Surbanes Oxley

•The Act

•Key Sections of Sarbanes Oxley

•Breaking the Law

•Cause of Sarbanes Oxley

•Costs of Sarbanes Oxley

•Litigation against Sarbanes Oxley

•CEO’s and Sarbanes Oxley

11 Titles11 Titles66 sections66 sectionsJuly 0f 2002July 0f 2002Important Sections to go overImportant Sections to go over

101, 302, 404, 401, 409, 802, 807, 906, 1107, 101, 302, 404, 401, 409, 802, 807, 906, 1107, 11031103

PurposePurposeDutiesDutiesMembershipMembershipOther Important FactsOther Important Facts

Who is accountable?Who is accountable?CEO & CFOCEO & CFO

What does their signature certify?What does their signature certify?ReviewReviewNo untrue statement or omission of material factNo untrue statement or omission of material factFair representationFair representation

What do they need to do?What do they need to do?Establishment/Maintenance of internal controlsEstablishment/Maintenance of internal controlsDisclosuresDisclosures

Loophole?Loophole?Nope Nope -- foreign reincorporation has no effectforeign reincorporation has no effect

Deadline Deadline –– 30 days30 days

Disclosure AmendmentDisclosure AmendmentAccuracyAccuracyOffOff--Balance Sheet TransactionsBalance Sheet Transactions

Pro Forma FiguresPro Forma FiguresSpecial Purpose EntitiesSpecial Purpose Entities

The StudyThe StudyThe ReportThe Report

0c 0c 002211EquityEquity--linked Derivatives linked Derivatives 6.36.366393922.522.5Guarantees Guarantees 1.21.21125251313Retained Interests Retained Interests 1.11.11114147.57.5Variable Interest Entities Variable Interest Entities (%) (%) (%) (%) (%) (%) (%) (%)

Categorized by Type of Categorized by Type of Arrangement b Arrangement b

Population Population (N=10,(N=10,

100) 100) (n=100) (n=100) (n=100) (n=100) (n=200) (n=200)

EstimateEstimatefor for

RandomRandomIssuers Issuers

LargeLargeIssuers Issuers Full Sample Full Sample

SubSub--Samples Samples

TABLE IV(B)(1): Issuers Reporting Arrangements in MD&A OffTABLE IV(B)(1): Issuers Reporting Arrangements in MD&A Off--Balance Sheet Balance Sheet Section a Section a

Oops you missed oneOops you missed oneSuppose to be reported in MD&ASuppose to be reported in MD&A

Where is it reported?Where is it reported?NotesNotes

Why?Why?Information GatheringInformation Gathering

ResultResultPoor qualityPoor quality

Improvement?Improvement?Yes! Can and should be improvedYes! Can and should be improved

Transparency Transparency Eliminate (or at least Reduce) AccountingEliminate (or at least Reduce) Accounting--Motivated Structured Motivated Structured TransactionsTransactionsContinue Implementation of Objectives Oriented Approach to Continue Implementation of Objectives Oriented Approach to Standard SettingStandard SettingImprove the Consistency and Relevance of DisclosuresImprove the Consistency and Relevance of Disclosures

Accounting StandardsAccounting StandardsStandards on Accounting for LeasesStandards on Accounting for LeasesStandards on Accounting for DefinedStandards on Accounting for Defined--Benefit Retirement Benefit Retirement ArrangementArrangementContinue Work on Consolidation PolicyContinue Work on Consolidation PolicyContinue to Explore the Feasibility of Reporting All Financial Continue to Explore the Feasibility of Reporting All Financial Instruments at Fair ValueInstruments at Fair ValueDevelop a Disclosure FrameworkDevelop a Disclosure Framework

GuidelinesGuidelinesDoes it have to go in the 10Does it have to go in the 10--Q?Q?Who makes the guidelines?Who makes the guidelines?

Evaluations & ReportingEvaluations & ReportingWho evaluates?Who evaluates?

Smaller Companies vs. Large companiesSmaller Companies vs. Large companiesHow many Key controls are evaluated?How many Key controls are evaluated?

Vs.

nowone

year out Change nowone year

out ChangeSmall Companies 262 202 -22.9% Small Companies 359 298 -17.0%Large Companies 669 540 -19.3% Large Companies 992 867 -12.6%

Auditor Company/Issuer

Amendment Amendment (Securities and Exchange Act of (Securities and Exchange Act of 1934)1934)

Real Time Issuer DisclosuresReal Time Issuer Disclosures““IN PLAIN ENGLISH!!IN PLAIN ENGLISH!!””

