sarbanes-oxley act sox logan cousins, jordan hensberger, darren kilby, emily messer, ben sweger
TRANSCRIPT
Sarbanes-Oxley ActSOX
Logan Cousins, Jordan Hensberger, Darren Kilby, Emily Messer, Ben Sweger
Pre-SOX Issues
●Auditing Conflicts of Interest
○ Prior to SOX, auditing firms were self-regulated and many firms also performed consulting work for firms they audited
●Boardroom mistakes○ Executives either did not fulfill
responsibilities or were inadequately prepared to understand the complexities of the business
○ Audit committees not independent of management
●Low funding from SEC○ SEC was not putting enough
money into enforcement and rule-making of financial reporting(Budget has since doubled)
Pre-SOX Issues
(Cont’d)
●Executive Stock Compensation
○ High pressures to make earnings in order for stock price to go up, and therefore compensation to go up
○ Stock options not treated as compensation expense, encouraging use
●Troubled Bank Loans○ Big banks loaned money to
several big name companies that appeared to be doing well but weren’t
○ Led to investors being falsely led to invest in failing companies (Enron….)
Enron Scandal - Background
●Energy company that also provided financial/risk management services to clients
●One of top 10 largest energy companies in world in late 90’s/early 2000’s
●Stock price peaked at $90 in August of 2000
●Top executives Ken Lay and Jeffrey Skilling pocketed over $100 million in combined compensation in 2001 before...
Enron Scandal - How did this
happen?
http://www.thebusinessowner.com/business-guidance/fraud-business-guidance/2013/07/the-fraud-triangle-2
Enron Scandal - Downfall
●In August of 2001, then VP Sherron Watkins alerts Ken Lay about potential accounting issues
●In October of 2001, Enron reported a loss of over $600 million
●By December 2001, Enron had filed for bankruptcy and SEC had already opened up formal investigation into accounting fraud at Enron
Enron Scandal -
Consequences
●Thousands of workers not only lost jobs but had worthless stock in pensions
●Investors lost over $60 billion within a matter of days
●Complete lack of trust in financial assurance of companies
●Downfall of Arthur Andersen
●SOX
Framework●SOX only enforced on Publically
Traded Companies
●Created PCAOB – Public Company Accounting Oversight Board
●The SEC -> PCAOB -> Public Companies
Audit Committee
● Audit Committee – Group selected from company’s Board of Directors to focus on audit process
● SOX created strict rules for Audit Committee’s of Public Companies:
○ Selects Independent Auditor
○ Oversight Financial Reporting process
○ Reviews SEC Filings (10-Q, 10-K, 8-K)
○ Oversee internal and external auditors to limit risks
Code of Conduct
● SOX forced public companies to create a Code of Conduct
● Code must be on company’s website or in filings with SEC
● Code must consist of:
○ Honest Behavior
○ Ethical actions during conflicts of interest
○ Accurate financial disclosures
○ Compliance with all rules and regulations
Document Retention
● SOX has implemented policies on how long certain types of documents must be retained for
● Documents include electronic copies
● Most documents have to be retained for at least 7 years
● Certain documents must be retained forever:
○ Stock ownership records
○ Bank statements
○ Training manuals
○ Contracts
Certification Requirement
• Required by the CEO and CFO of publicly traded companies
• Certify:
o Quarterly and annual reports
o Internal control functionality
o Inform Audit Committee and outside auditors of material weaknesses
o Inform Audit Committee and outside auditors of any fraud
o Identify necessary changes in internal controls
SOX Disallowances
• Incentive-Based Compensation
o Claw-back provision
• Company Provided Loans
• Coercion
• Whistleblower Retaliation
o Protection
o Including: discharging, demoting, suspending, threatening, harassing, or in any other manner discriminating
PCAOB
• Overseen by the SEC
• Establish audit standards and ethics rules
o Used ASB standards as foundation
• Registration Process
o Application
o Approval
o Fees
• Inspection and Discipline of CPA firms
Public Company Accounting Oversight Board
Independence
• AICPA Code of Conduct
• Concurring Auditor Opinions
o Engagement review/Concurring partner
o Evaluate engagement’s actions
• Auditor Rotation
o Partner Rotation
o Audit Firm Rotation - International
• Waiting period
o Revolving door policy
o Cooling-off period
• Performance of Nonaudit services
Impact on Other
Corporations
• High costs of compliance associated with
o Internal control
o Increased legal fees
o Increased personal liability obligations
• The burdens of the SOX have forced many smaller public companies to consider going private.
