Sarbanes- Oxley Act

Lack of confidence in financial reporting and the role of the independent auditor due to major frauds, such as Enron, WorldCom, etc. prompted action by Congress

Created by (D-Maryland)US Senator Paul Sarbanes and (R-Ohio)US Congressman Michael Oxley

Signed into law July 30, 2002

Restore the public confidence in both public accounting and publicly traded securities Assure ethical business practices through heightened levels of executive awareness and accountability

The Solution: Creation of the Public Company Oversight Board (the Board) Created as a non-profit organization, the Board will oversee audits of public companies; it is under the authority of the SEC but above other professional accounting organizations such as the AICPA

The Board is comprised of 5 members (appointees), with a maximum of two CPA’s

Conduct inspections and investigations

--mandatory registration of public accounting firms

–Adopt auditing standards

Coordinate and conduct discipline proceedings with the SEC

Audit functions and all other non-audit functions provided to the audit client must be pre-approved by the Board (such as tax services)

Audit Partner rotation – Lead partner on 5 years, off 5 years; other partners on 7 years, off 2

corporate responsibilty The Solution : Audit Committee (^{committees est. by the board of a company for the purpose of overseeing financial reporting}) are now the audit client. Establishes minimum independence standards for audit committees Independence of the audit committee crucial in that it must (1) oversee and compensate RPAF to perform audit, and (2) establish procedures for addressing complaints by the issuer regarding accounting, internal control, etc. (this lays the foundation for anonymous whistleblowing)

RPAFs performing audits to issuers must report to issuer’s audit committees about: 1) critical accounting policies to be used in the audit, (2) any written communication with management, and (3) any deviations from GAAP in financial reporting i.e., an employee of an RPAF who works on an audit of an issuer may not turn around and directly go to work for that issuer – they must wait one year

CEOs and CFOs must certify in any periodic report the truthfulness and accurateness of that report – creates liability