Effects of Sarbanes Oxley Act in corporate governance in the U.S.

Sarbanes-Oxley Act (SOX) was enacted in July 2002 to restore investors' confidence in the
financial markets and close loopholes that allowed public companies to defraud investors. The act had a
profound effect on corporate governance in the U.S. The Sarbanes-Oxley Act requires public companies
to strengthen audit committees, perform internal controls tests, make directors and officers personally
liable for accuracy of financial statements, and strengthen disclosure. The Sarbanes-Oxley Act also
establishes stricter criminal penalties for securities fraud and changes how public accounting firms
operate.

Public companies required to comply with Sarbanes-Oxley incur additional costs directly attributed to
the legislation. Initial costs related to the act include increased expense for annual audits, which
public accounting companies pass on to clients. Accounting companies also incurred additional
liability with increased due diligence and time necessary to complete audits. In addition, the scope of
audits broadened with the inclusion of Section 404. Not only do public companies pay high prices for
audits, but they also must purchase or create internal control software, create an internal control
plan and track and review their internal performance. Penalties for non-compliance are steep.

Most private companies didn’t opt to go public to avoid being bound by the provisions of the Sarbanes
Oxley Act. It creates cultural conflicts and issues may arise as a result of foreign laws and the
requirements of the act. Companies are ensuring they remain in compliance with the act while protecting
those working in international locations. The act helps in ensuring ethics within a company, serving as a
disciplinary. Sarbanes Oxley Act became a burdensome for the companies in terms of cost. It is heavily
felt by companies that rely on manual controls. It also creates new conflicts among jurisdiction. Auditing
firms in other countries that audit both foreign and American issuers are now required to register with the
Public Company Accounting Oversight Board.

Source: www.investopedia.com/ask/answers/052815/what-impact-did-sarbanesoxley-act-have-
corporate-governance-united-states.asp

http://smallbusiness.chron.com/impact-sarbanes-oxley-act-american-businesses-
1547.html

www.docurex.com/en/the-sarbanes-oxley-act-and-its-lasting-impact-on-businesses/

Requirements for Management

Section 302 of the act requires that both Chief Executive Officers and Chief Financial Officers
certify all quarterly and annual financial reports. These certifications must guarantee that all financial
reports issued do not contain any false statements of relevant information. Additionally, these reports
must accurately represent the current financial condition and outputs of the corporation. Misleading facts
or figures should not be contained within the report. By certifying these documents, the government and
public can evaluate the current financial status of all public corporations, as well as monitor actions taken
by the lead directors of the organization.
Due to the act, one of the newest terms to enter the corporate world is "disclosure controls and
procedures". Defined as the specifics surrounding the actual disclosure of the financial reports, the CEO
and CFO are responsible for establish ing the correct procedures for this action, which guarantees that all
material information is disclosed efficiently and in a timely manner. Evaluations are also in place to ensure
that the procedures in place are the most effective manner of disclosing the financial documents.

Section 302 also requires that the executives disclose all relevant information to auditors and the board of
directors. Relevant information includes both the design and operation of internal controls relating to
financial reporting. This allows the audit committee to identify any weaknesses in the operation or design.
Additionally, management and executives can be evaluated using this process. This includes evaluating
the employee's role in the financial reporting procedure. Executives must notify the audit committee of
any significant changes that may have altered the financial reporting process. The Securities and
Exchange Commission also requires that issuers of financial reports disclose an overall system of
disclosure procedures in adherence to Exchange Act Rules 13a-15 and 15d-15. (www.soxlaw.com)

Section 404 mandates internal control reports in conjunction with the annual report to the
Securities and Exchange Commission (SEC). Three areas are required: management's responsibility for
internal control structure, an assessment of the effectiveness of the internal controls, and a statement that
the company's public accountants have confirmed the management's assessment and annual report.

In summary, SOX Section 302 requires a company’s CEO and CFO to personally certify that all records
are complete and accurate. Specifically, they must confirm that they accept personal responsibility for all
internal controls and have reviewed these controls in the past 90 days. These internal controls include a
company’s information security infrastructure inasmuch as its accounting and reporting is performed
electronically in other words, for almost all modern businesses there is a clear mandate to ensure high
security standards are enforced. Section 404 stipulates further requirements for the monitoring and
maintenance of internal controls related to the company’s accounting and financials. It requires
businesses to have an annual audit of these controls performed by an outside firm. This audit assesses
the effectiveness of all internal controls and reports its findings back directly to the SEC.

