Sarbanes-Oxley (SOX) Act of 2002: Presented by Group

Sarbanes-Oxley (SOX) Act of 2002
Presented by Group
SJIM
Key Information
ENRON SCANDAL (2001)
The Enron bankruptcy, at $63 billion in assets, was the larg

est on record at the time. The company's collapse shook th
e financial markets and nearly crippled the energy industry.
• Enron executives used fraudulent accounting practices to

inflate the company's revenues and hide debt in its subsi
diaries.
• The Securities and Exchange Commission, credit rating
agencies, and investment banks were accused of neglige
nce—and, in some cases, outright deception—that enabl
ed the fraud.
• As a result of Enron, Congress passed the Sarbanes-Oxl
ey Act to hold corporate executives more accountable for
their company's financial statements.
Key Information
WorldCom (2002)
The company was one of America’s leading long-distance phone
companies through acquisitions of other telecom companies. At t
he peak of the dotcom bubble, its market capitalization had grow
n to $175 billion.
• WorldCom was the biggest accounting scandal in the history of the U

nited States as well as one of the biggest bankruptcies.
• After the tech bubble burst and companies slashed spending on telec
om services, WorldCom resorted to accounting tricks to maintain the
appearance of ever-growing profitability. By capitalizing expenses, it e
xaggerated profits by around $3 billion in 2001 and $797 million in Q1
2002
• Former CEO Bernard Ebbers was sentenced to 25 years in prison, an
d former CFO Scott Sullivan was sentenced to five years.
• Thanks to debtor-in-possession financing from Citigroup, J.P. Morgan
and G.E. Capital, the company would survive as a going concern whe
n it emerged from bankruptcy in 2003 as MCI—a telecom company W
orldCom had acquired in 1997. However, tens of thousands of worker
s lost their jobs.
Key Information
Internal Controls
Internal controls are the mechanisms, rules, and procedures impl

emented by a company to ensure the integrity of financial and ac
counting information, promote accountability and prevent fraud.
Preventive control : documentation and authorization practices. A

nd the separation of duties
Detective controls : reconciliation, used to compare data sets, an

d corrective action is taken upon material differences.
Introduction
What is the Sarbanes-Oxley (SOX) Act of 2002?
• The U.S. Congress passed the Sarbanes-Oxley Act of 2002 on July 30
• To help protect investors from fraudulent financial reporting by corporations.
• Also known as the SOX Act of 2002 and the Corporate Responsibility Act of 2
002.
• The act took its name from its two sponsors—Sen. Paul S. Sarbanes (D-Md.)
and Rep. Michael G. Oxley (R-Ohio).
• It mandated strict reforms to existing securities regulations and imposed toug

h new penalties on lawbreakers.
Introduction
Understanding the Sarbanes-Oxley (SOX) Act
The rules and enforcement policies amended/supplemented existing laws dealin

g with security regulation, including the Securities Exchange Act of 1934 and oth
er laws enforced by the Securities and Exchange Commission (SEC). The Sarba
nes-Oxley Act is arranged into 11 sections, or titles
The new law set out reforms and additions in four principal areas:
• Corporate responsibility
• Increased criminal punishment
• Accounting regulation
• New protections
Major Provisions of the Sarbanes-O
xley (SOX) Act of 2002
Section 302
mandates that senior corporate officers personally certify in writing t

hat the company's financial statements "comply with SEC disclosure
requirements and fairly present in all material aspects the operations
and financial condition of the issuer." Officers who sign off on financi
al statements that they know to be inaccurate are subject to criminal
penalties, including prison terms.
Section 404
Requires that management and auditors establish internal controls a

nd reporting methods to ensure the adequacy of those controls. Som
e critics of the law have complained that the requirements in Section
404 can have a negative impact on publicly traded companies becau
se it's often expensive to establish and maintain the necessary inter
nal controls.
Section 802
contains the three rules that affect recordkeeping. The first deals wit
h destruction and falsification of records. The second strictly defines
the retention period for storing records. The third rule outlines the sp
ecific business records that companies need to store, which includes
electronic communications.
Other Provisions
• mandated disclosure of transactions and relationships that are off

-balance sheet that could impact financial status.
• near-ubiquitous prohibition of personal loans from a corporation t
o executives.
• establishment of fines and terms of imprisonment for tampering o
r destroying documents in events of investigations or court action.
• requirements for attorneys who represent public companies befor
e the SEC to report security violations to the CEO.
• Protection for whistleblowers is another significant provision in th
e Sarbanes-Oxley Act.
Public Company Accounting Oversi
ght Board (PCAOB)
The Public Company Accounting Oversight Board (PCAOB) was est
ablished with the passage of the Sarbanes-Oxley Act of 2002.
• The board's aim is to protect investors and other stakeholders of

public companies by ensuring that the auditor of a company's fina
ncial statements has followed a set of strict guidelines.
• PCAOB is overseen by the Securities and Exchange Commission

.
• Firms that audit public companies, brokers and dealers must regi
ster with PCAOB. Registered firms are subject to inspection of th
e audits they have performed.

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Sarbanes-Oxley (SOX) Act of 2002

The Enron bankruptcy, at $63 billion in assets, was the larg

• Enron executives used fraudulent accounting practices to

• WorldCom was the biggest accounting scandal in the history of the U

Internal controls are the mechanisms, rules, and procedures impl

Preventive control : documentation and authorization practices. A

Detective controls : reconciliation, used to compare data sets, an

What is the Sarbanes-Oxley (SOX) Act of 2002?

• The U.S. Congress passed the Sarbanes-Oxley Act of 2002 on July 30

• To help protect investors from fraudulent financial reporting by corporations.

• It mandated strict reforms to existing securities regulations and imposed toug

Understanding the Sarbanes-Oxley (SOX) Act

The rules and enforcement policies amended/supplemented existing laws dealin

mandates that senior corporate officers personally certify in writing t

Requires that management and auditors establish internal controls a

• mandated disclosure of transactions and relationships that are off

• The board's aim is to protect investors and other stakeholders of

• PCAOB is overseen by the Securities and Exchange Commission

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