Sibel Ulusoy

8/8/2019 Sibel Ulusoy

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SARBANESSARBANES--OXLEY ACT OF 2002OXLEY ACT OF 2002--Regulations Affecting Corporate Responsibility andRegulations Affecting Corporate Responsibility andIts DisclosureIts Disclosure--


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SarbanesSarbanes--Oxley Act of 2002(SOAOxley Act of 2002(SOA--Act)Act)--Regulations Affecting Corporate Responsibility andRegulations Affecting Corporate Responsibility and

Its DisclosureIts Disclosure--

Outline of the projectOutline of the project First ChapterFirst Chapter-- Reasons behind the SOAReasons behind the SOA

Second ChapterSecond Chapter-- General overview of majorGeneral overview of majorprovisions and critics about the Actprovisions and critics about the Act

Third ChapterThird Chapter-- Focused on the responsibilities andFocused on the responsibilities andrelated disclosure requirements for companies`related disclosure requirements for companies`

executives & attorneys by referring related SECexecutives & attorneys by referring related SECRules. In this chapter discussions about each of theRules. In this chapter discussions about each of theregulations are also provided.regulations are also provided.


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Reasons Behind The SarbanesReasons Behind The Sarbanes--OxleyOxley

SOA was enacted soon after the significant corporateSOA was enacted soon after the significant corporate

scandalsscandals most popular ones are Enron and WorldCom,most popular ones are Enron and WorldCom,

The environment triggering corporate scandalsThe environment triggering corporate scandals is providedis providedin the paper in summary;in the paper in summary;

Take over movement, equity compensation linkedTake over movement, equity compensation linkedexecutives interest to the share price.executives interest to the share price.

Motivations to meet market expectations amongMotivations to meet market expectations amongconcerns.concerns.

Long term bull market effect (1994Long term bull market effect (1994--2000),2000), Specifically, the reasons for failure of gatekeepers e.g.Specifically, the reasons for failure of gatekeepers e.g.

auditors, lawyers, analyst in the scandals. (deterrence,auditors, lawyers, analyst in the scandals. (deterrence,bubble)bubble)

Investors` position in that environment is alsoInvestors` position in that environment is alsoconsidered.considered.


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Reasons Behind The SarbanesReasons Behind The Sarbanes--OxleyOxleyEnron CaseEnron Case

As a main model to enlighten the objectives of the SOA theAs a main model to enlighten the objectives of the SOA theshort timeline of Enrons fall and the comments about the roleshort timeline of Enrons fall and the comments about the roleof participants provided.of participants provided.

EnronEnron when its stock price was $90 in August 2000, waswhen its stock price was $90 in August 2000, wasAmericasAmericas 77thth largest company,largest company,

It went to chapter 11 (bankruptcy) on December 2, 2001,It went to chapter 11 (bankruptcy) on December 2, 2001,promptly after restating their financial reports, aspromptly after restating their financial reports, as largestlargestbankruptcy reorganization in American historybankruptcy reorganization in American history, the stock, the stockprice at that time was 60 cents.price at that time was 60 cents. The most highlighted event at the collapse of the EnronThe most highlighted event at the collapse of the Enron isisits relations with limited partnerships (Special Purposeits relations with limited partnerships (Special Purpose

EntityEntity-- SPEs),SPEs),-- Executives got personal gains being on both sidesExecutives got personal gains being on both sides

(Fastow(Fastow --CFOCFO--more than $ 30 million)more than $ 30 million)-- Enron failed to disclose the extent of these relationsEnron failed to disclose the extent of these relations

(off(off--balance sheet and related party transaction)balance sheet and related party transaction)


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Reasons Behind The SarbanesReasons Behind The Sarbanes--OxleyOxleyEnron Case (Contd)Enron Case (Contd)

Special Committee founded to investigate the events,Special Committee founded to investigate the events,notednoted failures all levels of monitoring within the companyfailures all levels of monitoring within the companyincluding board.including board.TheThe gatekeepers such as lawyersgatekeepers such as lawyers (Vinson & Elkins), rating(Vinson & Elkins), ratingagencies severelyagencies severely criticized.criticized.

SomeSome investment banksinvestment banks after the event alleged aiding andafter the event alleged aiding andabetting the securities fraud.abetting the securities fraud.Enrons both internal and outside auditorEnrons both internal and outside auditorArthur AndersenArthur Andersen,,indicted to obstruction of justice,indicted to obstruction of justice, shredding of Enronshredding of Enron--relatedrelateddocuments,documents,

The whistleThe whistle--blowerblower, vice president of Enron until resigned,, vice president of Enron until resigned,Sharon Watkins, letter to the top of EnronSharon Watkins, letter to the top of Enron highlyhighlyemphasized by media.emphasized by media.