Source: http://trace.tennessee.edu/cgi/viewcontent.cgi?article=2025&context=utk_chanhonoproj

https://www.blackstratus.com/sox-compliance-requirements/

Requirements for Auditors

An independent auditor must conduct SOX audits. To avoid a conflict of interest, SOX audits must
be separate from other internal audits undertaken by the company. The first step in a SOX audit usually
involves a meeting between management and the auditing firm. In this meeting, both parties will discuss
the specifics of the audit, including when it will take place, what it will look at, what its purposes are and
what results management expects to see. Auditors will inspect previous financial statements to confirm
their accuracy while ultimately it is the auditor’s discretion whether or not a company’s financials pass,
any variance in the numbers more than 5% either way is likely to set off red flags. An audit will also look at
personnel and may interview staff to confirm that their regular duties match their job description, and that
they have the training necessary to access financial information

Auditors now have a list of non-audit services they can't perform during an audit. The Act also imposes a
one-year waiting period for audit firm employees who leave an accounting firm to become an executive
for a former client. In addition, the former firm must wait one year before performing any audit services for
the new employer

Source: https://www.blackstratus.com/sox-compliance-requirements/
Comparison of SOX with PH legislation on corporate governance

Section 101 of the Sarbanes-Oxley Act provides for the creation of the U.S. Public Company
Accounting Oversight Board. The Board has a specialized function, that is, to oversee audits of all public
companies, that is, those companies whose shares of stock are listed and traded in the public stock
exchanges. The Board was created to protect the interests of the investing public by ensuring that
financial reports of listed companies are informative and accurate with respect to their true financial
conditions, results of operations, and sources and uses of funds, and disclosures of other information that
may influence the market prices of their shares of stock. The Board is also tasked with ensuring that audit
companies and their partners have no other financial interest in their client companies, which may affect
the quality of their audit reports. In the Philippines, the Philippine Regulatory Board of Accountancy is
tasked under the Revised Accountancy Law of 2004 with the supervision, control and regulation of the
practice of accountancy and has the power to oversee the quality of audits of all financial statements.

Section 201 of the Sarbanes-Oxley Act prohibits firms performing audits of listed companies from
engaging in other financial services for the latter. Prohibited activities include bookkeeping, financial
system design and implementation, appraisal or valuation services, actuarial services, internal audit
outsourcing services, management or human resources consultancy, investment advising, and legal and
other expert services not connected to the audit. The Code of Ethics for Professional Accountants in the
Philippines prohibits firms performing audits of listed companies from acquiring other engagements with
that are directly related to the preparation of financial statements such as bookkeeping, information
technology and actuarial services. However, it does not prohibit external auditors from performing other
services not directly connected to the preparation of financial statements such as taxation and
management consultancy.

Section 302 of the Sarbanes-Oxley Act requires a certification of listed companies’ annual and/or
quarterly reports by the principal executive officer or officers, and principal financial officer or officers, or
persons performing similar functions. In the Philippines, the SEC released a Financial Disclosures
Checklist summarizing the disclosures required by SRC Rules 68 and 68.1 and current SFAS/IAS in
effect as of January 1, 2004. The checklist includes a Statement of Management’s Responsibility
certifying, among others, that: (1) financial statements have been prepared in conformity with generally
accepted accounting standards; (2) management maintains a system of accounting and reporting which
provides for the necessary internal controls; (3) management has disclosed to the audit committee and to
its external auditor significant weaknesses in internal controls; and (4) its board of directors has reviewed
the financial statements.

Section 401 of the Sarbanes-Oxley Act requires that financial reports must include a statement of all
material correcting adjustments and off-balance sheet transactions, arrangements, obligations, and other
relationships of the issuer that may have a material current or future effect on the company. The
requirement is intended to provide additional information and, thus, protection to investors. In the
Philippines, the Accounting Standards Council requires disclosure of all significant accounting policies
(SFAS No. 15 1986) and all related party transactions (SFAS No. 16 1986) although there is a move
towards adopting international accounting standards by 2005. Currently, the SEC’s Financial Disclosures
checklist recommends disclosure of correction of all fundamental errors and related party transactions.

