Thursday, September 25

Sarbones Oxley - Overview


Sarbonex Oxley Act (SOX) or Investor Protection Act 2002

The Act was written by Senator Paul Sarbanes and Congressman Michael Oxley and enacted by the Congress of the United States in response to corporate management, accounting, and reporting scandals.
The Act has heightened the role of regulation within the accounting industry and with it the role of the US Securities and Exchange Commission ("SEC") and the newly created Public Company Accounting Oversight Board ("PCAOB") in that regulatory process.
The Act represents the biggest change in the US corporate governance and reporting since the federal securities laws were first enacted in 1933 and 1934. The Act has required the SEC to issue more regulations within six months than the SEC had ever issued before in a similar period.
Among other things, the Sarbanes-Oxley Act establishes new or enhanced standards for corporate accountability and has increased penalties for corporate wrongdoing for SEC registrants.

The Sarbanes-Oxley Act was enacted in an effort to prevent accounting scandals and other reporting problems from recurring, and to rebuild public trust in US corporate business practices, financial reporting, and in the capital markets.

The Act created a new oversight organisation, PCAOB, which now regulates the auditors of US public companies; the SEC continues to regulate the public companies.

The Act requires the PCAOB to establish:

• auditing and related attestation standards
• quality control standards
• ethics standards
• professional standards on the independent auditors’ attestation report on management’s assessment of the effectiveness of internal controls

The Act also authorises the PCAOB to establish rules to implement and enforce auditor independence requirements. Previously, independence rules were established and enforced by the SEC for auditors of public companies and the American Institute of Certified Public Accountants ("AICPA") for auditors of private entities.

The Act gives the PCAOB authority on how it will develop and adopt its standards. The Act does recommend that the PCAOB gather input from outside experts during its standard setting process. The PCAOB agrees with the Act's recommendation and, consequently, develops its standards in an open, public process in which investors, the accounting profession, the preparers of financial statements, and others have the opportunity to participate. In order for a PCAOB standard to become final, however, it must be ratified by the SEC.
The purpose of the Sarbanes-Oxley Act is to protect investors through:

• Disclosures that are more:
• Accurate
• Timely
• Comprehensive
• Understandable

• Enhanced Corporate Governance rules

• Stricter enforcement of the auditing profession by creating the PCAOB

• Improved internal controls over financial reporting

Section 404 of the Sarbanes-Oxley Act requires the annual report (Form 10-K or Form 20-F) of each US SEC registrant (except a registered investment company) to include a report addressing the following:
• A statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for the company
• A statement identifying the framework used by management to conduct the required evaluation of the effectiveness of the company’s internal control over financial reporting
• Management’s assessment of the effectiveness of the company’s internal control over financial reporting as of the end of the company’s most recent fiscal year, including a statement as to whether or not the company’s internal control over financial reporting is effective
• A statement that the registered public accounting firm that audited the financial statements included in the annual report has issued an attestation report on management’s assessment of the registrant’s internal control over financial reporting

The cost of compliance with the Sarbanes-Oxley Act, both in dollars and hours, has been a source of debate within the US. So much so that the SEC, with the PCAOB, held and will hold public roundtables to discuss the Act with constituents. The result of such roundtables has been further interpretive guidance from the PCAOB, including the June 2007 release of Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements to assist in the most effective and efficient implementation of the Act's requirements.

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