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Reasons Behind The SarbanesReasons Behind The Sarbanes--OxleyOxleyOther Scandals way through legislation.Other Scandals way through legislation.

March 2002March 2002-- Enron demise followed byEnron demise followed by over 30 Enronover 30 Enroninspired bills and severalinspired bills and several regulatory responses from the SECregulatory responses from the SECand SRO s.and SRO s.

June 25 2002,June 25 2002, WorldComWorldCom confessed that it hadconfessed that it had overstatedoverstatedits income by $3.8 billionits income by $3.8 billion, the announcement staggered, the announcement staggeredfinancial world because of the size and simplicity offinancial world because of the size and simplicity ofoverstatement,overstatement,

On July 25 2002On July 25 2002, SOA passed the, SOA passed the SenateSenate, President signed, President signed

into Law oninto Law on July 30 2002.July 30 2002.


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What SarbanesWhat Sarbanes--Oxley BringsOxley Brings

Major Provisions of SarbanesMajor Provisions of Sarbanes--OxleyOxley

The Act has 11 titles can be summarized within;The Act has 11 titles can be summarized within;

Foundation of Public Company Accounting Oversight BoardFoundation of Public Company Accounting Oversight Board

Auditor independence provisions,Auditor independence provisions,A range of corporate governance measures,A range of corporate governance measures,Expanded financial disclosure requirements,Expanded financial disclosure requirements,Analyst`s potential conflict of interest,Analyst`s potential conflict of interest,Increase in SEC funding & enforcement power and directionIncrease in SEC funding & enforcement power and directionof various studies and reports,of various studies and reports,

Criminal penalties & fraud.Criminal penalties & fraud.


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Title I and II, regulates;Title I and II, regulates;--Foundation of PCAOBFoundation of PCAOB--empowered to set auditingempowered to set auditing

quality, control and ethic standards, inspect registeredquality, control and ethic standards, inspect registeredaccountants, take disciplinary actions,accountants, take disciplinary actions,

-- Funding of FASB changed by providing full financialFunding of FASB changed by providing full financialindependence from the accounting industry,independence from the accounting industry,

-- Auditor independence from corporate managementAuditor independence from corporate managementsupported by creating more separation between auditing andsupported by creating more separation between auditing andconsulting function,consulting function,

Title III and IVTitle III and IV brought enclosed provisions aboutbrought enclosed provisions aboutresponsibility of public company officers and lawyers for theresponsibility of public company officers and lawyers for thequality and accuracy of financial reporting, and some relatedquality and accuracy of financial reporting, and some relateddisclosure requirements, provided in detail in Chapter III.disclosure requirements, provided in detail in Chapter III.


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Title V seeks to limit and expose toTitle V seeks to limit and expose to public possiblepublic possible conflict of interestconflict of interesteffecting securities analystseffecting securities analysts, in that respect; Sec. 501 of the Act obliged,, in that respect; Sec. 501 of the Act obliged,SEC or on the SECs direction exchanges, designed regulations;SEC or on the SECs direction exchanges, designed regulations;

--Restricting the preRestricting the pre--publication clearance of research orpublication clearance of research orrecommendation by other staff,recommendation by other staff,

--Limiting supervision and compensation of analysts to one other thanLimiting supervision and compensation of analysts to one other thaninvestment banking,investment banking,

--Protects analysts from retaliation or threats.Protects analysts from retaliation or threats.

Title VI is related to SECs resources and authority and Title VII requiresTitle VI is related to SECs resources and authority and Title VII requiressome studies and reports to be conducted;some studies and reports to be conducted;

-- Increased SEC funding;Increased SEC funding;--Codified SECs authority to censure and deny temporarily orCodified SECs authority to censure and deny temporarily or

permanently preparing and practicing before,permanently preparing and practicing before,--To reduce the migration of fraud, SEC was authorized to bar securitiesTo reduce the migration of fraud, SEC was authorized to bar securities

industry employees barred from other financial sectors,industry employees barred from other financial sectors,


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Title VI is related to SECs resources and authority and TitleTitle VI is related to SECs resources and authority and TitleVII requires some studies and reports to be conducted;VII requires some studies and reports to be conducted;

