Sarbanes-Oxley Act

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Sarbanes Oxley Act

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The Sarbanes-Oxley Act of 2002, is propounded by the sponsorPaul Sarbanes and its Representative Michael G. Oxley.This law is designed by being influenced from the financialscandals prevalent in economy, such cases are Enron andWorldCom.This law is designed with an objective to formulate the strictstandards against all US publicly traded companies. Securitiesand Exchange Commission (SEC) and Public CompanyAccounting Oversight Board (PCAOB), which has an obligationto oversee, regulate, inspect, and create disciplinary standardsfor accounting firms with respect to the specific roles of them asauditors of public companies, is incorporated under this act.Introduction

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The lack of credibility caused by financial scandals ofEnron andWorldcomwas responsible for theintroduction in 2002 of the Public CompanyAccounting Oversight Board (PCAOB)by the SEC inthe United States, and the Canadian PublicAccountability Board (CPAB)by the CanadianInstitute of Chartered Accountants (CICA).The PCAOB will oversee professional accountants whoare able to practice before the SEC on large companieswhose stock is traded on U.S. stock exchangesProvision for PCOAB

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The duties expected of a profession are themaintenance of:Competencein the field of expertise.Objectivityin the offering of service.Integrityin client dealings.Confidentialitywith regard to client matters.Disciplineover members who do not discharge theseduties according to the standards expected.Responsibilities and Duties

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Significant provisions:TITLE I: PublicCompany Accounting Oversight Board101Establishment and administrative provisions. The Board:•Is a nonprofit corporation, not an agency of the U.S. government.•Will have five financially literate members who are prominent individuals of integrity and reputation with a commitment to theinterests of investors and the public.•Has authority to set standards related to audit reports and to conduct inspections of registered public accounting firms.102Registration with the Board:•Accounting firms auditing public companies must register with the PCAOB.103Auditing, quality control, and independence standards and rules. The Board:•Will establish or adopt rules regarding the conduct of audits and regarding audit firm quality control standards.•Will require audit firms to describe the scope of testing of issuers’ internal control structure.104Inspections of registered public accounting firms. The Board will:•Inspect annually registered accounting firms that audit more than 100 issuers.•Inspect at least every three years registered accounting firms that audit fewer than 100 issuers.•Publicly report results of its inspections.105Investigations and disciplinary proceedings. The Board will:•Adopt procedures for disciplining registered accounting firms.•Require registered accounting firms to provide documentation and testimony that the Board deems necessary to conduct investigations.•Be able to sanction registered accounting firms for noncooperation with investigations.106Foreign public accounting firms. Foreign accounting firms must comply with the same rules related to the PCAOB as domestic accounting firms.107Commission oversight of the Board. The SEC has oversight and enforcement authority over the Board, including in processes involving standardssetting, enforcement, and disciplinary procedures.108Accounting standards. The SEC will recognize as “generally accepted” accounting principles that are established by a standardsetter that meets theAct’s criteria.

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Provisions for Auditing CommitteeTITLE II: Auditor Independence201Services outside the scope of practice of auditors. There exist a variety of services that registered accounting firms may notperform for issuers, e.g., bookkeeping, systems design, appraisal services, and internal auditing, among others. Tax servicesmaybe performed, but only with preapproval by the audit committee.202Preapproval requirements. All audit andnonauditservices (with certain exceptions based on size and practicality) must beapproved by the audit committee of the issuer.203Audit partner rotation. The lead partner and reviewing partner must rotate off the issuer engagement at least every five years.204•Auditor reports to audit committees. Registered accounting firms must report to the audit committee issuesconcerning:Criticalaccounting policies and practices.•Alternative treatments of financial information within generally accepted accounting principles that have been considered bymanagement, and the preferred treatment of the accounting firm.•Significant written communications between the accounting firm and management.205Conforming amendments. This section details minor wording changes between the Sarbanes-Oxley Act and the Securities Act of1934.206Conflicts of interest. Registered accounting firms may not perform audits for an issuer whose CEO, CFO, controller, chiefaccounting officer, or other equivalent position was employed by the accounting firm during the one-year period preceding theaudit, i.e., a “cooling off period.”207Study of mandatory rotation of registered public accounting firms. The Comptroller General of the United States shall conductastudy addressing this issue.

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