Sarbanes-Oxley Act 2002 Is Also

Sarbanes-Oxley Act 2002 is also known as Public Company Accounting Reform and Investor Protection Act of 2002 and is most commonly called SOX or Sarbox. On July 30, 2002 the Act was introduced from United States federal law got a response with various numbers of major corporate and accounting scandals, which were affecting Enron, Peregrine Systems, WorldCom and Tyco International. In result, there was a decline in public trust for accounting and also reporting practices. Sarbanes-Oxley Act is named after the sponsors of the Senator Paul Sarbanes and the representative Michael G. Oxley. It was also planned to punish the corporate and fraud for accounting plus corruption as well which ensure the justice for the people with strong behaviors and to protect the workers and shareholders interest. The law was introduced for new rules with an objective to improve the accuracy and reliability of the disclosures to make the accordance of the security laws, in this way it will protect the investors. It was approved by the cote of 423-3 by the Senate 99-0. The act established new standards for all United States public companies for public accounting firms, management and boards. People who supported this Act believe that the legislation is important and can be useful but on the other hand critics say that it damages the economic even more rather than preventing it. It contains 11 sections including 302, 404, 401, 409, 802 and 906 from the additional Corporate Board responsibilities to criminal penalties. The requirement for this Act is the Securities and Exchange Commission to fulfill the rules which are required by the new law. A new public agency was established due to this Act namely Public Company Accounting Oversight Board or PCAOB which have the responsibility for regulating, disciplining accounting firms for their roles as auditors, inspecting and overseeing. It is found mostly in the area of public and media which focus on creating a clear compliance and motivation. Sarbanes-Oxley Act included various numbers of deadlines, the most important ones are that the companies must meet the financial reports and a certificate for end of any year showing financial statements after November 15, 2004 and small companies plus the foreign companies should meet these mandates for the statements after July 15, 2005. It is not for business practices and does not specify that how should a business store their records but it defines that which of the records should be stored and for how long. (George Pozgar, 2007).

Two different certificates came into effect under Sarbanes-Oxley Act, one civil (Section 302) and the other one is criminal (Section 906). Section 302 requires the Securities and Exchange Commission by SEC which passes rules to chief executive officers and chief financial officers of the public organizations to file the company's annual and quarterly reports to the SEC. They are also responsible for maintaining the internal controls of an organization and to ensure material information which is related to the company and to its consolidated subsidiaries within the entities. Internal controls must be evaluated as of a date within 90 days report. Section 906 comes under criminal penalties which come by civil penalties from Section 302. However, external auditors are required to make an opinion if the effective control over financial reporting was maintained or not by the management. This is an addition for the accuracy of the financial statements although the requirement to make a third opinion was regarding management was removed in 2007. (Linklaters).

Many of the people agree that SOX is the most important part of the legislation which affects the financial disclosure, corporate governance and public accounting. It sweeps the issues of auditors, corporate board members, publicly traded securities and lawyers. As mentioned above that SOX consists of 11 titles with multiple sections are the following,

Title One "Public Company Accounting Oversight Board (PCAOB)"

Sections: 101. Establishment administrative provisions, 102. Registration with the board, 103. Auditing, quality control and independence standards and rules, 104. Inspections of registered public accounting firms, 105. Investigations and disciplinary proceedings, 106. Foreign public accounting firms, 107. Commission oversight of the board, 108. Accounting Standards and 109. funding.

Title Two, "Auditors Independence"

Sections: 201. Services outside the scope of practice of auditors, 202. Pre-approval requirements, 203. Audit partner rotation, 204. Auditor reports to audit committee, 205. Confirming amendments, 206. Conflicts of interest, 207. Study of mandatory rotation of registered public accounting firms, 208. Commission authority, 209. Considerations by appropriate State regulatory authorities.

Title Three, "Corporate Responsibility"

Sections: 301. Public Company audit committees, 302. Corporate responsibility for financial reports, 303. Improper influence for financial reports, 304. Forfeiture of certain bonuses and profits, 305. Officer and director bars and penalties, 306. Insider trade during pension fund blackout periods, 307. Rules of professional responsibility for attorneys and 308. Fair funds for invertors.

Title Four, "Enhanced Financial Disclosures"

Sections: 401. Disclosures in periodic reports, 402. Enhanced conflict of interest provisions, 403. Disclosures of transactions involving management and principal stock holders, 404. Management assessment of internal controls, 405. Exemption, 406. Code of ethics for senior financial officers, 407. Disclosure of audit committee financial expert, 408. Enhanced review of periodic disclosures by issuers and 409. Real time issuer disclosures.

Title Five, "Analyst Conflicts of Interest"

Sections: 501. Treatment of securities analysts by registered securities associations and national securities exchanges.

Title Six, "Commission Resources and Authority"

Sections: 601. Authorization of appropriations, 602. Appearance and practice before the commission, 603. Federal court authority to impose penny stock bars and 604. Qualifications of associated persons of brokers and dealers.

Title Seven, "Studies and Reports"

Sections: 701. GAO study and report regarding consolidation of public accounting firms, 702. Commission study and report regarding credit ranges agencies, 703. Study and report on violators and violations, 704. Study of enforcement actions and 705. Study of investment banks.

