significantly affects the regulation of accountants; imposes new responsibilities
and liabilities on CEOs, CFOs and Boards of Directors; and extends criminal penalties,
in terms of both fines and prison sentences, for corporate fraud, destruction
of documents and impeding investigations. Corporate governance became mandatory.
Public Company Accounting Oversight Board
SOX creates the Public Company
Accounting Oversight Board to oversee the auditing of public companies. The Board
will consist of five members appointed by the SEC. The Board will register public
accounting firms, establish the standards for audits of public companies, conduct
inspections of public accounting firms, investigations and disciplinary hearings
and have the power to impose sanctions.
prohibits public accounting firms from performing specific services for their
audit clients, including internal audit services and financial information systems
design and implementation. The Act provides that auditors may engage in tax services
or other services not specifically excluded if approved in advance by the Audit
Committee. SOX requires that all non-auditing services be pre-approved by the
Audit Committee except for the de minimus non-audit services. In addition to further
approval by the Audit Committee of non-audit services, issuers will be required
to disclose to investors in their periodic reports the nature of such approval.
SOX also requires that audit partners or reviewing audit partners cannot serve
on the issuer’s account for more than five years. In addition, a company’s CEO,
controller, CFO, chief accounting officer, or equivalent may not have been employed
by the company’s auditors or participated in any capacity in the audit of the
company during the one year period preceding the date of the initiation of the
Under SOX, the Audit Committee must
be composed solely of independent directors. Members of the Audit Committee cannot
receive any consulting or other fees other than board or committee fees. Audit
Committee members cannot be an "affiliated persons of the company or a subsidiary."
SOX disqualifies for Audit Committee membership a director who owns a controlling
interest in the company. The Audit Committee under SOX is responsible for appointment,
compensation and oversight of the public accounting firm. Significantly, the Audit
Committee is now charged with resolving any disagreements between management and
the independent accounting firm. SOX requires that the Audit Committee establish
a complaints procedure for receipt, retention and treatment of complaints regarding
accounting, internal accounting controls or auditing. The Audit Committee is specifically
authorized to engage independent counsel and other advisors.
The SEC will
direct the NYSE and Nasdaq to "de-list" any public company from their
exchange whose audit committee does not comply with a new list of requirements
affecting auditor appointment, compensation and oversight.
SOX requires each principal executive officer and principal financial
officer to certify with respect to each periodic report containing financial statements
(Forms 10-K, 10-Q and 20(f)) filed with the SEC that the report complies with
the requirements of 13(a) or 15(d) of the Exchange Act and that information in
the report fairly presents the financial condition and results of operations of
the issuer. SOX also instructs the SEC to issue rules requiring certification
in each annual or quarterly report as to not only the financial condition and
results of operations but also as to internal controls. In addition, SOX mandates
the SEC within 30-days by rule to require CEO’s and CFO’s to make specified certification
in each annual and quarterly report filed with the SEC. SOX makes it unlawful
for any officer or director to take any action to fraudulently influence any independent
public accountant in the performance of the audit.
All annual reports
filed with the SEC containing financial statements must include all material corrections
identified by a public accounting firm.
To ensure timeliness of information,
each company must disclose “on a rapid and current basis” information about the
company’s financial condition or operations as the SEC determines is necessary
or useful to investors or the general public.
The SOX deadline for insiders
to report any trading in their companies’ securities is within two business days
after the execution date of the transaction.
Forfeiture of Bonuses
SOX provides that if there is a requirement that the issuer
restate its financial statements due to material non-compliance as a result of
misconduct relating to any financial reporting requirement under the securities
laws, the Chief Executive Officer and the Chief Financial Officer of the company
must reimburse the issuer for (i) any bonus or other incentive-based or equity-based
compensation received by that person from the issuer during the twelve- month
period following the first public issuance or filing of the financial document
embodying the misleading financial reporting and (ii) any profits realized from
the sales of securities during that twelve- month period.
SOX makes it unlawful for any director or executive officer to
purchase, sell, acquire or transfer any equity security of the issuer (other than
exempted securities) during certain blackout periods under 401(k) and other similar
retirement plans, if the director or officer had acquired the equity security
in connection with his or her service or employment as a director or executive
officer. Any profits made from violation of insider trading during blackout periods
should be returned to the issuer. SOX requires notice of certain blackout periods
be given to officers, directors, the SEC and to all affected participants in the
Professional Responsibility of Attorneys
that the SEC adopt standards for attorneys appearing and practicing before the
SEC that would 1) require attorneys to report evidence of material violations
of the securities laws or breach of fiduciary duty or similar violations to the
chief legal officer or chief executive officer of the issuer; and 2) if the chief
legal officer or chief executive officer does not appropriately respond, report
the misconduct to the Audit Committee or another committee with no inside directors
or to the board of directors.
Extension of Credit to Insiders
public company may extend, modify or renew any personal loan to its executive
officers or directors. With limited exceptions, SOX makes it unlawful for the
issuers to directly or indirectly extend credit to directors or executive officers.
Disclosure of Transactions Involving Management and Principal Stockholders Trades
by executive officers and directors and principal stockholders must be reported
to the SEC within two days of such transaction.
on Internal Controls
Under section 404 of SOX, the SEC must adopt rules
requiring that each annual report contain an internal control report. The registered
public accounting firm auditing the issuer must attest to the assessment of the
internal controls made by senior management of the firm.
Code of Ethics
for Senior Financial Officers
SOX requires the chief financial officers
of the issuer to be bound by a code of ethics and requires that any change or
waiver to the code of ethics be reported on Form 8-K. SOX also requires disclosure
of the member of the Audit Committee who meets required financial expertise standards.
SOX increases criminal penalties. The maximum
penalty for securities fraud has been raised to 25 years. There are new crimes
with potential 20-year sentences for destroying, altering or fabricating records
in federal investigations or any scheme or attempt to defraud shareholders. CEOs
and CFOs must certify in each periodic report containing financial statements
that the report fully complies with Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934 and that the information fairly presents the company’s financial
condition and results of operations. Fines and penalties have also been increased
for issuing false statements or failing to certify a financial report to a $5
Million fine and a 20-year imprisonment. SOX requires preservation of documents
relating to an audit for five years and creates a 10-year felony for destroying
such documents. Electronic documents such as e-mails also need to be preserved.
Charges for mail and wire fraud are raised to 20 years. In addition, SOX prevents
officers and directors guilty of securities fraud from discharging liability for
securities fraud in bankruptcy.
For analysis on the impact of SOX on coporations,