Destruction, alteration, or falsification of records in Destruction, alteration, or falsification of records in Federal investigations and bankruptcyFederal investigations and bankruptcy

Fine, up to 20 years, or bothFine, up to 20 years, or both

Destruction of corporate audit recordsDestruction of corporate audit recordsFine, up to 10 years, or bothFine, up to 10 years, or both

**A firm needs to maintain all audit review **A firm needs to maintain all audit review work papers for 5 yearswork papers for 5 years

Amendment (Ch. 63, title 18 U.S. Code)Amendment (Ch. 63, title 18 U.S. Code)““Whoever knowingly executes, or attempts Whoever knowingly executes, or attempts to execute, a scheme or artifice shall be to execute, a scheme or artifice shall be fined under this title, or imprisoned not fined under this title, or imprisoned not more than 25 years, or bothmore than 25 years, or both

““WhiteWhite--Collar Crime Penalty Enhancement Collar Crime Penalty Enhancement Act of 2002Act of 2002””

Certifying a statement not in compliance with Certifying a statement not in compliance with The Commission Act of 1934 (section 13a or The Commission Act of 1934 (section 13a or 15d) and does not fairly present, in all 15d) and does not fairly present, in all material respects, the financial condition and material respects, the financial condition and results of operations of the issuerresults of operations of the issuer

Unwillingly Unwillingly –– UP to 1M, 10 years, or bothUP to 1M, 10 years, or bothWillingly Willingly –– UP to 5M, 20 years, or bothUP to 5M, 20 years, or both

““Corporate Fraud Accountability Act of Corporate Fraud Accountability Act of 20022002””

Tampering with a record or otherwise Tampering with a record or otherwise impeding an official proceedingimpeding an official proceeding

Fine, 20 years, or bothFine, 20 years, or both

What about What about PonzyPonzy??No paymentsNo paymentsPeriodPeriodExtensionExtension

Who petitions the Freeze?Who petitions the Freeze?The SECThe SEC

What did you do!!What did you do!!Fraud and falsificationFraud and falsification

ChargesChargesKenneth L. LayKenneth L. Lay

Conspiracy, false statements, and securities and Conspiracy, false statements, and securities and bank fraudbank fraud

Jeffrey K. Jeffrey K. SkillingSkillingConspiracy, money laundering, insider trading and Conspiracy, money laundering, insider trading and securities fraudsecurities fraud

The First year of SOX

•Companies with $4 billion or more in revenues are spending on average $35

million a year to comply with SOX

•The average cost of compliance of small companies was approximately 2.5% of the

firms annual revenues

The SEC originally estimated that the cost of compliance The SEC originally estimated that the cost of compliance would be $91,000would be $91,000

•Cisco Systems: $50 million and 240,000 hours on its first years audit

•Yellow Roadway Corp: Paid about $9 million to accountants for audit work, or approximately 3% of

annual profits for 2004

•General Electric Co.: spent about $30 million on audit work

•Across 96 Fortune 1,000 companies, respondents expected 2nd year costs to decline from $7.3 million to

$4.3 million

•Companies with market caps between $75 and $700 million have seen costs drop from approximately $1.5

million to $900,000

1.1. Increase in consumer confidenceIncrease in consumer confidence

2.2. Increase in company efficiencyIncrease in company efficiency

••CostsCosts

••Staying PrivateStaying Private

••Economic DrawbacksEconomic Drawbacks

••IPOIPO’’s are moving abroads are moving abroad

“It’s a bad law and we’ll get rid of it any way we can”Mallory Factor, chairman of the Free Enterprise Fund

BusinessWeek, March 13,2006

Which of the following statements are true about you?

•SOX has significantly increased my workload 75%

•Complying with SOX has made my job less satisfying 49%

•SOX will be good for my career 29%

•SOX has elevated the stature of my job within the company 26%

•SOX has made me consider a career outside of finance 16%

Mark Kirk of Illinois Tom Feeney of Florida

SourcesSourcesSarbanesSarbanes--Oxley Act of 2002Oxley Act of 2002

http://files.findlaw.com/news.findlaw.com/hdocs/docs/gwbush/sarbhttp://files.findlaw.com/news.findlaw.com/hdocs/docs/gwbush/sarbanesoxley072anesoxley072302.pdf302.pdf

Report and Recommendations Pursuant to Section 401(c) of the Report and Recommendations Pursuant to Section 401(c) of the SarbanesSarbanes--Oxley Act of 2002Oxley Act of 2002

http://http://www.sec.gov/news/studies/soxoffbalancerpt.pdfwww.sec.gov/news/studies/soxoffbalancerpt.pdf