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Sarbanes Oxley Act

Sarbanes Oxley Act. General Provisions of SOX. To make rules governing audits of public companies To oversee audits and audit firms Independent of Federal Government Self-funded through fees assessed on CPA firms and publicly traded companies

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Sarbanes Oxley Act

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  1. Sarbanes Oxley Act

  2. General Provisions of SOX • To make rules governing audits of public companies • To oversee audits and audit firms • Independent of Federal Government • Self-funded through fees assessed on CPA firms and publicly traded companies • Not applicable to NFP or foreign listed companies

  3. Governing Members • Five Members, three of whom must NOT be CPAs • If the chair is a CPA, that person must be out of the business of auditing for the prior 5 years

  4. PCAOB’s Duties • Write audit standards, temporarily they have adopted the AICPA’s • Register public CPA firms to do audits • Set Quality Control standards for audits • Do peer reviews of CPA firms – at least every three years • Investigate and discipline • CPE • Review company disclosures and financial statements at least every three years

  5. Provisions for CPA firms • Maintain audit papers for 7 years • Managing Partner rotation every 5 yrs. • Second partner rotation every 5 yrs. • Audit manager rotation every 7 years • Reports to audit committee • All material findings • Disclose fees for all types of services in proxy statement • Review disclosures of firm • Attest to Internal Control of firm

  6. Independence Rules • Can’t do other types of work for clients, de minimus exceptions • Bookkeeping • Systems design • Valuation services • Actuarial services • Internal audit • Management functions • Other work needs pre-approval by audit committee • Can’t do audit if CEO, CFO from their firm, 1 year wait period

  7. Audit Committee Reports • All critical accounting policies • Alternate treatments • Internal Control findings • Engagement letter • Independence letter • Management representation letter • Material weaknesses

  8. Corporate Provisions • Corporate Officers • Certify means they have • Reviewed the reports • Reviewed internal control • Certify that there are no material weaknesses • Certify that there is no fraud • Report fairly presents the financial condition of the company

  9. Corporate Provisions • Corporate Officers • Can’t influence audit • No trading during blackout periods • In pro-formas, no material untrue statements, reconciliation • No officer loans • File any trading information within two business days • Code of ethics • Disclose off-balance sheet financing • Disclose any non-GAAP financial measures

  10. Corporate Provisions • Audit Committee of Board • Responsible for oversight of external audit • Be independent of the firm • Set up whistle-blowing provisions • One must be financial expert

  11. Penalties General penalties • If alter, destroy, cover-up or falsify documents with objective to hinder investigation – fines and up to 20 years

  12. Penalties – Corporate Officers • Give back to firms any bonuses, incentive compensation or equity based compensation earned within 12 months • Give back profit on sales during blackout period • False certification - $1m and up to 10 yrs. • Willful false cert. - $5 m and up to 20 yrs. • Company can hold up any payments to officers

  13. Penalties Audit firms • Temporary suspension from industry • Temporary or permanent revocation of license • Can’t go to another firm if suspended or license revoked • Fines of up to $100,000 personal for each violation, firm up to $2 m • If intentional up to $750,000 personal, firm up to $15 m • Destroy working papers within 5 years – fine and up to 10 years.

  14. Statute of Limitations • Two years after violation found or • Five years after violation

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