--Required special studies;Required special studies;

--Sec. 701Sec. 701--Consolidation of public accounting firmsConsolidation of public accounting firms(Comptroller General)(Comptroller General)

--Sec. 702Sec. 702--Role of credit rating agency in the operation ofRole of credit rating agency in the operation ofsecurities markets (SEC)securities markets (SEC)

--Sec. 705Sec. 705--Role of investment bankers and financial advisersRole of investment bankers and financial advisersin assisting public companies manipulation of their earningsin assisting public companies manipulation of their earnings(GAO)(GAO)


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Major Provisions of SarbanesMajor Provisions of Sarbanes--OxleyOxleySOA imposes new criminal penalties for fraud and otherSOA imposes new criminal penalties for fraud and otherwrongful act;wrongful act;

--Creates a new federal criminal violation, called securitiesCreates a new federal criminal violation, called securities

fraud, violation of this statue will be punishable by fine andfraud, violation of this statue will be punishable by fine andimprisonment upto 25 years,imprisonment upto 25 years,

--Strengthens the existing penalties of mail and wire fraud,Strengthens the existing penalties of mail and wire fraud,

--Direct respond to Arthur Andersen`s shredding event,Direct respond to Arthur Andersen`s shredding event,

creates new document destruction crime,creates new document destruction crime,--Contains federal protection for whistle blowers when actContains federal protection for whistle blowers when act

lawfully to disclose information,lawfully to disclose information,

--Increases statue of limitation in private lawsuits,Increases statue of limitation in private lawsuits,


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Critics of SarbanesCritics of Sarbanes--OxleyOxley

An election year is not proper to overhaul a complicatedAn election year is not proper to overhaul a complicatedarea like securities regulation.area like securities regulation.

Simply follows headlines from Enron and others with littleSimply follows headlines from Enron and others with little

appreciation for systemic problemsappreciation for systemic problemsThe efforts of SEC and other SROs is not taken into accountThe efforts of SEC and other SROs is not taken into accountby Congress.by Congress.

Little appreciation for markets` response to the scandals.Little appreciation for markets` response to the scandals.

Many provisions are simply delegations of authority to theMany provisions are simply delegations of authority to theSEC to adopt rules, some of them involve the SEC or theSEC to adopt rules, some of them involve the SEC or theother SROs had already undertaken rulemaking initiatives.other SROs had already undertaken rulemaking initiatives.

May cause longMay cause long--term systemic harm to the competitivenessterm systemic harm to the competitivenessof US capital markets.of US capital markets.


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Regulations of SarbanesRegulations of Sarbanes--OxleyOxleyAffecting Corporate Responsibility and Its DisclosureAffecting Corporate Responsibility and Its Disclosure

Audit CommitteesAudit CommitteesSec. 301Sec. 301--SEC Proposed Rule Standards Relating to ListedSEC Proposed Rule Standards Relating to ListedCompany Audit CommitteesCompany Audit CommitteesSec. 301 requires the SEC toSec. 301 requires the SEC to direct the exchanges and NASD todirect the exchanges and NASD toprohibit the listing of securities of companies not complying withprohibit the listing of securities of companies not complying withcertain audit committee requirements.certain audit committee requirements.

DefinitionDefinition--A committee (or equivalent body) established by andA committee (or equivalent body) established by andcomposed of members of an issuers board of directors tocomposed of members of an issuers board of directors to overseeoverseethe accounting and financial reporting processes and audits of thethe accounting and financial reporting processes and audits of thefinancial statementsfinancial statements. If the issuer does not establish such a. If the issuer does not establish such acommittee, the entire board of directors serves in that capacity.committee, the entire board of directors serves in that capacity.

The Responsibilities of Audit Committees cited as;The Responsibilities of Audit Committees cited as;--Relationships to auditorsRelationships to auditors--Audit committee independenceAudit committee independence--Authority and funding to hire advisersAuthority and funding to hire advisers--Procedures to address complaints regarding accounting, internalProcedures to address complaints regarding accounting, internal

accounting controls, or auditing mattersaccounting controls, or auditing matters


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Audit CommitteesAudit Committees

SEC rule details the audit committee responsibilities and addSEC rule details the audit committee responsibilities and addsome disclosure requirements to ensure the investors aresome disclosure requirements to ensure the investors areinformed about the composition.informed about the composition.

