Sarbanes Oxley Act

The Sarbanes Oxley Act consists of 11 Sections I – Public Company Accounting Oversight Board II – Auditor independence III – Corporate Responsibility IV – Enhanced Financial Disclosures V – Analyst Conflicts of Interest VI – Commission Resources and Authority VII – Studies and Reports VIII – Corporate and Criminal Fraud Accountability Act of 2002 IX – White-Collar Crime Penalty Enhancements X – Corporate Tax Returns XI – Corporate Fraud and Accountability

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

PCAOB Governing Members 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

PCAOB’s Duties Write audit standards, temporarily they have adopted the AICPA’s Write audit standards, temporarily they have adopted the AICPA’s 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 CPE Review company disclosures and financial statements at least every three years Review company disclosures and financial statements at least every three years

Duties of the are: Register public accounting firms that prepare audit reports for issuers. Establish or adopt rules: Auditing, Quality control, Ethics, Independence, as related to preparation of audit reports Conduct investigations of and disciplinary proceedings involving registered public accounting firms. Establish auditing standards Establish quality control standards. Quality control standards could include rules to require monitoring professional ethics and independence

Provisions for Audit 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

Auditor Independence Rules Can’t do other types of work for clients, de minimus exceptions Can’t do other types of work for clients, de minimus exceptions Bookkeeping Bookkeeping Systems design Systems design Valuation services Valuation services Actuarial services Actuarial services Internal audit Internal audit Management functions Management functions Other work needs pre-approval by audit committee 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

SOx requires every public accounting firm to use quality control policies relating to (i) monitoring of professional ethics and independence from entities on which the firm issues audit reports; (ii) consultation within the firm on accounting and auditing questions; (iii) supervision of audit work; (iv) hiring, professional development, and advancement of personnel; (v) the acceptance and continuation of audit engagements; (vi) internal inspection

CPAs Report to Audit Committee All critical accounting policies All critical accounting policies Alternate treatments Alternate treatments Internal Control findings Internal Control findings Engagement letter Engagement letter Independence letter Independence letter Management representation letter Management representation letter 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 – if don’t have one – why? Code of ethics – if don’t have one – why? 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

Audit Committee Independent Directors Audit committee members should not receive fees other than for board service and should not be an “affiliated person” of the company. Audit committee members should not receive fees other than for board service and should not be an “affiliated person” of the company. Financial Expert At least one member of its audit committee must be a "financial expert" (expertise in US GAAP). At least one member of its audit committee must be a "financial expert" (expertise in US GAAP). Auditor Oversight Responsible for oversight of external reporting, internal controls and auditing, and the appointment and compensation of the auditor. Whistle-Blower Communications Confidential and anonymous submissions by employees.

SOx Company Audit Committee Ω Under SOx Sec 301 public company audit committees are directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by their company (including resolution of disagreements between management and the auditor regarding financial reporting). Ω Audit firm reports directly to the audit committee. Auditors may also have to discuss accounting complaints with the Audit Committee.

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

Penalties – Corporate Officers 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 Give back profit on sales during blackout period Give back profit on sales during blackout period 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.

Statute of Limitations Two years after violation found or Two years after violation found or Five years after violation Five years after violation