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Sarbanes-Oxley Analysis

SOX 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.

Auditor Independence
SOX 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 audit.

Audit Committee
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.

Financial Reports
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 and Profits
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.

Blackout Periods
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 Plan.

Professional Responsibility of Attorneys
SOX requires 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

No 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.

Management Sign-Off 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.

Criminal Penalties
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, select
SOX Case Studies ...

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