Signed
into law by President Bush in 2002, the Sarbanes-Oxley Act (often shortened
to just Sarbanes-Oxley, or even SOX) represents the most dramatic change
to federal securities law since the 1930’s. The Sarbanes-Oxley
Act applies to all publicly traded companies, and is the federal government’s
response to accounting scandals involving businesses like Enron.
The purpose of the Sarbanes-Oxley Act is to ensure the board of directors of publicly held companies take responsibility for both receiving accurate information about the company’s finances and reporting accurately on those finances to the public. Sarbanes-Oxley also affects accounting firms and their auditing standards.
With so many provisions, complying with Sarbanes-Oxley can be an intimidating and confusing process. You may want to consider hiring a consultant to help you implement the necessary changes in your company. In the mean time, here is a brief overview of a few of the components of Sarbanes-Oxley:
Board Membership:
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In order to ensure proper financial governance, Sarbanes-Oxley requires the board of directors to be made up of five members who have a proven ability to review and comprehend financial documents.
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Of the five members, two must be either a Certified Public Accountant (CPA) or must have been a CPA. The other three must not be CPAs, nor can they be retired CPAs.
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Each of the five financially literate board members must serve a five-year term.
Board Responsibilities under Sarbanes-Oxley:
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The Board is responsible for adopting auditing, internal control and ethical standards for the company.
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The Board must adopt standards for evaluating public accounting firms and must require the firm keep accurate records supporting audit findings for a period of at least seven years.
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The Board must ensure each audit is approved by a second partner.
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The Board must develop internal controls in keeping with revised audit standards in order for the public accounting firm to evaluate the company’s compliance with said internal controls.
Public Accounting Firm Responsibilities under Sarbanes-Oxley:
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Certified public accounting firms who wish to work with public companies must register with the Board, and must pay a registration fee to cover the costs of the review of their application by the Board.
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If a firm audits more than 100 issues, they must comply with an annual inspection. If a firm audits less than 100 issues, the inspection will take place every three years.
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Sarbanes-Oxley states if a certified public accounting firm performs an audit of a publicly traded entity, they are not allowed to provide any other non-audit service. This includes bookkeeping services, consulting services, legal services, systems implementation and management.
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Non-audit services can only be performed if they have been pre-approved by the Board, investors have been notified, and the fees for non-audit services are less than 5% of the total fees paid to the firm.
Company Staff Responsibilities under Sarbanes-Oxley:
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The Chief Financial Officer and the Chief Executive Officer must provide a letter stating the financial data they have provided the auditors is accurate. This letter must be provided to the auditing firm before the audit can be approved, and must be included with the published audit.
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Company executives and staff must not withhold financial information from the auditors, or attempt to influence the audit findings in any way.
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Loans may not be issued to a director or executive officer of a publicly held company.
For more information and additional details on the Sarbanes-Oxley
Act, please contact the Securities and Exchange Commission (SEC).
