The Sarbanes Oxley Act of 2002

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THE SARBANES OXLEY ACT of 2002
Course Name and No: GEB2430
Ethics & Social Responsibility
Yanelis Diaz
Prof. Georges De Schryver
Saturday, December 01, 2012

THE SARBANES OXLEY ACT of 2002
The Sarbanes Oxley Act of 2002 was signed into law after a series of corporate financial scandals affected companies such as Enron, WorldCom, and Arthur Anderson. It provides a solid set of government rules that will discourage and punish corporate and accounting fraud and corruption by imposing severe penalties for wrongdoers, while protecting the interest of workers and shareholders. Acknowledged as the most significant change to securities laws since 1934, the Sarbanes Oxley Act, a new penal law, 18 U.S.C. $1348, became effective on July 30, 2002. The Act contains reforms for issuers of publicly traded securities, corporate board members, auditors, and lawyers. It was designed to improve the quality of financial reporting, accounting services, and independent audits (Zameeruddin, 2005). The provisions of the act apply to U.S. companies that are required to file annual reports with the Securities and Exchange Commission (SEC) as well as foreign companies that that are listed in the U.S. or are obligated to report to the SEC periodically. Title I of the Sarbanes Oxley Act stipulates that a new Public Company Accounting Oversight Board will be appointed and overseen by the SEC. The Board, which is made up of five full-time members, will oversee and investigate the audits and auditors of public companies and penalize for violations of laws, regulations, and rules. It is funded by fees to be paid by all public companies. The Board has the authority to set accounting standards and conduct annual quality reviews. The SEC will appoint the chairperson and other members of the board and members are not allowed to engage in any other professional or business activity while serving on the board. Prior to the Act, a common loophole for executive officers was that they did not sign off on company reports, and thus were not held accountable, for possible fraudulent activity within their company. The Sarbanes Oxley Act now requires personal certification by the company’s CEO and CFO of periodic reports files with the SEC. It also places a series of requirements and restrictions on executive officers and directors of companies, including a civil and criminal certification. The civil certification requires that CEO’s and CFO certify each quarterly and annual report, establish internal controls, and disclose of any fraud or significant deficiencies in design or operation of internal controls. The criminal certification requires that CEO’s and CFO certify that the information in the reports fairly represents the company’s financial condition and results of operations. The Act also imposes a severe fines and possible imprisonment for willfully certifying reports that are non-compliant with SEC regulations. With the effective date of the Act, it became unlawful to extend credit to a director or executive officer. This had an immediate effect on executive compensation: Any advances to officers and directors per personal expenses such as home purchases or college tuition are now strictly prohibited. Split dollar Life insurances, in which a company pays all or part of the premiums, as well as Stock option broker assisted trading plans may be considered extended credit by the company (Zameeruddin, 2005). Should company be required to restate its financial statements due to noncompliance with financial reporting requirements resulting from misconduct, the CEO and CFO are must reimburse the company for any bonuses or incentive based pay received within twelve months following the filing of the non-compliant document. Impacts of the Sarbanes Oxley Act to the accounting profession are quite dramatic. It affects not just the large accounting firms, but any CPA or auditor working for a publicly traded company. Audit requirements have changed under the new...
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