Notre Dame University- Louaize Corporate Governance
Deir El Kamar- Shouf MBS 625
Sarbanes- Oxley Act Summary
Presented to:
Dr. Michael Bassous
Presented by:
Spring 2017
Content
I- Introduction:
a. Overview of Sarbanes Oxley Act
II- The Duties of the Board
III- The Members and Appointment of the Board
IV- The Power of Board
V- Rules and Responsibilities according to Sarbanes Oxley Act
VI- Conclusion
I- Introduction:
a. Overview of the Sarbanes Oxley
The 2002 Sarbanes-Oxley Act (SOX) was enacted following exposure of corporate misconduct and the collapse of the Enron Corporation. In an attempt to protect investors by improving the accuracy and reliability of corporate disclosures, Congress introduced strict new rules affecting financial practices and corporate governance regulation (Butler, 2006). “the main plan of Sarbanes‐Oxley is to improve the integrity of the audit process for publicly traded companies and the dependability of audit reports on corporate financial statements. For many companies, this will require a major new corporate compliance plan, of which plenty internal controls – including records management – is the key element.(Stephens, D.O., 2005).
The main goal of Sarbanes-Oxley Act urges public companies to reinforce audit committees, perform internal controls tests showing how effective and efficient the company is, set personal liability of directors and officers for precision of financial statements, where senior managers are held accountable for the information they provide, and strengthen disclosure, where sensitive information is known inorder to have better understanding of a firm or company’s financial standings. The Sarbanes-Oxley Act also creates stricter criminal punishments for securities fraud and changes how public accounting firms function their businesses.
Public Companies Accounting Oversight Board “PCAOB” are established to oversee audit public companies that are subject to the securities laws and related matters in order to protect the interests of the investors. The board shall not be an agency or establishment of the united state government (Lekatis, G., 2012).
The article will be concentrating on the duties of the board, how members are chosen and appointed, and the rules and responsibilities that the board should follow and the power they are granted by the government.
II- The Duties of the Board
The duties of the board mainly fall into:
– Registering public accounting firms that prepare audit reports
– Establishing or adopt by rule; auditing quality control ethics, independence and other standards relating to the preparation of audit reports for issuers
– Performing inspections of registered public accounting firms
– Conducting investigation and disciplinary proceeding concerning and impose appropriate sanctions were justified upon registered public accounting firms
– Conducting such other duties or function as the board are necessary to promote high professional standards among and improve the quality of audit service
– Enforcing compliance with this act the rules of board
– Setting budget and manage the operations of the board
In addition to the duties that the board shall perform during its term, selecting the members of this board is important as well.
III- The Members and Appointment of the Board
The board membership consisting of 5 members that should be appointed; individuals who reveal commitment to the interests of the investors and the public. Only 2 members should be publicly certified accountants provided that one of those 2 members is the chairperson.“He/she might not have been a practicing certified public accountant for at least 5 years prior to his/her appointment to the board” (Public Law 107-204, 2012). Board members should be employed on a full-time basis and not engaged in any other business activity, and shall receive a fixed payment and not in any other form.
The appointment of the board members, occurs after consulting with the chairman of the board of the Governors of Federal Reserve System, the chairperson and other members of board, at most 90 days after the date of the endorsement of this Act. If a vacancy on the board exists, this shall not affect the power of the board. In general, the term of the service shall be 5 years for each board member, but no person may serve as member of the board or as a chairperson of the board for more than 2 terms.
IV- The Power of the Board
The board has the power to sue, complain and defend its corporate name, conduct its operation and maintain offer and exercise all other rights, and to lease, purchase , accept gifts or donation , use, sell exchange all of or an interest in any property. In addition to that, they have the power to assign employees, accountants, attorneys and other agents after determining their qualifications and defining their duties. The board has the power to allocate, assess and collect accounting support fees, and to enter into contracts.
V- Rules and Responsibilities according to Sarbanes Oxley Act
The rules consist of that board shall provide for the operation and administration and exercise of its authority, determine allocation of any of its function to an individual member or employee (ordering, certifying, and reporting) and establish ethics, rules and standards of conduct of board members and staff.
Sarbanes Oxley Act focuses on investors’ interests and supervises the audit of public companies, auditing, quality control and independence standards; it shall include in the auditing standards that each public accounting firm shall prepare and maintain for a period of greater than 7 years, and include the quality control standards ( monitoring of professional ethics, discussion inside the firm on accounting and auditing questions, supervision of the work, internal inspection, and the acceptance and continuation of engagement). Hence inspection is conducted annually with respect to each registered public accounting. During the inspection the board shall identify any act or practice or omission to act by the registered public accounting firm, report any such act practice, omission and start a formal investigation or take disciplinary action with respect to any violation of this Act. The document may consist of the testimony of the firm or any person associated and require the production of audit work papers and any other document of information (may inspect the books and records to verify the accuracy).
