Overview of Sarbanes-Oxley Act

1. Overview of Sarbanes-Oxley Act • Corporate scandals resulted in numerous investigations by Congress and regulatory agencies • Congress responded with the Sarbanes-Oxley Act which some view as the most sweeping corporate reform legislation since the Securities Exchange Act of 1934 • The Act was signed into law by President Bush on July 30, 2002 • The SEC is responsible for implementation and will establish necessary rules in the coming months

2. Provisions of Sarbanes-Oxley Act • Creates Public Company Accounting Oversight Board (Meet the Board’s founding members) • Empowers audit committees to be the “client” and to oversee the audit function independent of management • Establishes new financial reporting requirements and criminal penalties for corporate misconduct • Requires financial statements to be certified by the CEO and CFO • Prohibits certain non-audit services

3. Bookkeeping or other services related to the accounting records or financial statements Financial information systems design and implementation Appraisal or valuation services, fairness opinions, or contribution-in-kind reports Actuarial services Internal audit outsourcing services Management or human resources functions Broker or dealer, investment adviser, or investment banking services Legal and expert services unrelated to the audit Any other service that the Public Company Accounting Oversight Board (Board) determines, by regulation, is impermissible Prohibited Non-audit Services The Securities Exchange Act of 1934 was amended to prohibit the following services most of which were previously prohibited by the SEC’s rule on auditor independence:

4. Provisions Affecting CPA Firms • Audit committees must approve audit and non-audit services • Firms must rotate the lead audit and review partners every five years • Audit documentation must be maintained for at least seven years • Firms may not audit a company if its CEO, CFO, controller, chief accounting officer, or person in a similar capacity worked for the firm during the one-year period prior to the initiation of the audit

5. Provisions Affecting CPA Firms • Auditors must describe their testing of internal control and report on their findings • Auditors must report to the audit committee: • All critical accounting policies and practices • All alternative treatments (and their implications) of financial information within GAAP discussed with management • Other material written communications between the firm and management (e.g., schedule of unadjusted differences and management letters)

6. Corporate Governance Changes • US stock exchanges have embraced requirements of Sarbanes-Oxley • Approved and proposed changes strengthen the integrity and independence of the BOD and its committees, especially the audit, nominating, and compensation committees • Read more about these changes at: • www.amex.com • www.nasdaq.com • www.nyse.com

7. Corporate Governance Changes

8. Demise of Andersen • Andersen closed its audit practice and offices after the firm’s June 2002 conviction for obstruction of justice related to Enron • Firm is no longer allowed to audit public companies under SEC rules as a result of the verdict • Andersen still exists but very few employees remain at the firm • Andersen was fined $500,000 and placed on five years probation as a result of the Enron verdict

9. Disposition of Consulting Units • The Big 5 firms began disposing of their consulting practices well before Sarbanes-Oxley, partially to address concerns over independence and conflicts of interest • The last two remaining Big 5 consulting units were recently disposed of • PwC sold its consulting practice to IBM for $3.5 billion • Deloitte Consulting went private and was renamed Braxton • Earlier dispositions • Ernst & Young consulting sold to Cap Gemini in Feb. 2000 • Andersen Consulting separated from Andersen in Aug. 2000, went public, and was renamed Accenture • KPMG Consulting went public in Feb. 2001, and was recently renamed BearingPoint

10. Current Look at the Big 4 Revenue (2) Prof. (2) Revenue % RankFirm $ million Staff A&ATaxMAS Other 1 PwC (1) 8,057 31,142 35 20 31 14 2 Deloitte & Touche (1) 6,130 20,472 33 21 35 11 3 Ernst & Young 4,485 13,871 58 39 0 3 4 KPMG 3,400 10,400 44 38 18 0 Source: Accounting Today: March 18- April 7, 2002 at www.electronicaccountant.com (1) Data include consulting practices sold or separated in 2002 (2) Revenue and staff figures do not reflect clients and staff gained after Andersen discontinued its audit practice

11. Corporate Scandals • 2002 has seen numerous corporate scandals and shareholder value has declined by billions of dollars • Highly publicized scandals include: TycoAdelphia Communications WorldCom Global Crossing Qwest ImClone • Get updates on corporate scandals from CNN Money’s “Fraud.inc” web site

12. Corporate Scandals Primer • Tyco – CEO and CFO charged with looting the company of more than $600 million • WorldCom – Corporate officers charged with issuing fraudulently prepared financial statements, CEO and CFO are currently under investigation regarding capitalization of certain expenses • ImClone – CEO admitted to trading on “insider” information prior to the FDA’s announcement regarding its cancer fighting drug • Adelphia Communications – Members of the company’s founding family charged with unapproved “borrowing” from the company to cover personal investment losses

13. Enron Update • Arthur Andersen LLP was found guilty of obstruction of justice on June 15, 2002. Two days later, the firm relinquished its membership in the SEC Practice Section. • Michael Kopper, former assistant to Andy Fastow, pleaded guilty to money laundering and conspiracy to commit wire fraud. He is cooperating in the government’s ongoing investigation. • Andy Fastow, former Enron CFO, was arrested on October 2, 2002 and charged with securities, mail and wire fraud, as well as money laundering and conspiracy. On October 31, a Grand Jury indicted him on 78 additional counts. • David Duncan, former Andersen partner in charge of the Enron audit, pleaded guilty on April 6, 2002 and is awaiting sentencing on obstruction of justice charges. • Enron continues to operate and is pursuing a plan to restructure under Chapter 11 bankruptcy.

14. New Fraud Standard - SAS No. 99 • New “brainstorming” meeting among audit engagement team about fraud risks and discussion about professional skepticism • Broader set of information gathered to assess fraud risks • Focus on the “fraud triangle” • Expand auditor responses to fraud risks • Mandate procedures in all audits to address ever-present risk of management override

15. The “Fraud Triangle” Opportunities Weak Board of Directors Weak Internal Controls Attitudes/Rationalizations Lack of a Code of Conduct Disregard for Financial Reporting Incentives/Pressures Tight Debt Covenants Unrealistic Analyst Expectations

16. Information to Assess Fraud Risks Analytical Procedures Fraud Risk Factors Other Information Brainstorming Inquiries Identified Fraud Risks

17. The ASB has issued two other new standards: SAS No. 97, Amendment to SAS No. 50 SAS No. 98, Omnibus-2002 SAS No. 97 – auditors may not provide a written report on a hypothetical transaction SAS No. 98 – omnibus standard that includes a number of amendments and revisions Other New SASs

18. “On the Horizon” • Joint Risk Assessments Task Force • Joint effort between ASB and IAASB • Considering a revision of the current risk model • Exposure draft is to be issued in December 2002 • Audit Committee Task Force • Consider impact of Sarbanes-Oxley Act on SASs • Modify establishment of understanding with client given that audit committees are now to be viewed as the “client” • Include additional required discussions in the communications with audit committees