboard of directorsoutside directors companyboard of directorsoutside directors Reports Reports All critical accounting policies All critical accounting policies Alternate treatments Alternate treatments Internal Control findings Internal Control findings Material weaknesses Material weaknesses

Corporate Provisions Corporate Officers Corporate Officers Certify means they have Certify means they have Reviewed the reports Reviewed the reports Reviewed internal control Reviewed internal control Certify that there are no material weaknesses Certify that there are no material weaknesses Certify that there is no fraud Certify that there is no fraud Report fairly presents the financial condition of the company Report fairly presents the financial condition of the company

Corporate Provisions Corporate Officers Corporate Officers Can’t influence audit Can’t influence audit No trading during blackout periods No trading during blackout periods In pro-formas, no material untrue statements, reconciliation In pro-formas, no material untrue statements, reconciliation No officer loans No officer loans File any trading information within two business days File any trading information within two business days Code of ethics Code of ethics Disclose off-balance sheet financing Disclose off-balance sheet financing Disclose any non-GAAP financial measures Disclose any non-GAAP financial measures

Corporate Provisions Audit Committee of Board Audit Committee of Board Responsible for oversight of external audit Responsible for oversight of external audit Be independent of the firm Be independent of the firm Set up whistle-blowing provisions Set up whistle-blowing provisions One must be financial expert One must be financial expert

Penalties General penalties If alter, destroy, cover-up or falsify documents with objective to hinder investigation – fines and up to 20 years If alter, destroy, cover-up or falsify documents with objective to hinder investigation – fines and up to 20 years Give back to firms any bonuses, incentive compensation or equity based compensation earned within 12 months Give back to firms any bonuses, incentive compensation or equity based compensation earned within 12 months False certification - $1m and up to 10 yrs. False certification - $1m and up to 10 yrs. Willful false cert. - $5 m and up to 20 yrs. Willful false cert. - $5 m and up to 20 yrs. Company can hold up any payments to officers Company can hold up any payments to officers

Penalties Audit firms Temporary suspension from industry Temporary suspension from industry Temporary or permanent revocation of license Temporary or permanent revocation of license Can’t go to another firm if suspended or license revoked Can’t go to another firm if suspended or license revoked Fines of up to $100,000 personal for each violation, firm up to $2 m Fines of up to $100,000 personal for each violation, firm up to $2 m If intentional up to $750,000 personal, firm up to $15 m If intentional up to $750,000 personal, firm up to $15 m Destroy working papers within 5 years – fine and up to 10 years. Destroy working papers within 5 years – fine and up to 10 years.

Arthur Andersen LLP, based in Chicago, was once one of the "Big Five" accounting firms (the other four are PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG), performing auditing, tax, and consulting services for large corporations. Arthur Andersen LLP, based in Chicago, was once one of the "Big Five" accounting firms (the other four are PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG), performing auditing, tax, and consulting services for large corporations.Chicago"Big Five" accounting firmsPricewaterhouseCoopers Deloitte Touche TohmatsuErnst & Young KPMGauditingtax consultingcorporationsChicago"Big Five" accounting firmsPricewaterhouseCoopers Deloitte Touche TohmatsuErnst & Young KPMGauditingtax consultingcorporations In 2002 the firm voluntarily surrendered its licenses to practice as Certified Public Accountants in the U.S. pending the result of prosecution by the Department of Justice over the firm's handling of the auditing of Enron, the energy corporation, resulting in the loss of 85,000 jobs. In 2002 the firm voluntarily surrendered its licenses to practice as Certified Public Accountants in the U.S. pending the result of prosecution by the Department of Justice over the firm's handling of the auditing of Enron, the energy corporation, resulting in the loss of 85,000 jobs.Certified Public AccountantsU.S.Department of JusticeauditingEnronCertified Public AccountantsU.S.Department of JusticeauditingEnron