Some Of The Sarbanes Oxley Act Provisions And Their Requirements Accounting Essay



This paper contains reasons for Sarbanes Oxley Act, different sections like 101,201, 301, 302, 401, 404, 407, 409, 809 which are most required and what it contains. Different titles of the Sarbanes Oxley act are also covered. In this paper regulations of the Sarbanes Oxley act like Audit control, application requirements, disciplinary powers, funding, document retention, auditor independence, audit committees are well described. Some of the ripple effect of the Sarbanes Oxley act like increase in audit fees, increase in accounting costs, increase effort by audit committees, increase record management, increase in salary, and increased volume of corporate disclosure are mentioned.



As we know that not any single event is responsible for enactment of the Sarbanes Oxley act. Because of several concurrent major corporate frauds, conflict of interest and accounting scandals that shock investor confidence in the viability and accountability of the corporate governance system as well as in the integrity of the nation's securities markets are responsible for this act.

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In 1999 to 2002 major publicly traded corporations did the fraud in a massive scale. As a outcome of intentional manipulation of the stock price by senior executives, buttressed by falsified and misleading accounting practices two major companies Enron and WorldCom are collapsed. Because of this in April 2002 House had passed the Oxley bill which was related to the accountability, responsibility and transparency of stating financial status of the company and at a same time another senator Paul Sarbanes presented the bill to senate banking committee which was also passes with a majority. So proposal of both House Representative Oxley and Senator Paul was reconciled and it is formed in one act and it is popularly known as "Sarbanes Oxley Act". This act is mainly affects the corporate governance, financial disclosure and total accounting pattern in the companies.


The Sarbanes Oxley act is anticipated help to shelter investors and restore investor confidence by improving the accuracy, reliability and transparency of corporate financial reporting and disclosures, and reinforce the importance of corporate ethical standards. This act is applies to all public companies in spite of of size and the public accounting forms that audit them.

The act also established the Public Company Accounting Oversight Board (PCAOB) as a private sector non-profit organization to manage the audits of public companies that are subject to securities laws. The act is mainly requires public companies to evaluate the effectiveness of their internal control over financial reporting and for their external auditors to report on management's assessment and the effectiveness of internal controls. The act also contains some provisions anticipated to make chief executive officers (CEO) and chief financial officers (CFO) more accountable, for making better the oversight role of boards of directors and audit committees and provide whistleblower protection.

Most companies' center of attention is on Sarbanes Oxley work in thirteen specific areas. These 13 areas are the ones where most of the financial impact is felt. Section 404 stated in the Sarbanes Oxley act is the ones that has caused the most concern in the financial sector according to which requires the corporate body to increase stricter controls over the financial reporting by internal accounting personnel.

Some of the Sarbanes Oxley act provisions and their requirements:

Table 1 (Reference 2)

Some other provisions like section 401 "disclosure of periodic reports" requires Financial statements which are published by issuers are also required to be accurate and presented in such a way that it does not contain any incorrect statements or admit to state material information. All material off-balance sheet liabilities, obligations or transactions are included by these financial statements. The Commission was required to study and report on the level of off-balance transactions which are resulted into transparent reporting. The Commission is also required to find out whether generally accepted accounting principles or other regulations result in open and meaningful reporting by issuers. 

Section 409 is within title IV of the act and "Real time issuer disclosures" and it requires to disclose to the public, on an urgent basis, information on material changes in their financial condition or operations. These disclosures are to be presented in such a manner that they are easy to understand and supported by trend and qualitative information of graphic presentations as appropriate.

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Section 802 is under title VIII of the act (corporate and criminal fraud accountability) and pertains to "criminal penalties for altering documents" and it imposes penalties of fines and/or up to 20 years imprisonment for altering, mutilating, concealing, destroying, falsify records, documents or tangible objects with the intent to obstruct, hold up or influence a legal investigation. This section shows penalties of fines and/or imprisonment up to 10 years on any accountant who knowingly and willfully violates the requirements of maintenance of all audit or review papers for a period of 5 years.













