Building on Our Core Values Building on Our Core Values The Sarbanes-Oxley Act Public Law 107-204 (JFZ edited)

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Building on Our Core Values Building on Our Core Values The Sarbanes-Oxley Act Public Law (JFZ edited)

Building on Our Core Values The “Perfect Storm”  Unethical Behavior  Fraudulent Activity (WorldCom, Enron, etc.)  Downturn in the Economy  Massive Business Failures  Audit Failures  Loss of Investor Faith in the Capital Markets Result: The most significant legislation affecting the accounting profession since 1934

Building on Our Core Values Sarbanes-Oxley Act  Law was enacted on July 30, 2002  Created the Public Company Accounting Oversight Board (PCAOB), funded by accounting firms and registrants  Revised “Corporate Governance” standards  Creates new federal crimes related to fraud  Significantly increases criminal penalties for violations of the securities laws

Building on Our Core Values Public Company Accounting Oversight Board  5 members must be full-time and independent. Requires 2 CPAs (but only 2) to serve.  PCAOB is responsible for: – Oversight of the auditors of public companies – Conducting inspections of and discipline of those auditors – Enforcing compliance with law – Establishing and/or adopting auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers

Building on Our Core Values Corporate Governance Revisions w/ “Sarbox”  CEO & CFO must establish Internal Controls – Auditors must form an opinion as to the adequacy of these internal controls (as established by mgmt)  CEO & CFO must “certify” financial statements – Potential $5mm fine and 20 years prison for fraud  Mgmt must establish a company Code of Ethics  Mgmt must establish a “hotline” or other mechanism to allow anonymous (i.e. “Whistleblower”) reporting of fraudulent activities.

Building on Our Core Values Sarbanes-Oxley Act  Auditor Independence, Partner Rotation & Other – Prohibits accounting firms from performing certain non- audit services for audit clients – Requires audit partner and review partner rotation every 5 years ( PCAOB proposal to rotate auditor firms entirely) – Audit firm cannot perform audit if CEO, CFO, controller, chief accounting officer, etc. was employed by the company 1-year prior to the start of the audit – Prohibits most director and officer loans Overall, the law applies to public firms, but represents “best practices” that effectively impact private firms.

Building on Our Core Values Building on Our Core Values The Sarbanes-Oxley Act Public Law