This is a graded discussion: 8 points possible

due -

Week 02: Discussion on Chapters 1 and 2 (SOX)

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Chapter 1

Has the legislative environment changed public expectations of nonprofit accountability and transparency?

Should nonprofits be self regulated or be regulated by the government?

Chapter 2

Was Sarbanes Oxley necessary and why did they eventually broaden its reach to cover nonprofits?

Has Sarbanes Oxley achieved its goals as it relates to Not-for-Profits?

READING 1: CHAPTER 1 (JACKSON/FOGARTY) I. Identify the composition requirements and responsibilities of the Public Company Accounting Oversight Board A) Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley Act of 2002) - signed into law by President George W. Bush on July 30, 2002 - broadens authority and resources of SEC to monitor and regulate the securities market and provides stiff penalties for noncompliance - only Securities Act of 1933 and Securities Exchange Act of 1934 rival the effects on public accounting, financial disclosure and corporate governance - purpose of legislation was to “protect investors by impropving the accuracy and reliability of corporate disclosures made pursuant to the securities laws and for other purposes. B)Title I - Public Company Accounting Oversight Board 1. Responsibilities: - enhance the standard setting process for accounting practices - strengthen the independence of firms that audit public companies - increase corporate responsibility and the usefuleness of corporate financial disclosure - protect the objectivity and independence of securities analysts - to improve SEC’s resources and oversight 2. Points: - nonprofit funded by public accounting firms and publicly held companies - partial funding comes from registration application fees and annual fees - has authority to levy annual fees to offset costs of reviewing annual reports submitted by the registered firms (has not done so) - process for submission by registered firms of annual reports has not been initiated 3. Fees: - application fees vary depending on number of issuer clients that company audited prior year - fees significantly higher for firms with more than 100 clients - accounting support fee which is paid by “equity issuers” and “investment company issuers” is major source of funding a)equity issuers - public traded companies with average monthly equity market capitalization greater than 25 million during the prior calendar year. b)total amount of the accounting support fees is equal to the SEC approved PCAOB budget less the amounts collected in the previous year from registration application fees and annual fees c)each issuer’s share is the average monthly US capitalization during the preceding calendar year divided by the sum of the average monthly US market capitalization of all equity and investment company issuers - PCAOB develops budget and submits it to SEC for approval 4. Membership: - 5 full time members, 5 yr appt, and two term limit - cannot engage in any other professional activity or be employed - may not share in profit of a public acct firm, nor may receive any payments from a public acct firm, other than fixed continuing payments such as retirement payments - SEC responsible for appt 5 members in consultation with Secretary of the Treasury and Chair of the Federal Reserve Board - SEC can remove member for “good cause” - all must be financially literate and at least two must be/must have been CPAS - to be chair of PCAOB must not have been engaged as a practicing CPA for at least 5yrs prior to appt - know Names of current members 5. Sec 102 - only Public Acct firms approved for reg with PCAOB are auth to prepare or issue audit reports on the financial statements of the companies reg with SEC - application for reg requires detailed info and re: audit clients, iinternal quality control policies and procedures, acct personnel, licensure and financial standing - maintenance - undergo periodic inspections and provide annual reports (once reqt is instituted) - sometimes more than annual 6. Sec 103, 104, 105, 107 and 109 - set budget and manage operations of PCAOB ands its staff - file annual report with SEC - establish/adopt standards re: preparation of audit reports - enforce compliance with SOX, PCAOB rules, prof standards, and sec laws related to prep and issuance of audit reports and related obligations and liab of auditors - conduct investigation of registered firms - establish procedures to investigate and discipline registered firms for violations - conduct disc procedures and impose sanctions (rev, susp or fine up to 15 million) - submit all disc sanctions to SEC for review (can modify or cancel sanctions) C) Title II - Auditor Independence 1. Prohibited Services (section 201) - bookkeeping - financial info systems design and implementation - appraisal or valuation - actuarial - expert services unrelated to audit - internal audit outsourcing - mgmt and hr functions - investment advisor, banking or broker services - legal 2. Engagement Standards (202, 203 and 206) - audit comm must preapprove services by auditor b4 engagement - audit committee must oblige audited firm to rotate auditors - “ ” define and prohibit conflicts of interest b/n auditors and audited company - “ ” responsible for oversight of auditors - also specific info that that auditor must convey to audit committee before audit report is issued D)Title III - Corporate Responsibility (responsibility on senior mgt team, audit comm, and attys of companies reg with SEC) 1. Senior Management Team - illegal for officer/director to exert improper influence on the auditor engaged in the audit of the company’s financial statement (Section 303) - CEO, CFOs etc must certify each quarterly and annual report (section 302) – certain cert reqts - certifying officer must report weaknesses in internal controls over financial reporting - must attest to disclosure controls and procedures which includes financial and nonfinancial information   2. Audit Committee Obligations - responsibility to appoint , compensate and oversee auditor - members prohibited from accepting any compensation other than recompense directly related to role on BOD and its committees - must develop and implement procedures to receive and resolve complaints and concerns from employees and others re acct, internal acct control and auditing matters   3. Attorney Obligations - minimum standards of professional conduct - reqd to report any knowledge/evidence of a material violation of securities law or breach of fiduciary duty (1st to comp chief legal counsel or CEO...if no response, then to audit committee, board committee or board itself) Management and Board Disincentives - members cannot retain profit from selling stock or any other income based or equity based compensation realized during 12 mths after noncompliant doc (304) - SEC has authority to remove any mgmt or board member if they are deemed “unfit” - members of mgmt and board cannot sell or buy any securities through the company’s equity compensation plan during a pension fund blackout period (???)   