Below we review some of the main elements of SOX.
I. Established independent oversight of public company audits
- Established the PCAOB, The Public Company Accounting Oversight Board, which ended over 100 years of self-regulation by the public company audit profession
- Provided the PCAOB with inspection, enforcement and standard-setting authority
II. Strengthened audit committees and corporate governance
- Required audit committees, independent of management, for all listed companies
- Required the independent audit committee, rather than management, to be directly responsible for the appointment, compensation and oversight of the external auditor
- Required disclosure of whether at least one “financial expert” is on the audit committee
III. Enhanced transparency, executive accountability and investor protection
- Required audit firms to disclose certain information about their operations for the first time, including names of clients, fees and quality control procedures
- Required the CEO and CFO to certify financial reports
- Prohibited corporate officers and directors from fraudulently misleading auditors
- Instituted clawback provisions for CEO and CFO pay after financial restatements
- Established protection for whistleblowers employed by public companies who report accounting, auditing and internal control irregularities
- Required management to assess the effectiveness of internal controls over financial reporting (404(a)) and auditors to attest to management’s representations (404(b))
- Established the “Fair Funds” program at the Securities and Exchange Commission (SEC) to augment the funds available to compensate victims of securities fraud
IV. Enhanced auditor independence:
- Prohibited audit firms from providing certain non-audit services to audited companies
- Required audit committee pre-approval of all audit and non-audit services
- Required lead audit partner rotation every five years rather than seven
SOX has been amended 12 times in three bills (the Housing and Economic Recovery Act of 2008, the Dodd-Frank Act of 2010 and the JOBS Act of 2012).
Some of these amendments have delayed or eliminated the requirement for certain companies to comply with Section 404(b), which requires the auditor’s attestation regarding the effectiveness of a company’s internal controls over financial reporting.
These include non-accelerated filers, which make up over 60% of all filers, and emerging growth companies.
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