On July 30, 2002, President Bush signed into law a revolutionary Act: the Sarbanes-Oxley Act, also known as the Public Company Accounting Reform and Investor Protection Act. In the wake of many financial scandals, this law establishes new accounting and control requirements on U.S. publicly owned companies. Administrated by the Securities and Exchange Commission, it aims at safeguarding against fraudulent accounting, protecting shareholders, and requires CEOs and CFOs to certify the accuracy and truthfulness of the accounts. Enron, WorldCom, Tyco International, Adelphia, and many others: all are known for highly-publicized frauds that resulted in $500 billion in the declines of share prices. In each of these scandals, the senior management did not behave ethically, which led to the misstatement of earnings and hit the confidence of investors.
[...] Corporate governance and accountability: Title III - “Corporate Responsibility”: The title mandates the civil responsibility of boards and audit committees for accuracy, validity, integrity and completeness of corporate financial reports. It explains specific limits on the behaviors of corporate officers and describes specific forfeitures of benefits and civil penalties for non-compliance. For instance, CEO and CFO should certify and approve the integrity of their financial reports quarterly. Title VIII “Corporate and Criminal Fraud Accountability”: The title describes specific criminal penalties for fraud by manipulation, destruction or alteration of financial reports Title IX “White-collar Crime Penalty Enhancement”: It increases the criminal penalties associated with white-collar crimes and conspiracies. [...]
[...] It constitutes the most costly aspect of the act for the companies to implement, because documenting and testing important financial manual and automated controls requires high effort. Title V “Analyst Conflicts of Interest”: The main purpose of this section is to restore investor confidence in the reporting of securities analysts. Thus, it defines the codes of conduct for securities analysts. It also requires the disclosure of knowable conflicts of interests. Title VI “Commission Resources and Authority”: This title also defines practices in order to restore investor confidence in securities analysts. [...]
[...] The contents of the Sarbanes-Oxley Act Sarbanes-Oxley contains eleven titles that describe specific mandates and requirements for financial reporting. The Act covers issues such as auditor independence, corporate governance, internal control assessment and enhanced financial disclosure. Auditor independence and internal control: Title I - “Public Company Accounting Oversight Board The act establishes a new quasi-public agency which is charged with overseeing, regulating, inspecting, registering and disciplining accounting firms in their roles of auditors of public companies. This title also creates a central oversight board tasked with registering auditors and defining the specific processes and procedures for compliance audits. [...]
[...] Miller, Sarbanes-Oxley Section 404 Work: Looking at the Benefits Leonce Bargeron, Kenneth Lehn, Chad Zutter, Sarbanes-Oxley and Corporate Risk-Taking Ivy Xiying Zhang, William E Simon, Economic Consequences of the Sarbanes- Oxley Act of 2002 Peter Iliev, The Effect of the Sarbanes-Oxley Act (Section 404) Kate Litvak, The Effect of the Sarbanes-Oxley Act on Non-US Companies Cross- Listed in the US Ehud Kamar, Pinar Karaca-Mandic, Eric Talley, Sarbanes-Oxley's Effects on Small Firms: What is the Evidence? Hollis Ashbaugh-Skaife, Daniel W. Collins, William R. [...]
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