Relationships to auditorsRelationships to auditors-- directly responsible for thedirectly responsible for theappointment, compensation, and oversight of the registeredappointment, compensation, and oversight of the registered

audit firms work, including the resolution of disagreementsaudit firms work, including the resolution of disagreementsover financial reporting.over financial reporting.

IndependenceIndependence--Two criterias were set for the independence;Two criterias were set for the independence;--CompensationCompensation--They cant accept any consultation feeThey cant accept any consultation fee

other than for their service as a board memberother than for their service as a board member

--Affiliated personAffiliated person--Not being an affiliated person of theNot being an affiliated person of theissuer (controls the issuer or under common control)issuer (controls the issuer or under common control)--(A safe(A safeharbor provision defined for affiliated person definition byharbor provision defined for affiliated person definition byRule)Rule)


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Authority and funding to hire advisorAuthority and funding to hire advisor-- For auditors and otherFor auditors and otheroutside advisors funding will be determined by auditoutside advisors funding will be determined by auditcommittee.committee.

Procedures to handling complaintsProcedures to handling complaints-- Requires the auditRequires the auditcommittee establish procedures for complaints of employeescommittee establish procedures for complaints of employees

and others, about accounting, internal control and audit.and others, about accounting, internal control and audit.(Anonyms also to make sure to enable whistle blowing)(Anonyms also to make sure to enable whistle blowing)

Some exemptions are also provided by Rule (IPO, holdingSome exemptions are also provided by Rule (IPO, holdingcompanies etc.),companies etc.),

For foreign private issuers limited exemptions enabledFor foreign private issuers limited exemptions enabled(permission for employee etc),(permission for employee etc),


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Exchanges Situation;Exchanges Situation;--SEC rule only sets a base line, exchanges expected to add information onSEC rule only sets a base line, exchanges expected to add information on

implementation and enforcement,implementation and enforcement,--Issuers must notify the exchanges or associations in case of material nonIssuers must notify the exchanges or associations in case of material non--

compliancecompliance--Exchanges expected to establish procedures for correcting problems and deExchanges expected to establish procedures for correcting problems and de--

listinglisting--Exchanges must adopt the rules provisions no later than the anniversary ofExchanges must adopt the rules provisions no later than the anniversary of

Final Rule.Final Rule.Financial Expertise of Audit Committee MemberSec. 407Sec. 407 SEC Final Rule Disclosure Required by Sec. 406 and 407 of SarbanesSEC Final Rule Disclosure Required by Sec. 406 and 407 of Sarbanes--Oxley ActOxley Act

Role of audit committee member requires financial expertise, the Sec. 407Role of audit committee member requires financial expertise, the Sec. 407directs SEC to issue Rules thatdirects SEC to issue Rules thatrequire a company to discloserequire a company to disclose whether or not, andwhether or not, andif not, the reasons why not, the audit committee of that company is comprised ofif not, the reasons why not, the audit committee of that company is comprised ofat least one member who is a financial expert at annual reports.at least one member who is a financial expert at annual reports.Rules had a detail definition for audit committee financial expert,Rules had a detail definition for audit committee financial expert, regulatingregulatingattributes of financial expert, how it is expected to be acquired,attributes of financial expert, how it is expected to be acquired,(Definition is among the controversial areas(Definition is among the controversial areas--whether have direct expertise at thewhether have direct expertise at thepreparation of financial statements)preparation of financial statements)


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Professional Responsibility of AttorneysProfessional Responsibility of Attorneys

Sec. 307Sec. 307 -- SEC Final Rule Implementation of Standard of Professional Conduct forSEC Final Rule Implementation of Standard of Professional Conduct forAttorneysAttorneysReflecting the critics about the lawyers` role in scandals,Reflecting the critics about the lawyers` role in scandals, Sec. 307 requires and givesSec. 307 requires and givesauthority SEC to adopt rules establishing minimum standards of professional conduct forauthority SEC to adopt rules establishing minimum standards of professional conduct forattorneysattorneys appearing and practicing before the SECappearing and practicing before the SECThe Rule defines appearing and practicing before the SEC expansively includingThe Rule defines appearing and practicing before the SEC expansively including inin--househouseand outside attorneys (even advising an issuer to whether a statement required under theand outside attorneys (even advising an issuer to whether a statement required under thesecurities laws or the SEC`s Rule)securities laws or the SEC`s Rule)

UpUp--ToTo--Ladder ReportingLadder Reporting--Report evidence of a material violation of securities law or breach of a fiduciary duty orReport evidence of a material violation of securities law or breach of a fiduciary duty orsimilar violation by the company or one of its agents to the chief legal officer or the CEO ofsimilar violation by the company or one of its agents to the chief legal officer or the CEO ofthe company.the company.--If they does not appropriately respond to the evidence, attorney must report the evidenceIf they does not appropriately respond to the evidence, attorney must report the evidenceto the boards audit committee or to another board committee comprised solely of directorsto the boards audit committee or to another board committee comprised solely of directorsnot employed directly or indirectly by the company or to the board of directors.not employed directly or indirectly by the company or to the board of directors.

