Provisions of SOX

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Passage of SOX
Provisions of SOX

 

The Sarbanes–Oxley Act (“SOX”) contains 11 sections (or titles).  Each section contains specific requirements for financial reporting.  

Title 1.         Public Company Accounting Oversight Board (PCAOB)

Title I of SOX contains nine sections related to the establishment of the Public Company Accounting Oversight Board (“Oversight Board”).  The Oversight Board provides independent oversight of public accounting firms providing audit services.  The Oversight Board also is responsible for registering auditors, defining processes and procedures for compliance audits, inspecting and policing conduct and quality control, and generally enforcing compliance with SOX mandates.

Title 2.         Auditor Independence

Title II of SOX consists of nine sections that establish standards for external auditor independence.  The goal of Title II of the Act is to auditor’s limit conflicts of interest.  Title II also addresses new auditor approval requirements, audit partner rotation, and auditor reporting requirements.  The new provisions regarding auditor independence restrict auditing companies from providing non-audit services (e.g., consulting services) for the same clients in which they audit.

Title 3.         Corporate Responsibility

Title III of SOX contains eight sections and mandate senior executives take individual responsibility (and liability) for the accuracy and completeness of corporate financial reports.  No longer can corporate executives deflect responsibility for the inaccuracies of their financial statements.  Title III of SOX also defines the interaction between external auditors and corporate audit committees, and limits the permissible behavior of corporate officers.  This section of SOX contains forfeiture provisions and civil penalties for non-compliance.  For example, Section 302 requires that the company's "principal officers" (usually the Chief Executive Officer and Chief Financial Officer) certify the veracity of their company’s financial statements.

 

Title 4.         Enhanced Financial Disclosures

Title IV of SOX has nine sections that describe the enhanced reporting requirements for financial transactions, including off-balance-sheet transactions, pro-forma figures and corporate officers’ stock transactions.  Title IV of SOX also requires internal controls for assuring the accuracy of financial reports and disclosures, as well as mandates audit and reporting controls.  Companies are also mandated to provide prompt reporting of material changes in their financial condition.  The Securities and Exchange Commission (“SEC”) now has enhanced power to review corporate reports.

Title 5.         Analyst Conflicts of Interest

Title V of SOX has only one section, but it is still an important one.  This section includes defines the codes of conduct for securities analysts and requires disclosure of knowable conflicts of interest.  This measure is meant to restore investor confidence in the reporting of securities analysts.

Title 6.         Commission Resources and Authority

Title VI of SOX contains four sections that defines various practices aimed at restoring investor confidence in securities analysts.  It also defines the SEC’s authority to punish securities professionals who deviate from standard practices.  The SEC now has the power censure or even bar a securities professional from practicing.  The SEC’s power applies to professionals, including brokers, advisors, and dealers.

Title 7.         Studies and Reports

Title VII of SOX consists of five sections and requires the Comptroller General and the SEC to perform various studies as well as report their findings.  These studies and reports are meant to address the effects of consolidation within the large public accounting firms, analyze the role of credit rating agencies have within the operation of securities markets, discuss securities violations and enforcement actions, and determine whether investment banks assisted Enron, Global Crossing and others players in the financial services industry manipulated earnings and obscured their true financial conditions.

Title 8.         Corporate and Criminal Fraud Accountability Act of 2002

Title VIII of SOX, also called the Corporate and Criminal Fraud Accountability Act of 2002, consists of seven sections.  It describes the stiff criminal penalties associated with being guilty of manipulating, destroying or altering of financial records or otherwise interfering with investigations.  The title also provides certain protections for whistle-blowers.

Title 9.         White Collar Crime Penalty Enhancement Act of 2002

Title IX of SOX, also called the White Collar Crime Penalty Enhancement Act of 2002, consists of six sections. This section increases the criminal penalties associated with white-collar crimes and conspiracies. It recommends stronger sentencing guidelines for those guilty of financial/security-related crimes.  A criminal punishment also is implemented for those corporate officers who fail to certify corporate financial reports.

Title 10.     Corporate Tax Returns

Title X of SOX consists of only one section.  The section confirms that the CEO of a public company should sign the company tax return. 

Title 11.     Corporate Fraud Accountability Act of 2002

Title XI of SOX, also known as the Corporate Fraud Accountability Act of 2002, consists of seven sections.  It identifies corporate fraud and records tampering as criminal offenses and provides specific penalties for those crimes.  Title XI revises sentencing guidelines and stiffens penalties for offenses.  This Title also enables the SEC to temporarily freeze financial transactions or payments that are deemed "unusual".

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