As the accounting standards, the body should present an annual report to the commission and the public containing audited financial statement, also the body shall establish a budget for each fiscal year which is approved according to internal procedure.
Under title II “auditor independence”, there are some prohibited activities that are unlawful for a registered public accounting firm to carry out an audit of an issuer’s financial statement. Some of these include:
a) services related to accounting records or financial statements of the audit client
b) financial information system design and implementation
c) evaluation services
d) actuarial services
e) internal audit outsourcing activities
f) management functions or human resources
g) broker or dealer, investment adviser or investment banking services
h) legal services and expert services unrelated to the audit
i) any other services that the Board determines, by regulation, is impermissible.
Moreover, the Act needs the main audit partner to be held responsible for the audit and for reviewing all the statements adding to that the partner should be rotated/ changed every 5 years. The Act requires that auditor report to the audit committee on all critical accounting issues. The Act adds to Securities Exchanges Act that there should be conflict of interest hence considered to be unlawful.
According Title III “Corporate Responsibility”, the annual and quarterly reports must be certified by the company’s singing officers, in which these reports indicate the company’s financial condition and results of operations for the indicated period. Moreover, the signing officers must sustain and establish internal control to guarantee that they are sentient of material information. The signing officers must also disclose to the company's auditors and audit committee all information which could negatively affect the issuer's ability to record, process, summarize and report financial data.
Title IV “ Enhanced Financial Disclosures”, requires that the company's annual and quarterly report include management's evaluation of the effectiveness of the company's internal control structure and require the company's public accountants to attest to and report on the assessment. The directors, officers, and principal stockholders is required to file the statement of the amount of all the equity securities.
As for conflicts of interest it is designed to limit the audit relationship, free the auditor from the effects of client pressure, and odder an opportunity for a new point of view at the company’s financial reporting. There are additional resources allocated for budget and granting it power to investigate and penalize anyone / or company who violates the security law (Lekatis, G. 2012)
Moreover there are regulatory bodies such as the Comptroller General of the United States that have the power to conduct studies regarding the combination in the audit industry and to increase the competition and number of firms capable of providing audit services and investigate in case that violates the security law. In addition to that conducting studies on whether investment banks and financial advisers supported public companies in manipulating their earnings after the collapse of Enron Corporation, Global crossing…
Of course the Act mentions that any manipulation of documents, falsification of important information and creating false documents is considered as a felony. The punishment for such action is to be fined, imprisoned for about 20 years or even both. Moreover the officers must certify the documents that hold information about financial reports being accurate and represent the company’s status (Kolb, R. W., 2008).
VI- Conclusion
The Act requires that companies to change their corporate governance in which they would be able to balance the interests of all shareholders and board members. Adding to that, the audit committee would be more proactive delivering accurate financial reporting and efficiently overseeing the firm’s financial resources. Senior managers will hold much more responsibilities for the information presented where they would be held accounted for the data provided and its accuracy. Firms now should report directly to the audit committees and are subject to the vision of their new government regulator, the PCAOB.
Some governance changes may be costly. When considering the firms, not only do such changes reduce decision making quality where decisions are pressured by government norms and bureaucracy but also they result in inefficient capital allocation where sometimes the good of the people or government is prioritized over the good of the company. On the other hand when it comes to the society, shareholders, and stakeholders, it reduces economic growth and damage the value. (Larcker, D. & Tayan, B.,2016)
Therefore, corporate governance regime cannot be standardized among all firms, due to the different variables that may negatively affect the firm. Moreover, such a regime is subject to many factors that will affect the overall growth of companies in local markets and international ones where government interference is not preferred.
References:
Butler, H. &Ribstein, L. (2006). The Sarbanes-Oxley Debacle: What We’ve Learned; How to Fix It. AEI Press, Washington D.C.
Larcker, D. & Tayan, B. (2016). Corporate Governance Matters (2nd Ed.). Pearson Press. ISBN: 9780134031569.
Lekatis, G. (2012). Understanding Sarbanes Oxley: Sarbanes Oxley Compliance Professional Association (SOXCPA). www.sarbaness-oxley-association.com.
Kolb, R. W. (2008). Encyclopedia of Business Ethics and Society. Thousand Oaks: SAGE Publications, Inc, Vol. 4, pp 1851- 1856
Public Law 107-204 (2012). Sarbanes Oxley Act. 107th Congress. 116 STAT. 745.
Stephens, D.O (2005) "The Sarbanes‐Oxley Act: Records management implications", Records Management Journal, Vol. 15 Issue: 2, pp.98-103, doi: 10.1108/09565690510614247