Alternative procedureAlternative procedure--Rules establish a new term Qualified Legal Compliance Committee as an alternative toRules establish a new term Qualified Legal Compliance Committee as an alternative tothe reporting evidence. Disclosure to QLCC relieves attorneys reporting requirementsthe reporting evidence. Disclosure to QLCC relieves attorneys reporting requirementsmentioned above.mentioned above.--This committee has at least one member of the issuers audit committee or equivalentThis committee has at least one member of the issuers audit committee or equivalentcommittee of independent directors and two or more independent board members.committee of independent directors and two or more independent board members.


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Disclosure of Confidential InformationDisclosure of Confidential Information

-- Rules contains a selfRules contains a self--defense exception to issuer confidentialitydefense exception to issuer confidentiality

-- Allow an attorney to reveal to the SEC, without issuer consent,Allow an attorney to reveal to the SEC, without issuer consent,confidential information related to the attorneys representation of theconfidential information related to the attorneys representation of theissuer to the extent he or she reasonably believes necessary to preventissuer to the extent he or she reasonably believes necessary to prevent(e.g. a material violation by the issuer that is likely to cause substantial(e.g. a material violation by the issuer that is likely to cause substantial

injury to the issuer or investors)injury to the issuer or investors)

RulesRules do not create a private cause of actiondo not create a private cause of action and that authority.and that authority.

Proposed rule required a lawyer to make aProposed rule required a lawyer to make anoisy withdrawalnoisy withdrawal fromfromrepresenting the company if the attorney sees evidence of fraud and therepresenting the company if the attorney sees evidence of fraud and thecompany fails to react (As reporting to SEC his/her withdrawal "forcompany fails to react (As reporting to SEC his/her withdrawal "forprofessional reasons.") SEC delayed the applicationprofessional reasons.") SEC delayed the application


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Discussions on Professional Responsibility of AttorneysDiscussions on Professional Responsibility of Attorneys

Sec. 307s reporting up requirement is attempted to force attorneys as an informationSec. 307s reporting up requirement is attempted to force attorneys as an informationintermediaryintermediary

This can affect attorneys behavior in two ways;This can affect attorneys behavior in two ways;--firstlyfirstly causing lawyers to investigate potential corporate misconduct more vigorously.causing lawyers to investigate potential corporate misconduct more vigorously.--secondlysecondly bringing evidence of misconduct to the officers and the Board, so corporatebringing evidence of misconduct to the officers and the Board, so corporate

decision maker will be informed.decision maker will be informed.

Sec. 307 can provide a type of early warning system for independent directors, who areSec. 307 can provide a type of early warning system for independent directors, who arenot involved in day to day corporate operations much.not involved in day to day corporate operations much.The cost of the regulation can be threatening for the quality of information flow betweenThe cost of the regulation can be threatening for the quality of information flow betweencorporate attorneys and their clients.corporate attorneys and their clients.

On the other hand to reduce the risk lawyers may choice over disclosure or decreaseOn the other hand to reduce the risk lawyers may choice over disclosure or decreaseincentive to become fully informed.incentive to become fully informed.

Willingness of the employee to provide information to attorney can be affected.Willingness of the employee to provide information to attorney can be affected.Regulations like noisy withdrawal may compromise a lawyers professional reputation.Regulations like noisy withdrawal may compromise a lawyers professional reputation.Other managers will be unwilling to hire a lawyer who is known as a whistle blower.Other managers will be unwilling to hire a lawyer who is known as a whistle blower.

These Rules are likely to have a profound impact on attorneyThese Rules are likely to have a profound impact on attorney--client confidentiality rules.client confidentiality rules.The debated noisy withdrawal requirements which SEC is proposed and delayed to applyThe debated noisy withdrawal requirements which SEC is proposed and delayed to applyseem beyond the Sec. 307s intention. This regulation can inhibit information flow betweenseem beyond the Sec. 307s intention. This regulation can inhibit information flow betweencustomers and attorney.customers and attorney.