Title I of the act establishes PCAOB as a private sector nonprofit organization to oversee the audits of public companies that are subject to the securities laws. PCAOB is subject to SEC oversight. The act gives PCAOB primary areas of responsibility like,

Registration of public accounting firms which audit the public companies in U.S

Establishment of rules like auditing, quality control, ethics, independence and other standards relating to the preparation of audit reports.

Conducting inspections (the successor to peer review for public companies) of registered accounting firms, investigations and disciplinary proceedings.

Imposing appropriate sanctions to make compulsory compliance with the rules and laws.

Title II of the act describes auditor independence and it also prohibits the registered external auditor of public company from providing confident non-audit services to that public company client audits. It also specifies some option for communication that is required between auditors and the public companies audit committee and requires periodic rotation of audit partners not audit firms for managing a public company's audits.

Title III and IV of the act mainly focus on corporate responsibility and enhanced financial disclosures. Title III described listed company audit committees which also include responsibilities and self-government, and corporate responsibilities for financial reports, together with certifications by corporate officers in annual and quarterly reports and other provisions.

Title IV addresses disclosures in financial reporting and transactions involving management and principal stockholders and other provisions such as internal control over financial reporting.


As per application requirements of Public accounting firms they will have to give some attention to the information on the application for registration with the PCAOB. The information given below is required under the new act, some of which goes well clear of the scope of what is currently required by state boards of accountancy or the AICPA: Give the Names of all audit clients who are issuers. Annual fees paid by each issuer, broken down by audit and non-audit services.  As per PCAOB request all financial information will have to provide. Make the quality control policies for the firm's auditing and accounting practices. Mention the name of all accountants participating in any audit report of any issuer, including license or certification numbers. Provide Information relating to criminal, civil or administrative actions or disciplinary proceedings pending against the firm or any associated person of the firm. Give the Copies of any periodic or annual disclosures regarding disagreements between the issuer and the firm during the preceding calendar year. Any additional information specified by the new board.


Disciplinary Function is PCAOB's other major responsibility. The new board has a full range of sanctions at its disposal, criticize and significant fines as well as suspension or revocation of registration. They have right to investigate any act or practice which may violate the act or the new board's rules or any other requirements of the federal securities laws relating to audit reports or applicable to the professional standards. These proceedings will generally be confidential but it is used for good cause to the board orders on a public hearing. After the process was concluded, any disciplinary sanction which is accompanied by a supporting statement from the board would be made public, the act also includes secrecy provisions which protect most documents prepared or received by the board in connection with an investigation. These materials can, nevertheless, be shared with other regulators.

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Accounting firms will have to pay a registration fee and an annual fee for annual reports and the costs of processing and reviewing applications. The bulk of the Public Company Accounting Oversight Board's funding will be provided by an annual accounting support fee assessed on issuers. The funds which are provided by the issuers will help the board's inspection program, relieving firms of a financial load they now bear. The fee will be levied in amount to each issuer's equity market capitalization depends on larger issuers will pay larger fees. These fees also used for fund to the FASB, which will continue to set accounting standards.


Document maintenance has three separate, and potentially contradictory, requirements in the act. First, the board is required to accept rules of seven-year retention period for audit work papers and "other information which is related to any audit report, in enough detail to support the conclusions reached in such a report." Second, the board possibly will require retention of additional documents for inspection purposes. Third, the criminal provisions of the act contain a five-year retention period for all audit and review work papers. SEC is intended for to establish rules relating to the retention of such work papers by January 26, 2003. These document retention issues may be further problematical by state-level retention requirements. For example, California recently passed a law which is required for accountants to keep certain audit documentation for seven years and accounting firms to write document retention and demolition policies. As the penalties for noncompliance, it is increasingly essential for accounting firms to pay careful attention to the various record retention requirements that may be appropriate in the jurisdictions in which they practice.


Sarbanes-Oxley prohibits all registered public accounting firms from providing audit clients, certain non-audit services as well as internal audit outsourcing, contemporaneously with the audit, financial-information-system design and accomplishment services and expert services. These scopes of the service restrictions go away from existing SEC freedom regulations. In addition, all other services are acceptable including tax services, only if preapproved by the issuer's audit committee and all such preapprovals must be disclosed in the issuer's cyclic reports to the SEC.

