Key Provisions of the Sarbanes-Oxley Act of 2002 Essay

Key Provisions of the Sarbanes-Oxley Act of 2002 Essay

  1. Immediately effective requirement for CEO and CFO to certify annual and quarterly reports, subject to criminal and fines and imprisonment.
  2. Prohibits auditing firm that provides auditing services for an “issuer” from performing specified non-audit services and requires Audit Committee approval of non-audit services not expressly forbidden (effective 180 days after the Board becomes operational)
  3. Adopts Public Company Audit Committee Standards

    • Must preapprove all auditing and non-auditing services to be provided by auditing firm except for de minimus exceptions
    • Responsible for appointment, compensation and oversight of auditing firm
    • Mandatory disclosure of non-auditing services to shareholders
    • Committee members must be independent. May not (except in capacity of member of the board or any board committee) accept any consulting, advisory or other compensatory fee from the issuer and may not be an affiliated person of the issuer or any subsidiary of the issuer
    • Auditing firm must report to Audit Committee on specified matters
    • Must establish procedures for complaints regarding accounting, internal accounting controls and auditing matters and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters
    • Must have authority to engage independent advisers

I believe the above provisions hold CEOs, CFO’s and accounting professionals accountable and responsible for their deeds. It will be harder for CEO’s and CFO’s to cook the books and fudge financial statements when they adopt Public Company Audit Committee Standards. When audit committee members are independent and not associated to the issuer, the likelihood of fraud is minimized to a large extent.

No longer can a CEO or CFO claim that he was not aware of what was happening in the books. With the CEO and CFO having to certify the annual and quarterly reports, subject to criminal and fines and imprisonment, this adds an additional responsibility on the CEO to be even more careful and not ignore or take lightly any of the potentially fraudulent activities. The excess regulation will increase costs to issuers but it will also improve investor confidence and in all probability will command a higher share price for issuers on the stock exchanges in America compared to stock exchanges in other parts of the world.


Public Law No. 107-204, 7/30/02

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