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Corporate Responsibilities of Financial ReportsCorporate Responsibilities of Financial Reports

Sec. 302Sec. 302 Sec Final Rule Certification of Disclosure in CompaniesSec Final Rule Certification of Disclosure in CompaniesQuarterly and Annual ReportsQuarterly and Annual Reports

Certification applicationCertification application starts with the order of SEC to 947 biggeststarts with the order of SEC to 947 biggestpublic companies.public companies. Then transferred to SOA.Then transferred to SOA.

Sec. 302 regulatesSec. 302 regulates that SEC must adopt regulations, public companysthat SEC must adopt regulations, public companysprincipal executive officer and principal financial officerprincipal executive officer and principal financial officer or personor personperforming similar functions certify each annual and quarterly report filedperforming similar functions certify each annual and quarterly report filedunder Section 13(a) or 15(d) of the Securities Exchange Act.under Section 13(a) or 15(d) of the Securities Exchange Act.

The certificationsThe certifications pertain to the content of each reportpertain to the content of each reportand to aand to acompanyscompanys system of controls designed tosystem of controls designed to enable it to meet its periodicenable it to meet its periodicdisclosure obligations.disclosure obligations.

Certifications must use theCertifications must use the exact wording prescribed in the rulesexact wording prescribed in the rules..


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Sec. 906 CertificationSec. 906 Certification

In addition to Sec. 302 certification requirements, Sec. 906 of the ActIn addition to Sec. 302 certification requirements, Sec. 906 of the Actalso requires a certification by the companies chief executive officer andalso requires a certification by the companies chief executive officer andthe financial officer accompany each period filed under Section 13(a) orthe financial officer accompany each period filed under Section 13(a) or15(d) of the Securities Exchange Act of 1934 containing financial15(d) of the Securities Exchange Act of 1934 containing financialstatements.statements.

Providing that:Providing that:--The report fully complies with the requirements of reporting;The report fully complies with the requirements of reporting;--The information in the report fairly presents in all material respects,The information in the report fairly presents in all material respects,

the financial condition and results of operations of the company,the financial condition and results of operations of the company,

This certification requirement is effective immediately.This certification requirement is effective immediately.

Imposes criminal penalties of up to $1 million and/or ten years in prisonImposes criminal penalties of up to $1 million and/or ten years in prisonfor knowingly filing a false certification, and up to $5 million and/or 20for knowingly filing a false certification, and up to $5 million and/or 20years in prison for willfully filing a false certification.years in prison for willfully filing a false certification.


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Discussions on Corporate ResponsibilityDiscussions on Corporate Responsibility

Certification requirements Sec. 302 and Sec. 906 seems toCertification requirements Sec. 302 and Sec. 906 seems tooverlap.overlap.Both of them covers the certification of fair presentation ofBoth of them covers the certification of fair presentation offinancial conditions and results of operations of the company.financial conditions and results of operations of the company.

Bringing two separate certification burden for officers, may beBringing two separate certification burden for officers, may beinterpreted as an evidence of the disorganized manner of the Act.interpreted as an evidence of the disorganized manner of the Act.Using different officer terms is another evidence.Using different officer terms is another evidence.CEO and CFOs have been signing the annual reports. So beforeCEO and CFOs have been signing the annual reports. So beforethe certification CEOs or CFOs that make knowingly falsethe certification CEOs or CFOs that make knowingly falsecertification would have been subject to prosecution for makingcertification would have been subject to prosecution for making

false statements.false statements.Primary certification is the one codified in Sec. 302 which is alsoPrimary certification is the one codified in Sec. 302 which is alsoincluding the procedures to ensure the financial statementsincluding the procedures to ensure the financial statementsaccuracy. However only Sec. 906 certifications has criminalaccuracy. However only Sec. 906 certifications has criminalprovisions.provisions.


