August 2008

The Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 is a United States federal law enacted on 30th July 2002 in response to a number of major corporate and accounting scandals. It is considered to be the most far-reaching US legislation affecting financial services, accounting, auditing, financial reporting and professional services since the US securities and exchange laws of the early 1930s.

There are companies that operate in the UK that have to comply with this US legislation whose executives could face up to 20 years in prison if found guilty of violating this U.S. law. So, what does The Sarbanes-Oxley Act mean for those executives that fall within its scope?

The legislation establishes new or enhanced standards for all US public company boards, management and public accounting firms. It does not apply to private companies.

The Act establishes a new quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure.

Sarbanes-Oxley contains 11 measures that can be summed up as follows.

  1. The establishment of the Public Company Accounting Oversight Board (PCAOB), which has responsibilities including the registration, regulation and compliance of public accounting and auditing services.
  2. The setting of standards for external auditor independence, new auditor approval requirements, auditor reporting requirements and conflict of interest issues .
  3. The legal requirement for senior executives to take individual responsibility for the accuracy and completeness of corporate financial reports.
  4. The regulation of enhanced reporting requirements for financial transactions, including off-balance-sheet transactions, pro-forma figures and stock transactions of corporate officers.
  5. A confidence-building measure that redefines the codes of conduct for US Securities and Exchange Commission (SEC) analysts and requires disclosure of knowable conflicts of interest.
  6. A measure that defines how SEC analysts may practice, which also asserts the Commission's authority to censure or bar professionals from practicing as a broker, adviser or dealer.
  7. The authority to conduct research, studies and produce reports for the purposes of enforcing actions against violations by companies and auditors.
  8. A part of the Act known in its own right as the Corporate and Criminal Fraud Act of 2002, which describes specific criminal penalties for fraud whilst providing certain protections for whistle-blowers.
  9. A section of the Act referred to as the White Collar Crime Penalty Enhancement Act of 2002, which increases the criminal penalties associated with white-collar crimes and conspiracies. It also adds failure to certify corporate financial reports as a criminal offence.
  10. The legal requirement that the Chief Executive Officer should sign the company tax return.
  11. A section of the Act referred to as the Corporate Fraud Accountability Act of 2002, which specifically identifies corporate fraud and records tampering as criminal offences. It also details increased criminal penalties and empowers the SEC to freeze large or unusual payments.

The need for training

This Act is comprehensive and is one of the most challenging pieces of US legislation ever written. As such the law is not complex, it is the full and proper implementation of this law that is immensely challenging.

The senior management of a company that needs to comply with the Act have to understand the law it is very hard on the executives found guilty of non-compliance at a personal level. The criminal penalties for serious violations of the Act include fines of several million pounds or up to 20 years in prison. It is advisable to get your executives trained thoroughly to ensure that the company achieves full compliance of the Act.

Should you want to refer to a copy of the Act please click here.

We provide an online training solution, for details please click here.


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