The act also needs auditor (not audit firm) rotation. The pilot audit partner and/or the concurring review partner must rotate off the engagement if he or she has performed audit services for the issuer in each of the five previous financial years. There is no difference regarding the capacity in which the audit or concurring partner provided such audit services. For that reason, services provided as a manager or in some other capacity appear to count toward the five-year period. In addition, the provision applies as soon as the firm is registered, so, missing guidance to the differing, the audit and concurring partner must count back five years starting with the date in which PCAOB registration occurs. This provision is particularly important since of its prospective impact on small accounting firms. The SEC is considering whether or not to provide accommodation small firms in this area; currently there is no small-firm exemption from this provision.


The act provides for important corporate governance to reform regarding audit committees and their correlation to the auditor, compensation and oversight of the issuer's auditor. This should fundamentally change the auditor/client relationship making the audit committee dependable for the appointment. Furthermore, the auditor reports are directly to the audit committee, not to management, reinforcing the position that the auditor's duties run to the shareholders, rather than management. The audit committee must have the authority to hire independent counsel and other advisers and each member of the audit committee has to be independent. In addition, of this each issuer must offer appropriate funding, for compensating the auditor and any advisers retained by the audit committee. The audit committee also must establish procedures for the private submission by employees of concerns about questionable accounting or auditing matters and for handling complaints regarding accounting or auditing matters. In light of these new increasingly important audit committee everyday jobs, the audit committee must create an effective working relationship between itself and the auditor.

CEO and CFO certification of financial reports, improved financial disclosures, together with off-balance-sheet transactions and special purpose entities, pro forma financial information merging to GAAP financial statements and auditor reports on management assessments of internal controls because of this full scope of the act is too expensive. Act also mandates the completion of several studies, which may end result in additional legislation or law making.


Increased efforts by Audit Committees:

A Deloitte & Touche LLP survey shows that audit committee meetings are more regular and longer. Since the Sarbanes Oxley act, 39 companies have met more than six times per year before the act, 11 of the 66 companies met more frequently. Since the Sarbanes Oxley act, only 10% have met for one hour or less, before the act half of the companies met for such a short time. Data suggests that committee members are also working longer hours outside of audit committee meetings.

Negative pressure on corporate mergers and acquisitions:

SOX did not show that Merger and acquisition activity in the immediate wake is decline. From 7,702 in 2003 to 8,313 in 2004 the number of deals consummated actually rose. From 2003 to 2004 the dollar value of those deals rose from $570 billion to $833 billion. A portion of the increased activity is occur because of foreign buyers capitalizing on the weaker dollar said by R. Weisman, "Merger Activity at Full Tilt.

Increase in accounting costs:

One of the most costly provisions is fulfillment with section 404 of the act for some registrants. Section 404 requires management to arrange and evaluate internal control systems and the independent auditor to assess their efficiency. Section 404 compliance alone may cost 1% of earnings is estimated by some companies.

Total compliance costs for listed companies have been predictable at $7 billion a year. As the estimate implies, the costs are not for a one-time, but it is recurring because internal control systems must be tested each year. On the other hand, some larger registrants may have minimal out-of-pocket costs in complying with section 404 because sufficient systems and talent are already in place.

There is also increased in the cost of recruiting appropriate board members. A financially literate audit committee is now necessary to have a selected "financial expert."

Some registrants may have difficulty to find out the qualified board members under requirements of the stricter board composition. Based on average monthly market capitalization to support the PCAOB's operations additionally, 5,200 public companies and 3,300 mutual funds will pay fees. Estimation by the PricewaterhouseCoopers shows that 81% of public companies predict that the costs of complying with the act will rise in the future.

Increased records management requirements:

Before the Sarbanes-Oxley Act, the government had the burden of proof to show that an individual shattered evidence with knowledge that the evidence was required in an official proceeding. After the Sarbanes Oxley act comes, an individual can be charged with difficulty of justice for destroying evidence if the person should have known to maintain the document for any possible future government inquiries. The act also creates possible criminal liability for the destruction of records, even when conforming to an or else applicable records management policy and even if no federal investigation was in process at the time the records were destroyed.