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Discussions on Corporate ResponsibilityDiscussions on Corporate Responsibility

Certification requirements use fairly present clause not the GAAPCertification requirements use fairly present clause not the GAAPcompliance requirement. So the certification statement is not limited to acompliance requirement. So the certification statement is not limited to arepresentation that the financial statements and other financialrepresentation that the financial statements and other financialinformation have been presented in accordance with GAAP.information have been presented in accordance with GAAP.SECs view about disclosure in periodic reports would not be onlySECs view about disclosure in periodic reports would not be onlyrestricted with the GAAP compliance for financial statements resembles arestricted with the GAAP compliance for financial statements resembles anew perspective beyond the GAAP. It reflects intention of evolving thenew perspective beyond the GAAP. It reflects intention of evolving theprincipal based standards to rule based standards.principal based standards to rule based standards.The effect of fair presentation clause is concluded as codification ofThe effect of fair presentation clause is concluded as codification ofJudge Friendlys decision in United States v. Simon, which held that anJudge Friendlys decision in United States v. Simon, which held that anaccountant could be convicted of securities fraud even if the accountingaccountant could be convicted of securities fraud even if the accounting

practice at issue complied with GAAP. This can affect further casespractice at issue complied with GAAP. This can affect further casesconcept.concept.CEOs and CFOs of the companys would require downside certifications,CEOs and CFOs of the companys would require downside certifications,besides bringing new paperwork burden, can harm the trust in companybesides bringing new paperwork burden, can harm the trust in companyCertification requirement may bring more conscience to the process ofCertification requirement may bring more conscience to the process ofreport preparation.report preparation.


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Management Assessment of Internal ControlManagement Assessment of Internal ControlSEC. 404SEC. 404--SEC Proposed Rule Disclosure Required by Section 404, 406SEC Proposed Rule Disclosure Required by Section 404, 406and 407 of Sarbanesand 407 of Sarbanes--Oxley Act of 2002Oxley Act of 2002

DefinitionDefinitionControls that pertain to the preparation of financial statements forControls that pertain to the preparation of financial statements for

external purposes that are fairly presented in conformity with GAAPexternal purposes that are fairly presented in conformity with GAAPManagements Internal Control ReportManagements Internal Control ReportAnnual reports must include a report of management on internalAnnual reports must include a report of management on internalcontrols and procedures for financial reporting. Stating;controls and procedures for financial reporting. Stating;

The responsibility of management for establishing andThe responsibility of management for establishing and

maintaining an adequate internal control structure andmaintaining an adequate internal control structure andprocedures for financial reporting ,procedures for financial reporting ,

Contain an assessment, as of the end of the most recent fiscalContain an assessment, as of the end of the most recent fiscalyear of the issuer, of the effectiveness of the internal controlyear of the issuer, of the effectiveness of the internal controlstructure and procedures of the issuer for financial reporting.structure and procedures of the issuer for financial reporting.

In addition external auditor attestation.In addition external auditor attestation.


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Management Assessment of Internal ControlManagement Assessment of Internal Control

Rule proposes changes to certification requirementsRule proposes changes to certification requirements everyeveryperiodic report include both evaluation of disclosure andperiodic report include both evaluation of disclosure andinternal control.internal control.

Discussions on Assessment of Internal ControlDiscussions on Assessment of Internal Control

There is overlap between Acts Sec. 302 and Sec. 404There is overlap between Acts Sec. 302 and Sec. 404requirements.requirements.( SEC tried to differentiate them bringing a new concept as( SEC tried to differentiate them bringing a new concept asdisclosure control and procedures)disclosure control and procedures)

Disclosure controls and procedures should entail some levelDisclosure controls and procedures should entail some levelof internal controls review.of internal controls review.Acts two separate sections possess the same aim effectiveActs two separate sections possess the same aim effectiveinternal control procedures.internal control procedures.


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Compensation of CEOs and CFOsCompensation of CEOs and CFOs

Sec. 304Sec. 304--Forfeiture of Bonuses and ProfitsForfeiture of Bonuses and Profits

In case an accounting restatement due to the material noncompliance, asIn case an accounting restatement due to the material noncompliance, asa result of misconduct, the CEO and CFO of the issuer shall reimburse thea result of misconduct, the CEO and CFO of the issuer shall reimburse theissuer for:issuer for:

Any bonus or other incentiveAny bonus or other incentive--based or equity based compensationbased or equity based compensationAny profits realized from the sale of securities of the issuerAny profits realized from the sale of securities of the issuer

Sec. 402Sec. 402--Loans to Officers and DirectorsLoans to Officers and Directors

Makes unlawful for any issuer to arrange or to renew an extension ofMakes unlawful for any issuer to arrange or to renew an extension ofcredit, in the form of a personal loan to or for any director or executivecredit, in the form of a personal loan to or for any director or executiveofficer (Prohibits indirect compensation)officer (Prohibits indirect compensation)

FASBs and exchanges proposalsFASBs and exchanges proposals


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Compensation of CEOs and CFOsCompensation of CEOs and CFOs

Discussions on CompensationDiscussions on Compensation

Forfeiture required regardless of effect of restatement or whetherForfeiture required regardless of effect of restatement or whetherdirectly attributable to the misstatement of financial results.directly attributable to the misstatement of financial results.

