Beyond Sarbanes-Oxley Compliance

Effective Enterprise Risk Management

Anne M. Marchetti

• Publisher: Wiley
• Year: 2016
• Print ISBN: 9780471726265
• eBook ISBN: 9781119378389
• Edition: 1
• Topic: Business
• Subtopic: Managerial Accounting
• Index: Business

Designed to lead financial managers from initial compliance with the Sarbanes-Oxley Act, through ongoing maintenance and monitoring, Beyond Sarbanes-Oxley Compliance helps readers seize this opportunity to revitalize their business practice, drive greater performance, and transform their finance organization into a key contributor to the business. Focusing on the present and future financial road ahead, Beyond Sarbanes-Oxley Compliance explores how to implement enterprise risk management processes that comply with Sarbanes-Oxley 302/404/409 requirements, ways to build on initial compliance activities that will improve financial management processes and profitability, compliance and quarterly close checklists, timelines, and table summaries to help readers achieve their goals, and much more.

PART ONE
INITIAL COMPLIANCE

1
SARBANES-OXLEY ACT OVERVIEW

Enron, Arthur Andersen, WorldCom, Tyco, Adelphia. These companies have become household names mostly because of their past display of corporate greed, fraud, and accounting improprieties. The offenses of these few organizations are not representative of the majority of more than 15,000 public companies in the United States, yet the results of their abuses are far reaching. When the details of corruption emerged, and stock prices and retirement savings plummeted, the American public became outraged and demanded reform. On July 30, the U.S. Congress answered this public outcry for change and enacted the Sarbanes-Oxley Act of 2002 (the “Act”).

The Act was signed into law to improve the accuracy and transparency of financial reports and corporate disclosures, as well as to reinforce the importance of corporate ethical standards. As a result, the Securities and Exchange Commission (SEC) issued rules outlining the provisions of the Act. In addition, the New York Stock Exchange (NYSE), the American Stock Exchange (Amex) and the over-the-counter Nasdaq Stock Market (Nasdaq), have all significantly modified the standards for listing stocks on their exchanges. Many view the Act’s provisions for internal controls over financial reporting (Section 404) and executive certifications (Section 302) as painful and costly to implement with little derived benefit. Others see the mandated changes as an opportunity to implement best business practices, drive greater performance, and boost investor confidence.

OVERVIEW OF THE ACT

The Act is the most significant legislation impacting the accounting profession since the Securities Acts of 1933 and 1934, which it amends. It addresses a wide range of matters relevant to publicly held issuers and their auditors, including auditor oversight and independence, corporate responsibility for financial reports, and enhanced financial disclosures. The Act is composed of 11 Titles as outlined below.

Title Summaries

Title 1. Public Company Accounting Oversight Board (PCAOB or “Board”)

The Act establishes the board as a private, nonprofit company funded by annual accounting support fees assessed to issuers¹ (as defined in Section 3 of the Securities Exchange Act of 1934 (15 U.S.C.78c)). The board’s duties include the mandatory registering of public accounting firms that prepare audit reports; establishing auditing, quality control, ethics, and independence standards relating to the preparation of audit reports; conducting inspections of registered public accounting firms; and enforcing compliance with the Act.

Title 2. Auditor Independence

Title 2 prohibits registered public accountants conducting an issuers financial statement audit from performing nonauditing services such as bookkeeping, the design and implementation of financial information systems, appraisals, valuations, fairness opinions, internal audit outsourcing, and management functions. All audit and nonaudit services require preapproval by the audit committee of the issuer. Additionally, there are provisions for audit partner rotation, specific reporting requirements by registered public accounting firms to the issuers’ audit committee, and an absolute prohibition of an audit firm providing audit services to clients for one year if the client has hired certain employees of the registered public accounting firm in key financial positions.

