Sarbanes-Oxley Act 2002_M3 Flashcards
Who are required to certify the financial reports before submitting to SEC?
Per Title III (Corporate Responsibility) of the Sarbanes-Oxley Act of 2002, corporate officials (CEO, and CFO) must both sign certain representations regarding annual and quarterly financial reports filed with the U.S. (SEC). The representations include that:
- they have reviewed the report.
- the report does not contain untrue statements or omit material information.
- the report fairly presents in all material respects the financial condition and results of operations.
- that significant deficiencies, material weaknesses, and fraud have been disclosed to auditors and the audit committee.
- they are responsible for the establishment and effectiveness of internal controls.
What should be in an organizations code of ethics for its senior managers?
- How to handle conflicts of interest in an ethical manner.
- Compliance with laws and regulations.
- Timeliness of disclosures in periodic financial reports.
What is whistle blower protection given under title VIII of the Sarbanes Oxley Act of 2002 and who should the whistle blower report any retaliation too?
Compensatory damages is given:
- Back pay with interest if whistle blower was wrongfully terminated.
- If there are any special damages such as discrimination, they will be entitled to compensation.
- Reinstatement at an equivalent seniority level.
- Retaliation should be reported to the Secretary of Labor.
What are the required title IV of Sarbanes Oxley Act of 2002 disclosures regarding pro forma financial statements?
- No material information has been omitted.
- Reconciliation with GAAP basis financial statements.
- No statements contained in the pro forma financials are untrue.
What does Sarbanes Oxley Act of 2002 say that the CEO and CFO signers of the report must assert?
- All significant deficiencies in the operation or design of internal controls that may have an adverse effect on the financial statements should be disclosed to both the issuer’s auditors and the audit committee.
- Any fraud by management should be disclosed to both the issuer’s auditors and the audit committee.
- The audit committee, as well as the issuer’s auditors, should be aware of significant internal control deficiencies.
- Fraud regardless of materiality should be disclosed. The fraud to be disclosed would have been perpetrated by management or an employee with a significant role in
internal controls, rather than just any employee
What were these organizations designed for?
PCAOB and COSO
- Congress, through the Sarbanes-Oxley Act of 2002, created the PCAOB to oversee public company and broker/dealer audits.
- The COSO is a private sector initiative that was established in the mid-1980s for the purpose of assessing fraudulent financial reporting. Both the Internal Control-Integrated Framework and the Enterprise Risk Management-Integrated Framework are COSO initiatives.
What are the requirements of the audit comittee financial expert?
- Sarbanes-Oxley requires that an issuer’s audit committee have at least one financial expert or disclose why not.
- Must have an understanding of GAAP and financial statements, be able to assess the application of accounting principles, have comparable experience applying accounting principles to entities that present a similar level of complexity of the issuer, and understand both internal controls and audit committee functions.
- The audit committee is charged with negotiating the engagement of the external auditor and supervising their work.
- Qualifications as a financial expert: education, experience supervising a financial officer, experience overseeing auditors, or other relevant experience.
Who is responsible for selecting the Financial Expert?
- Qualification as a financial expert is a judgmental issue and is typically made by the Board of Directors.
- The Act provides some guidance but does not prescribe specific qualifications.
- The Board would evaluate the potential qualified individual based on his/her qualifications to serve on the audit committee and to be designated as a financial expert based on their mix of knowledge and experience.
What makes a contract voidable?
- If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable.
MITIGATIONS: (Contract will stand NOT VOIDABLE)
- If the director makes full disclosure of all of the facts to the disinterested directors or the shareholders, who then approve the transaction.
- The director can prove that the transaction was fair to the corporation.
What does SOX say management must report on regarding internal controls?
Financial statement disclosures include:
- Management’s assumption of responsibility for internal control.
- Management’s assessment of internal control effectiveness.
- A statement that the auditor has reported on management’s evaluation.
What is the main purpose of SOX?
- The Act specifically requires that the code of ethics include provisions for full, fair, accurate, and timely disclosure in periodic financial statements.
- The Act specifically requires that the code of ethics include provisions for honest and ethical conduct.
- The Act specifically requires that the code of ethics include provisions for compliance with laws, rules, and regulations
What are the consequences set by Sarbanes Oxley Act of 2002?
- An individual who knowingly executes or attempts to execute securities fraud will be fined or imprisoned not more than 20 years or both.
- The provisions of the Sarbanes-Oxley Act of 2002 provide for penalties for misrepresentation of company finance that may include both penalties and fines
What are the procedures set by the audit committee regarding managing employee complaints regarding accounting, internal controls, and audit?
- Procedures should be in place for addressing employee complaints.
- The policy for the retention of employee complaint records must be established.
- Maintaining the anonymity of the employee who raises the complaint is critical, assuming the employee wants it to be confidential.
What are the Title III Corporate Responsibility of the Sarbanes Oxley Act of 2002 requirements?
- The audit committee of the issuer must establish whistle-blowing mechanisms and procedures within the issuer.
- Corporate officials such as the CEO and CFO must certify that quarterly reports filed with the SEC fairly present the financial condition and results of operations.
- Each audit committee member of the issuer must be independent.
- The audit committee of the issuer is directly responsible for the appointment, compensation, and oversight of the registered accounting firm.
What are the criminal penalties for Title VIII corporate and criminal fraud accountability?
Altering Documents
- fined and/or imprisoned not more than 10 years.
AUDITORS - Must retain work-papers for 7 years/ fine and/or imprisonment for not more than 10 years.
Statute of Limitations for Securities Fraud
- 2 and 5 (the earlier of 2 years after discovery or 5 years later).
- Fined and/or imprisoned not more than 25 years.