E)Define the concepts of internal controls for financial reporting and disclosure controls 1. Title IV - Enhanced Financial Disclosures - prohibits personal loans to mgmt or board members (402) - requires disclosure of changes in ownership by management, board members and principal security holders (403) - requires mgmt to establish and maintain adequate internal controls and procedures for financial reporting and whether it has adopted a code of ethics a) Disclosure of Off Balance Sheet Arrangements and Non-GAAP Measures - requires disclosure of off-balance sheet arrangements and contractual obligations (i.e. long term debt, capital lease, operating lease, or purchase obligations) and publicly disclosed or released pro forma financial information (misleading non -GAAP financial measures) (401)  b)Internal Control Evaluation and Report - Management req’d to perform quarterly evaluations of the effectiveness of company’s internal controls and procedures for financial reporting which will be included in internal control report which is part of annual report (404) c) Code of Ethics Disclosure - Requires company to disclose whether it has req’d the prinicpal officer, principal acct officer, or controller to adopt a code of ethics - Must include written standards that promotes: - accountability - fair, reasonable and timely disclosure - ethical handling of any actual or apparent conflicts - compliance with applicable laws, rules or regulations - internal reporting of code of ethics violations d) Financial Expert Disclosure - at least one member of audit committee must have financial expertise and be considered a “financial audit expert” (406)   2. Titles VI, VII and VII - provide information related to security analysts and appropriations (do not apply to nonprofits)   3. Title VIII - Corporate and Criminal Fraud Accountability Act of 2002 - provides that debts incurred in violation of securities fraud law are not dischargeable (803) - extends ths SOL on securities fraud claims and creates crime for defrauding shareholders in publicly traded companies(807 F. Identify the SOX provisions that currently apply to all corporations including nonprofits 1. Document Destruction (802) - amendment of federal obstruction statute - criminal (felony) to “knowingly” conceal, destroy, cover up , add or falsify docs or records in order to impede a federal investigation or bankruptcy proceeding - now applies to all investigations (not just ongoing) - penalty of up to 20 years in jail and fines a) Preservation of Audit Materials - auditors can be charged with felony of they fail to keep audit and review records for five yrs prior from fiscal yr of date audit conducted (802) - penalty of up to 10 years and fines 2. Whistleblower Protection (806) - protected if you are employee of public company or accounting firm who disclose private company or firm information as evidence of accounting violation to a supervisor, federal regulator, law enforcement agency or Congress - cannot discriminate - PCAOB has established Central for Enforcement Tips, Complaints and Other Information E) Other Changes 1. Statute of Limitations (804) - Sol securities fraud used to be three yrs from fraud committed or one yr after discovered - Now, earlier of five yrs from when fraud was committed or two yrs from discovery 2. Title IX: White Collar penalty Enhancements Act of 2002 (902-905) - increases criminal penalties for certain white collar crimes 3. Criminal penalties under 906 - creates criminal penalty for CEO/CFO re quarterly and annual reports - willful violations of certification imprisonment to 20yrs and fines up to 5 million 4. Title X - Corporate Tax returns - CEO must sign federal income tax return of a corporation 5. Title XI: Corporate Fraud Acct Act of 2002 - only sections 1002 and 1007 apply to non profits 6. SEC - SEC has authority to petition federal court to freeze payment of extraordinary payment to director, officer partner, etc. for up to 45 days. - authority to prohibit, conditionally or unconditionally and permanently bar a person from serving as officer of public company if committed securities fraud 7. New Crimes and penalties - US Sentencing Commission must review federal sentencing guidelines to consider changes (1104) - increase of penalties (1106)   READING 2: CHAPTER 2 (JACKSON/FOGARTY)   A) Describe the two SOX requirements for all organizations, including nonprofits 1. Whistleblower Protection a)Requirement for documented whistleblower policy b)establish means to collect, retain and resolve claims regarding internal controls, audit matters and accounting matters (must have investigation process, and disseminating findings) c) MUST BE ANONYMOUS d)no retaliation e)all employees must have company of policy f) policy must be posted g)orientation   2. Document Preservation (preservation and archiving of documents and proh against destruction or falsification of records or docs) a)knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes false entry b)any record, document or tangible object c)with intent to impede , obstruct or influence the investigation or proper administration of any matter within the jd of any dept/agency in uS or any case filed under Title 11 (or in relation to) d) shall be fined, imprisoned and/or imprisoned up to 10 yrs   B) Describe SOX best practices and the benefits that these best practices provide to nonprofits a)audit