Title 3. Corporate Responsibility

This provision of the Act mandates the SEC to direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with the following Act requirements:

• Existence of audit committee oversight of registered public accounting firm
• Board of directors/audit committee independence
• Procedures for receiving complaints concerning accounting or auditing matters and anonymous employee concerns relating to questionable accounting or auditing matters established by the audit committee
• Audit committee authority to engage independent counsel and other advisors
• Provision of appropriate funding, as determined by the audit committee, for payment to the registered public accounting firm and to advisors hired by the audit committee

Title 3 also requires chief executive officer (CEO) and chief financial officer (CFO) certifications of financial statements, outlines penalties for corporate officers and directors for material noncompliance, and prohibits insider trading during pension fund blackout periods.

Title 4. Enhanced Financial Disclosures

Title 4 outlines requirements to help assure the accuracy of financial statements and supporting financial disclosures. It requires reporting of material unconsolidated and off-balance sheet transactions as well as mandates that pro forma financial information is factual and complete, and reconciles with the financial condition and results of operations of the issuer. Personal loans to executives are prohibited; issuers are required to disclose whether or not they have a code of ethics for senior financial officers, and mandates that the audit committee include at least one financial expert as defined by the Act. This provision also outlines requirements regarding management’s assessment of internal controls and the real-time disclosure of material changes to financial conditions or operations.

Title 5. Analyst Conflicts of Interest

This section of the Act requires the SEC, or national securities exchanges and national securities associations, to implement rules to improve “public confidence in securities research, and to protect the objectivity and independence of securities analysts ….”²

Title 6. Commission Resources and Authority

Pursuant to Title 6, $98 million in funding is authorized to the SEC to hire an additional 200 professionals to provide enhanced oversight of auditors and audit services required by Federal securities laws.

Title 7. Studies and Reports

Title 7 authorizes the General Accounting Office (GAO) and the SEC to perform studies and issue reports investigating the consolidation of public accounting firms; the role of credit rating agencies in the securities market; the number of professionals found to have aided and abetted a violation of securities laws from the period January 1, 1998, to December 31, 2001; the enforcement actions taken by the Commission involving violations of reporting requirements; and whether investment banks and financial advisers assisted public companies in obfuscating their true financial condition.

Title 8. Corporate and Criminal Fraud Accountability

This provision of the Act, which is also referred to as the Corporate and Criminal Accountability Act of 2002, details the penalties for the destruction of corporate audit records and the willful destruction, alteration, or falsification of records in Federal investigations and bankruptcy proceedings. This section also establishes a five-year record retention period for audit or review workpapers and provides protection for whistleblowers.

Title 9. White-Collar Crime Penalty Enhancements

The Act in Title 9, which is also referred to as the White-Collar Crime Penalty Enhancement Act of 2002, modifies the Federal Sentencing Guidelines to increase the penalties for white-collar crimes. More importantly for issuers, it establishes a requirement for the CEO/CFO certification of periodic financial statements and specifies the penalties for the failure to certify and the willful certification of knowingly false financial reports. Penalties range from $1 million to $5 million and may include imprisonment for up to 20 years depending on the violation.

Title 10. Corporate Tax Returns

Title 10 s...

Table of contents

• Cover
• Table of Contents
• Title
• Copyright
• Dedication
• ACKNOWLEDGMENTS
• PREFACE
• PART ONE: INITIAL COMPLIANCE
• PART TWO: ONGOING MAINTENANCE AND MONITORING
• PART THREE: BEYOND COMPLIANCE
• APPENDIX A: SARBANES-OXLEY SECTION
• APPENDIX B: SARBANES-OXLEY SECTION
• APPENDIX C: SARBANES-OXLEY SECTION
• APPENDIX D: EVALUATION QUESTIONS TO UNDERSTAND THE CURRENT STATE OF CONTROL PROCESSES
• APPENDIX E: INTERNAL CONTROL OVER FINANCIAL REPORTING
• APPENDIX F: EVALUATING CONTROL DEFICIENCIES
• APPENDIX G: SAMPLE DOCUMENTATION
• APPENDIX H: AS2 CONTROL TESTING PROVISIONS
• APPENDIX I: RESPONSIBILITIES OF INTERNAL AUDITING
• APPENDIX J: ACTUAL INTERNAL CONTROL DISCLOSURES
• INDEX
• END USER LICENSE AGREEMENT