Impact on Other Service
Lines
• Accounting firms had to limit the number of services they could provide to one client
• Tax serviceso If a CPA firm also provides
audit services to a public client, tax services must be pre-approved by the client’s audit committee
• Advisory services are more in demand to help companies implement a SOX 404 compliance plan to adhere to internal controls requirements
Impact on Privately Held
Companies
• Recommended that Companies thinking about going public should adopt SOX governance practices
• Lenders and investors are requesting more detailed financial disclosures because SOX has become a benchmark at which every company’s F/S will be measured
• Private and non-profits have adopted similar whistleblower policies to public companies
Impact on Investors
• Risk management• Reduced fraud risk• Enhanced governance• Strengthened controls All of these have resulted from implementation of SOX
Their purpose: to strengthen investor confidence. • Sox has cut opportunities for
corporations to defraud institutional and individual investors
Five Years Post-Sox
The Economist. “Five years under the thumb.” (2007)
Negatives• Estimated law costs exceed any
benefits by $1.4 trillion• Firms have significantly reduced their
investment R&D and overall capital spending
• Firms are increasing their holdings of cash
• Successful whistleblowing by employees fell (from 20.7% to 15.6% success rate)
Positives• Serious frauds discovered by auditors
rose to about 50%• Costs of complying with SOX are
coming down
Ten YearsPost-Sox
John Coates & Suraj Srinivasan. “Sox after Ten Years: A Multidisciplinary Review.” (2014)
Negatives• Only 32.4% of firms reported an
internal control weakness when it actually existed
• More companies “going dark” & fewer IPOs in the 2000s
• Audit fees increased by 74-86% by 2006
Positives• Other countries adopting SOX-like
regulations• Lower tendency to meet forecasts
by managing earnings
SOX During Financial
Crisis:Negative Effects
Was SOX effective during financial crisis?
Clean Audit Report
Failure/Bailout
Bear Sterns January 28 March 14
Thornburg February 27 March 4
Northern Rock
July 25 September 14
US Bancorp February 20 November 14
Conclusion:Auditor’s may not been able to prevent financial crisis, but definitely had the chance to warn investors these companies were about to go under
John Coates & Suraj Srinivasn. “Sox after Ten Years: A Multidisciplinary Review.” (2014)
SOX During Financial
Crisis:Positive Effects
Evidence that suggest SOX improved some banks’ situations• Banks with fully
independent audit committees performed better
• Bank with auditors who specialized in banking were less likely to fail
Questions?
References
The Economist. “Five years under the thumb.” (2007). http://www.economist.com/node/9545905
Coates, John & Srinivasan, Suraj. Accounting Horizons, Forthcoming. “Sox after Ten Years: A Multidisciplinary Review.” (2014). http://ssrn.com/abstract=2379731
Klein, G. (2016). Ethics in Accounting: A Decision-Making Approach. Hoboken, NJ:Wiley.
One Year Later, The Impact Of Sarbanes-Oxley. (n.d.). Retrieved November 28, 2015, from http://www.forbes.com/2003/07/22/cz_af_0722sarbanes.html
NACD Library. (n.d.). Retrieved November 27, 2015, from https://www.nacdonline.org/Resources/Article.cfm?ItemNumber=564
Lowengrub, P. (2005, December 6). The Impact Of Sarbanes Oxley On Companies, Investors, & Financial Markets. Retrieved November 28, 2015, from http://www.s-ox.com/dsp_getfeaturesdetails.cfm?cid=1141
Cushwaha, R. (2004, January 16). The Impact of Sarbanes-Oxley on Corporate Tax Departments. Retrieved December 1, 2015, from http://www.accountingweb.com/practice/practice-excellence/the-impact-of-sarbanes-oxley-on-corporate-tax-departments