The Sarbanes-Oxley Act (SOX) was passed by Congress in 2002 (www.sarbanesoxley. com). The Act, along with subsequent regulations adopted in 2003 and 2004, affected the responsibilities of auditors, boards of directors, and corporate managers with respect to financial reporting. Also, the act established the Public Companies Accounting Oversight Board (PCAOB) that is now responsible for oversight of financial statement audits of publicly-traded corporations and the establishment of auditing standards in the U.S. The primary purpose of SOX was to increase investor confidence in the financial reports provided by corporations. To achieve this purpose, the Act established the PCAOB to oversee external auditing and corporate governance issues that potentially affect the reliability of financial reports. Further, SOX increased the responsibilities of corporate managers for producing reliable financial reports and specified restrictions on the activities of external auditors to increase their independence from their audit clients.
Though there are many provisions in the legislation and subsequent regulations, three issues are of primary importance for accounting. These involve the financial reporting responsibilities of the PCAOB, corporations (including their boards of directors and managers), and external auditors.
Responsibilities of the Public Companies Accounting Oversight Board The PCAOB (www.pcaob.com) reports to the Securities and Exchange Commission (SEC), which appoints members of the Board. The Board has five full-time members. The Board establishes auditing standards for external audits of publicly traded companies and oversees the accounting firms that provide these audits. Accounting firms that provide external audits of companies that report to the SEC must register with the PCAOB and report to the PCAOB information about their audit clients, audit fees, and the services provided to clients. As part of its oversight responsibilities for accounting firms, the PCAOB issues standards for accounting firms that provide guidance concerning auditor ethics and independence; supervision, hiring, and development of audit personnel; and client acceptance and continuation. Also, the PCAOB is responsible for inspecting auditing firms to ensure their compliance with SOX regulations and professional auditing standards.
The PCAOB is responsible for investigating potential violations of SOX regulations, the Board’s rules, and professional accounting standards. The Board may impose sanctions on accounting firms, including suspension from auditing public companies and civil penalties. The Board may refer these matters to the SEC and the Department of Justice for further legal action if it believes such action is needed. Responsibilities of Corporations
The Sarbanes-Oxley Act affects corporations that are required to report financial information to the Securities and Exchange Commission (SEC). These corporations must provide a certification from the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) along with their financial reports. The officers certify that the financial reports comply with requirements of the Securities Exchange Act of 1934 and contain information that fairly presents, in all material respects, the financial condition and results of operations of the issuer. A company’s balance sheet reports its financial condition 2
and its income statement and statement of cash flows report its results of operations. Consequently, the officers are required to confirm that the corporation’s financial statements reliably represent its economic activities. These provisions affect a company’s annual report (10-K) and quarterly reports (10-Q) that must be filed with the SEC. The penalty for falsely certifying the financial statements is a fine of up to $5 million and imprisonment for up to 20 years.
The reports signed by the CEO and CFO must state that:
• they have reviewed the financial reports
• the reports are...
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