Title Eight, "Corporate and Criminal Fraud Accountability"

Sections: 801. Short title, 802. Criminal penalties for altering documents, 803. Debts non-dischargeable if incurred in violation of securities fraud laws, 804. Statute of limitations for securities fraud, 805. Review of federal sentencing guidelines for obstruction of justice and extensive criminal fraud, 806. Protection for employees of publicly traded companies who provide evidence of fraud and 807. Criminal penalties for defrauding share holders of publicly traded companies.

Title Nine, "White Collar Crime Penalty Enhancements"

Sections: 901. Short title, 902. Attempts and conspiracies to commit criminal fraud offenses, 903. Criminal penalties for mail and wire fraud, 904. Criminal penalties for violations of the employees retirements security act of 1974, 905. Amendment to sentencing guideline relating to certain white collar offenses and 906. Corporate responsibility for financial reports.

Title Ten, "Corporate Tax Returns"

Sections: 1001. Sense of the Senate regarding the signing of corporate tax returns by chief executive officers.

Title Eleven, "Corporate Fraud and Accountability"

Sections: 1101. Short title, 1102, Tempering with a record of otherwise impeding an official proceeding, 1103. Temporary freeze authority for the Securities and Exchange Commission, 1104. Amendment to the Federal Sentencing Guidelines, 1105. Authority of the commission to prohibit persons from serving as officers or directors, 1106. Increased criminal penalties under Security Exchange Act of 1934 and 1107. Retaliation against informants. (Public Law)

In the mid of 2000 to 2002, huge corporate frauds occurred due to variety of different factors created by the conditions. There was a high public fraud happened to be at Enron, Tyco and WorldCom with conflicts of interest and compensation. It declined the market value of United States by $500 billion of investments which made almost 95 million Americans into deep problem who owned the stock directly from the companies. The roots which caused the frauds, contribute to the passage of SOX in 2002. Many of the contributing factors and events included the auditing firms and priority to SOX performed consulting work for the companies they audited, as the agreements were much more profitable than the auditing. The entire scenario presented the appearance of a conflict of interest, practice for bonus and stock with unstable stock prices resulted in pressure to manage the earning, decline of technology in 2000 in the overall market made the managers presumed to purchase a technology stock by selling them quietly made the invertors angry due to the losses, audit committees which comes under the category of board of directors who are responsible for the financial reports in United States corporation on the behalf of investors had scandals that proved that the members were not the expertise or did not practiced which resulted that they were not aware or independent of management, on the other hand security analysts did the same issuing a stock and then selling it while presuming which created almost the appearance of a conflict of interest. They are responsible for to analyze that who make buy and sell on the company stocks, help provided for the loads, bankers investments and who provides opportunities for conflicts. Last factor which caused a decline in U.S. overall market is that the bank provided huge loans to the companies, due to this both the investor and the bank got into deep problem by such bad loans, resulting the large payments settlement by the banks. The investors got intoxicated by fraud happened to them because of greedy people. Thousands of employees left as the stock market went to the peak but most of them left their jobs due to low pay as well. (Kerry Hannon, July 6, 2005) bill was passed by the President Bush after the corporate fraud nearly just after three weeks on April 25, 2002. It referred to the Senate Banking Committee which was clearly supported by the president and SEC. The bill was passed for the corporate fraud, regulatory board with investigative, enforcement powers to check out the accounting company, securities and laws for accounting and also to punish the corrupt auditors. However, more than 200 federal prosecutors were involved in this fraud. At the same time, the chairman of the committee, Senator Paul Sarbanes also prepared a bill which was passed on June 18, 2002 to the Senate Banking Committee. After few days, WorldCom accepted that it had overstated it by more than $7.2 billion during the past 15 months because of wrong calculations in accounting for its operating costs. On the following day, the Senator introduced the Senate Bill 2673 as well. A conference was held in the White House where the Senate formed a conference committee. When the bill got approved by the committee members they named it "The Sarbanes-Oxley Act of 2002." (Elisabeth Bumiller, July 31, 2002).