Cost inhibiting the CEO and CFOs eager to make prompt disclosure ofCost inhibiting the CEO and CFOs eager to make prompt disclosure ofnonnon--compliances.compliances.

Loans to officers and directors concept is ambiguousLoans to officers and directors concept is ambiguous

Types of indirect compensations can be created if there is an intentionTypes of indirect compensations can be created if there is an intentionfor it.for it.

After these penalizing attempts compensation techniques can evolveAfter these penalizing attempts compensation techniques can evolve


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Officer Bar and PenaltiesOfficer Bar and Penalties

Sec. 305Sec. 305Replaces substantial unfitness standard for banning officer andReplaces substantial unfitness standard for banning officer anddirectors with an unfitness standard.directors with an unfitness standard.

Contains an equitable relief sectionContains an equitable relief sectionSec. 1105Sec. 1105In any ceaseIn any cease--andand--desist proceeding, the SEC may order to prohibit officerdesist proceeding, the SEC may order to prohibit officeror director of any issuer with registered securities demonstrates unfitnessor director of any issuer with registered securities demonstrates unfitness

DiscussionsDiscussions--SEC has a lower standard and new administrative technique for banningSEC has a lower standard and new administrative technique for banningthe officersthe officers

--Responsibility of the fraud for officers is also increasedResponsibility of the fraud for officers is also increased


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Fair Fund For InvestorsFair Fund For Investors

Sec. 308Sec. 308Disgorgement of profits ordered against those who have violatedDisgorgement of profits ordered against those who have violatedsecurities laws, or any other funds collected as a result of the impositionsecurities laws, or any other funds collected as a result of the imposition

of penalties following securities laws violations, be added to a fund forof penalties following securities laws violations, be added to a fund forthe benefit of the victims of the violations if the SEC so directs.the benefit of the victims of the violations if the SEC so directs.

DiscussionsDiscussions

--Civil money penalties can be distributed harmed investorsCivil money penalties can be distributed harmed investors--priorpriorforwarded to Treasuryforwarded to Treasury

--Utilization requires amendments to Act and enhanced collectionUtilization requires amendments to Act and enhanced collectiontechniques (another spontaneous manner of the Act)techniques (another spontaneous manner of the Act)


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Code of EthicsCode of Ethics

Sec. 406Sec. 406--SEC Final Rule Disclosures Required by Section 406SEC Final Rule Disclosures Required by Section 406and 407 of Sarbanesand 407 of Sarbanes--OxleyOxley

--Requires disclosure of whether they have adopted a code of ethics andRequires disclosure of whether they have adopted a code of ethics and

of any change in, or waiver of an issuers code of ethics in annualof any change in, or waiver of an issuers code of ethics in annualreports.reports.

DefinitionDefinition

--honest and ethical conducthonest and ethical conduct

--Full fair, accurate timely disclosure in reports and documents,Full fair, accurate timely disclosure in reports and documents,

--Compliance with laws, rules and regulations,Compliance with laws, rules and regulations,--Prompt reporting to violations,Prompt reporting to violations,

DisclosureDisclosure

--Made publicly available by exhibit to annual report, post internet webMade publicly available by exhibit to annual report, post internet website, by giving information in annual report give copy to any personsite, by giving information in annual report give copy to any person

without chargewithout charge


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Code of EthicsCode of Ethics

Waiver of Code of EthicsWaiver of Code of EthicsRequired to promptly disclose any changes to, or waivers of,Required to promptly disclose any changes to, or waivers of,the code of ethics on Form 8the code of ethics on Form 8--K or on its Internet Web siteK or on its Internet Web site

Discussion on Code of EthicsDiscussion on Code of Ethics

Has been used by companies for several years (Enron alsoHas been used by companies for several years (Enron alsohad a code of ethics).had a code of ethics).Only raise the level of ethical behavior if taken seriously andOnly raise the level of ethical behavior if taken seriously andenforcedenforced

Provide information to investors on code of ethic but canProvide information to investors on code of ethic but cannot guarantee or impose ethical behavior to officers.not guarantee or impose ethical behavior to officers.


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THANK YOU FOR YOURTHANK YOU FOR YOUR

PATIENCEPATIENCE

Sibel Ulusoy

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