The Public Company Accounting Oversight Board (PCAOB)

The PCAOB was established to oversee the audit of public companies that are subject to the securities laws, and related matters, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by and for, public investors. The Board is a body corporate, operates as a nonprofit corporation, and has succession until dissolved by an Act of Congress.

Auditor independence

SOX prohibited joint provision of many non-audit services, such as bookkeeping related to the accounting records or financial statements of the audit client, financial information systems design and implementation, internal audit outsourcing services, etc. Audit partners have to be rotated very five years. An audit firm cannot audit a client whose chief executive officer (CEO), controller, chief financial officer (CFO), chief accounting officer, or any person serving in an equivalent position for the company was employed by this audit firm during the one-year period preceding the data of the initiation of the audit.

Corporate responsibility

The corporate principal executive or financial officers take individual responsibility for the accuracy and completeness of corporate financial reports.

The audit committee is responsible for the appointment, compensation, and oversight of auditors (including resolution of disagreements between management and the auditor regarding financial reporting). Auditors report directly to audit committees.

Enhanced financial disclosures

SOX requires corporate disclosures on off-balance-sheet transactions, pro-forma figures, and stock transactions of corporate officers. It requires management to establish and maintain an adequate internal control structure and procedures for financial reporting. Each annual report should contain an assessment of the effectiveness of these internal controls from the management and auditor. It also requires timely disclosure on changes in corporate codes of ethics for senior financial officers. Public companies are required to disclose whether or not, and the reasons if not, the audit committee is composed of at least one member who is a financial expert. They need to report material changes in financial condition and are subject to specific enhanced reviews by the SEC.

Analyst conflicts of interest

This part set rules to improve public confidence in securities research, and to protect the objectivity and independence of securities analysts. Analysts and broker or dealers are required to disclose any conflict of interest. Examples of disclosures of conflict of interests include the extent to which the securities analyst has debt or equity investments in the issuer that is the subject of the appearance or research report, and whether the analyst received compensation with respect to a research report, based upon the investment banking revenues (either generally or specifically earned from the company being analyzed) of the registered broker or dealer.

Commission resources and authority

This part shows the allocation of funds to SEC, defines the SEC’s authority to censure or bar securities professionals from practice, and defines conditions under which a person can be barred from practicing as a broker, adviser, or dealer.

Studies and reports

SOX requires the Comptroller General, in consultation with the SEC, other related regulatory agencies, and the Department of Justice, to perform various studies and report their findings. Studies and reports include the effects of consolidation of public accounting firms, the role of credit rating agencies in the operation of securities markets, securities violations, and enforcement actions, and whether investment banks assisted Enron, Global Crossing, and others to manipulate earnings and obfuscate true financial conditions.

Corporate and criminal fraud accountability

This title may be cited as the “Corporate and Criminal Fraud Accountability Act of 2002.” It describes specific criminal penalties for destruction, alteration, or falsification of financial records or other interference with investigations, and provides certain protections for whistleblowers.

White-collar crime penalty enhancement

This title may be cited as the “White-Collar Crime Penalty Enhancement Act of 2002.” This section increases the criminal penalties associated with white-collar crimes and conspiracies. It recommends stronger sentencing guidelines and specifically adds failure to certify corporate financial reports as a criminal offense.

Corporate tax returns

This section states that the Federal income tax return of a corporation should be signed by the chief executive officer of such corporation.

Corporate fraud accountability

This section may be cited as the “Corporate Fraud Accountability Act of 2002.” It identifies corporate fraud and records tampering as criminal offenses and imposes specific penalties to those offenses. It also revises sentencing guidelines and strengthens their penalties. The SEC is able to resort to temporarily freezing transactions or payments that have been deemed “large” or “unusual.”

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