1. Signed into law on July 30, 2002 Response to highly publicized corporate scandals Provisions affect corporate governance, accounting, and auditing Purpose is to restore ____________

2. Enron –Material misstatements due to fraud: off-balance sheet financing, abuse of fair value accounting rules –Outcome: $3 billion in required restatements. Largest bankruptcy in history. Auditor Arthur Andersen convicted (later overturned) of obstruction of justice. Big 5  Big 4 –Key Players: Ken Lay, Jeff Skilling, Andrew Fastow, David B. Duncan –Whistleblower: Sherron Watkins WorldCom –Material misstatements due to fraud: capitalization of expenses, improper use of reserves –Outcome: First 4 billion then 11 billion in restatements. WorldCom bought out by Verizon –Key Players: Bernard Ebbers, Scot Sullivan, Mike Meyers, Betty Vinson, Buddy Yates –Whistleblower: Cynthia Cooper Other Frauds: Global Crossing, Adelphia, Qwest, Tyco

3. Prior to PCAOB the profession was ______ - regulating. The PCAOB is a private nonprofit organization with members appointed by the __________ Responsible for setting ________________ for _________ of __________ companies Composed of ___ members, three ______ Funded by firms that _________________ Sets standards for _________ Conducts __________ to ensure that performance is up to standards. Has authority to ________ members for wrongdoing.

4. Specified non-audit services are prohibited –bookkeeping, information systems design and implementation, appraisals, actuarial services, internal audit, human resources, investment banking, unrelated legal services Audit partner rotation Cannot serve as partner for more than __________ years ____________ partner review _____________ period

5. To whom do the auditors report? –External auditor –Internal auditor Who hires and approves services? What kind of items get reported to the audit committee? Majority of members are ________ (What does this mean?) Members must be __________ and __________

6. What is the role of the PCAOB? What is the new role of ASB (of the AICPA)? –Past –Future Role of the IFAC and IAPC Convergence PCAOB Audit Standards, SASs, ISAs

7. Certain acts now carry federal penalties: –Workpaper __________ –Document __________ Securities fraud penalties are increased Fraud discovery _________________ increased Loans to _____________ and insider trading during ____________ periods ___________protections

8. Management assessment of ICS –SOX 404—This is the most significant provision of the Act What does SOX 404 require?

9. To whom is it applicable? What does it require of management? What does it require of auditors?

10. CEO and CFO ______________ –Another major provision of the act –trickle down Codes of ________ and disclosure of __________ for executives Ban on _________ to executives Increased disclosure of _____________ compensation

11. Pro-forma financial statements Form 8-K disclosures--changes to financial position Off-Balance Sheet Arrangements-- explained in section of MD&A