Section 404 was enacted in 2002, after the corporate accounting scandals to protect the investors. On November 2004, U.S. companies working on larger scale took effect with the financial matters that ended up, applies with the public company with more than 300 U.S. shareholders for presenting annual reports with the SEC. Although, SEC gave the same process to increase the scale of smaller U.S. companies and also to non-U.S. chosen company. The requirements of section 404 led a debate on if the company's costs of compliance are prohibited. Almost five hundred companies have reported short listed under the new law. A file report is required under the section 404 of Sarbanes-Oxley containing the following, a statement on the company's internal controls on the management of the company from an accounting firm that audited the company's finance statement, keeping the secret to any of the weakness of the internal controls in the company, a statement to recognize the framework to examine the company's internal control, a statement about the responsibilities of the management for the internal control over financial reports and a test by the management to check out the company's internal control whether the controls are effective or not. This report should be confirmed by the auditor for the effectiveness of the company's internal control including the maintenance of the company as well. The Sarbanes-Oxley Act only effects on non-U.S. companies who are cross listed in U.S. And also on the firms which belongs to less developed countries. However, as the halt of section 404 has not stopped the smaller companies which are non-U.S. companies from moving to delist although many of the companies are questioning about whether the new reporting will make the adjustment with law being very expensive and consuming a lot of time to maintain the U.S. market flow. Non-U.S. companies with large capital with huge financing needs will probably find that section 404 which is indeed a worthwhile but on the other hand, companies with smaller floats and less need to increase the capital in the markets may find section 404 as benefit to remain on the list. Companies who focus on the internal controls help them to be aware about the investors who are willing to start in private financings with some of the government control for their standard with the public company to apply the Sarbanes-Oxley. Many of the investors are seeing this as a benefit or assuring their funds participants that they are investing on the right place. Non-U.S. companies who are willing to raise their capital may not escape the Sarbanes-Oxley standards as some of the requirements will be insisted by the contract when the financing is provided by an investor including some other laws. It has became clear for the companies who are in the United States or are non-U.S. companies that if the investors are in small quantity than it will lead them to a lower stock market valuation (White & Case, April 6, 2005). Sarbanes-Oxley Act has affected the small companies comparatively to large or medium size companies. It is confirmed by the SEC as it is very hard to apply SOX, small companies are given time for one year extension as the firms were having problems to establish the requirements by SOX. Higher cost of SOX drained the small companies in financial crisis still Sarbanes-Oxley Act has insisted the small companies to comply with the same rules and regulation as the Act doesn't take small firms as a complication in the market structure like large companies. Larger scale companies have variety of problems such as accounting problems; thus, they are more pressurized for SOX controls as compared to smaller firms, they have a very simple business structure with simple financial statements. Small firms are usually owned by the entrepreneur because they don't have much investor interests as they won't cheat their families and public shareholders so there is less danger from there side. SOX believed that less attention of director leads towards fraud in trading as it is investigated that fraudulent act is mostly done in large corporation then in smaller ones. However, main purposes for SOX rules are made to decrease frauds. Many of the people expected after SOX passed in 2002 that the cost will reduce within a few years but still till 2006 cost of SOX remains the same. SEC expected a decline of 26% for SOX complying small and large companies in the second year but the companies found that the auditing fees have gone down of only 13% in the second year. These costs are taking away resources of the companies for they cannot spend or expand their company on any cost. Most of the companies went towards privatization since the passage of SOX but most of them were small firms with small revenue, assets and capital. There are many reasons for small companies who went private including that about 110 of the 236 firms were de listed in January 2001 and July 2003, about 60% of companies privatized because of high cost of SOX, in addition, about $900,000 cost increased for being public in pre-SOX but in post-SOX it went up to $1,954,000. Thus, these costs increased the price of audits plus higher premiums for the directors. Secondly, SOX requirements included that at least only three outside members and one financial expert should be in an audit committee. After the announcement for SOX, eventually increased the cost of public and private costs went much lower of about $50,000 to $100,000. Another reason is that, many of the public firms knew that they won't be able to spend much on their business after adopting SOX's regulation so they went out of the market but most of the large firms remained in the market for they had enough capital to spend. However, about 130% of small firms went towards privatization, the fact is the SOX cannot benefit the small public firms as the costs increases in the public sector. Compared to the large firms, small firms cannot handle the cost of compliance so they go private by deregistering from public market or by selling their firms to a private owner. After the SOX implementation, demand went up for CEO's and CFO's to attest the financial statements but most of the CEO's were not expertise in verifying the statement whether it was correct or not. They spend a lot of time in learning for the interpretation of financial statement. On the other hand, executives spent a lot of time to keep an eye on audits, also going in meetings to make sure that it is compliance with the SEC, making deadlines of reports filed in SOX, creating procedure and getting approval of the directors before releasing any financial reports. Increased cost in public sector did not improve the securities analysts, as a result small firms were not getting the amount of securities analysts that they needed. Lack of liquidity is another reason for companies moving towards private. Most of the firms entered in public market for improvement of liquidity but the firms that weren't liquid moved towards private after SOX was announced and became more beneficial. They felt that this will build up their firms by getting capital as this opportunity was not available for public companies. Thus, small firms entered the private section to avoid time pressures and tasks which are associated with SOX. There was another situation of SOX that mostly private firms are owned by public stockholders. About triple of 37% of Firms went private on the same year of the announcement was through a reverse stock split. This split is performed by converting thousand shares into one share. Most of the shareholders are forced to sell their shares back to the company which enables small companies to buy their all shares to reduce the amount of their shareholders to below three hundred. If a company has less then three hundred shares for them it is not possible to cope up with SEC and from complying with SOX. After the company get enough shareholders than rest of their shares are left in public sector's custody. Sarbanes-Oxley has also increased mergers of small firms. It has been noted that a lot of mid sized and small firms are merging with public companies, in this manner it helps small firms to expand. However, Sarbanes-Oxley Act of 2002 has built the investors confidence plus it has also improved internal controls, corporate governance and proper financial reporting. (Elina Grinberg, 2007).