There is more work on legal exposure has been required for data protection and for focus on content management and a new meaning of a "record" or "data." In June 2003, members of the National Association of Securities Dealers (NASD) were informed that they must maintain records of instant messaging (IM) for three years. Accounting firms retain e-mail for five years and audit-related work-papers, analyses, and correspondence for seven years as per the requirement of the Sarbanes Oxley act. Content-management vendors are responding by developing products that capture and store e-mail, instant messaging, and other correspondence.

Increase in audit fees:

Audit fees reported are up by 25% to 33% as per reported by the big four. These increases are reportedly because of assisting clients in complying with the new Sarbanes Oxley regulations. Audit fees are expected to rise an additional 35% by mid-2004 According to a May 2003 survey by Financial Executives International. The act's requirement for companies to assess their internal controls and have auditors prove to this assessment is effective May 2004.

Influence on SEC sanctions:

With the consolidation in the audit market, some question whether regulators would be able to administer severe sanctions when disciplining the Big Four. A severe sanction, such as a firm wide one year prohibits on auditing SEC clients, could put an accounting firm out of business and severely stress the remaining firms to cover up the resulting needs of the audit market. Regulators will need to become more creative with their sanctions and will likely require more short-term firm wide bans and make the most punitive penalties financial in nature.

The SEC has shown elasticity in applying sanctions on companies not complying with CEO certification. The SEC has sanctioned very few companies for tardy certification filings. This may happen because of a lack of manpower or to a desire to slowly lead in the corporate changes necessary for compliance.

Increase in Salary:

In 2005's Lucas Group, professional recruiting firms' reports indicate that strong hiring growth in positions needed to meet Sarbanes-Oxley compliance. This growth in demand has impacted salaries for accounting and finance professionals. A 2005 Salary Guide of, Robert Half International's forecasts that starting salaries for accounting and finance professionals will increase an average of 2.4% next year. However, the guide reported double-digit average increases for certain areas of accounting:

Internal auditors at large corporations of 12.5%

Internal auditors at mid-size corporations of 16.8%

Managers at large public accounting firms of 10.2%

Senior accountants at large public accounting firms of 11.7%

Entry-level professionals at small public accounting firms also at 11.4%.

Increased volume of corporate disclosure:

To increase investor confidence and the assurance of the integrity of the U.S. capital markets is one of the primary goals of the SOX. At this end SOX also requires increased corporate disclosures to get better the quality of financial reporting. The SEC has suggested that companies consider the formation of disclosure committees to be charged with judging the materiality of information and disclosure obligations on a timely basis. Since SOX has increased the volume of disclosure not only due to such increased corporate diligence with respect to disclosure, but also because real additional reporting is required by SOX. New SOX disclosure also includes the following requirements:

Management certifications (section 302);

Reconciliations of publicly disclosed non-GAAP financial measures, such as pro forma measures with GAAP [section 401(b)];

Off-balance-sheet transactions, arrangements, and obligations in quarterly and annual reports filed with the SEC [section 401(c)]; and

The internal control report (section 404) stating management's responsibility for establishing and maintaining internal controls, as well as management's assessment of the effectiveness of controls, including any material weaknesses.

Trickle down accountability and power to shareholders:

The act requires top-level managers to confirm financial statements in regulatory filings. A trickle-down accountability is being reported, wherein lower and mid-level managers certify results generated at their respective level of responsibility. Even third parties are being required to sub-certify documents prepared for top management in some cases.

Shareholders of some publicly traded companies have gained the right to suggest candidates to the board of directors that appear on proxy ballots alongside board-nominated candidates. Many companies are hesitant to give shareholders this power. The SEC proposed the rule that allow shareholders more power to nominate directors to corporate boards (E. Iwata, "Businesses Say Corporate Governance Can Go Too Far," USA Today, October 4, 2005).


Sarbanes Oxley act is more helpful for the companies for follow the audit control, auditor independence, for enhance the financial disclosure, document management also. It has not that much impact on the pharmaceutical company they have to follow the some regulations of the Sarbanes Oxley act but not all. For that there is a spreadsheet validation and also some financial reports also. Sarbanes Oxley act is more helpful for the financial related companies and also for the more market capitalization. Day by day there is much more improvement in the act and it is good for the company also. Companies have much more impact due to follow of this act and they requirements of the act and, their impact and advantages are described in this paper.