Page 31 - Souvenir - v4 (2)

Sarbanes Oxley Act, 2002- Insight and Introspection
-CA Sandeep Basu

Background

Post encountering few of world’s largest accounting scandals involving large corporations like Enron Corporation,
World Com, Tyco International, Peregrine Systems and Adelphia, the United States Congress passed the
Sarbanes-Oxley Act (SOX) in 2002 in order to minimise and monitor fraudulent corporate activities, and protect
the public. Spearheaded by Senator Paul Sarbanes and Representative Michael Oxley, the act was approved by
the House by a vote of 423 in favour, 3 opposed, and 8 abstaining and by the US Senate with a vote of 99 in
favour and 1 abstaining. President George W. Bush signed it into law, stating it included “the most far-reaching
reforms of American business practices since the time of Franklin D. Roosevelt. The era of low standards and
false profits is over; no boardroom in America is above or beyond the law.”

The act contains eleven titles, and requires the Securities and Exchange Commission (SEC) to implement rulings
on requirements to comply with the law. Harvey Pitt, the 26th Chairman of the SEC, led the SEC in the adoption
of dozens of rules to implement the Sarbanes–Oxley Act. It created a new agency, the Public Committee
Accounting Oversight Board (PCAOB), 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.

Applicability of the Act

1. All US publicly traded companies including wholly owned subsidiaries of publicly traded companies
2. Foreign companies that have registered debt or equity with the US Security and Exchange Commission (SEC).
3. Accounting firms that audit companies that are required to comply with SOX must themselves also comply
with SOX.

Overview of Key SOX Provisions

Section 302- Corporate Responsibility for Financial Reports

The CEO and CFO must certify in each Form 10-Q quarterly report and Form 10-K annual report that:
• He or she has reviewed the report and the report does not contain any material misstatement or omission of
any material fact and the financial statements, and other financial information included in the report, fairly
present in all material respects the financial condition, results of operations and cash flows of the issuer as of,
and for, the periods presented in the report.
• He or she is responsible for establishing and maintaining internal controls and procedures. Such controls and
procedures have been designed and implemented for the period mentioned in the report. Also, he or she has
evaluated the controls and procedures within 90 days prior to the filing date of the report and found them
effective and have presented in the report their conclusions about the effectiveness of their internal controls
based on their evaluation as of that date.
• He or she has disclosed to the auditors and the audit committee
a. All significant deficiencies in the design or operation of internal controls which could adversely affect
the issuer's ability to record, process, summarize, and report financial data and have identified for
the issuer's auditors any material weaknesses in internal controls;
and
a. Any fraud, whether material or not, that involves management or other employees who have a
significant role in the issuer's internal controls

• He or she has highlighted in the about any significant changes in internal controls or other factors that could
significantly affect internal controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

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