Section 402 of the U.S. Sarbanes-Oxley Act prohibits the granting by listed companies of personal loans
to executives. The objective of the prohibition is to prevent executives from acquiring a personal interest
in the company that may conflict with their fiduciary obligation to its stockholders. It prevents executives
from taking advantage of their position in the company and from competing for company funds with
business uses and stockholders. Directors in Philippine boards were previously prohibited under the
Corporation Code of the Philippines from receiving compensation as such; they may only receive
reasonable per diems. The foregoing provision has been amended by section 8, chapter II of the Code of
Corporate Governance now allowing the payment of remuneration to directors. As a safeguard, however,
directors are prohibited from participating in decisions involving their own remuneration. In addition, all
compensation paid to directors must be disclosed. Further, directors receiving compensation for services
rendered to a corporation in a capacity other than as directors are still subject to the requirements for
approval of contracts with self-dealing directors provided under sections 32 and 33 of the Corporation
Code of the Philippines. There is no similar prohibition on personal loans to executives under Philippine
law.

Section 407 of the U.S. Sarbanes-Oxley Act requires listed companies to disclose in their periodic reports
whether or not the board committee has at least one (1) member who is a financial expert. A financial
expert is one who possesses an understanding of audit committee functions and generally accepted
accounting principles and financial statements. Under Philippine law, the Code of Corporate Governance
requires at least one (1) board audit committee member to have related audit experience and gives
preference to those with accounting or finance background although the latter does not specify the nature
of the required audit experience.

Sec. 906 of the U.S. Sarbanes-Oxley Act provides for the imposition of a fine of not more than $1,000,000
and penalty of imprisonment for not more than 10 years for certification by a chief executive officer of a
listed company’s periodic financial statements or reports while knowing that they do not comply with all
the requirements of the U.S. Securities Exchange Act of 1934, as amended. The penalty is higher (fine of
not more $5,000,000 and imprisonment of not more than 20 years) in case of willful certification. Thus, the
U.S. Sarbanes-Oxley Act imposes a fine for any false certification although it did not necessarily result in
a material misstatement or omission. Further, the penalties imposed by the Sarbanes-Oxley Act are more
U.S Sarbanes-Oxley Act and Philippine Law on Governance June 2004 12 onerous for willful certification
as compared to those imposed under the Philippine Tax Code for willful falsification or essential
misstatement in financial reports. Under the National Internal Revenue Code of the Philippines, in case of
willful falsification of any report or statement bearing on any examination or audit for tax purposes by any
financial officer, he will be subject, upon conviction, to a fine of not less than P50,000 but not more than
P100,000 and imprisonment of not less than 2 years but not more than 6 years. The same penalties are
imposed in case of certification of financial statements containing essential misstatement of facts or
omission in respect of the transactions, taxable income, deduction and exemption.

Section 1106 of the Sarbanes-Oxley Act increased the fine from $1,000,000 to $5,000,000 and the
penalty of imprisonment from 10 to 20 years for any willful violation by a natural person of the U.S.
Securities Exchange Act of 1934, as amended. The same penalties are imposed on the making of any
false or misleading statement in any document or report that is required to be filed under the said
Securities Exchange Act. Further, the Sarbanes-Oxley Act increased the fine from P2,500,000 to
$25,000,000 in case of violations committed by corporations. Under section 73 of the Securities
Regulation Code imposes a lower fine of not less than P50,000 but more than P5,000,000, or
imprisonment of not less than 7 years nor more than 21 years, or both, in the discretion of the court, for
any violation of the said Code.

Sec. 906 of the U.S. Sarbanes-Oxley Act provides for the imposition of a fine of not more than $1,000,000
and penalty of imprisonment for not more than 10 years for certification by a chief executive officer of a
listed company’s periodic financial statements or reports while knowing that they do not comply with all
the requirements of the U.S. Securities Exchange Act of 1934, as amended. The penalty is higher (fine of
not more $5,000,000 and imprisonment of not more than 20 years) in case of willful certification. Thus, the
U.S. Sarbanes-Oxley Act imposes a fine for any false certification although it did not necessarily result in
a material misstatement or omission. Further, the penalties imposed by the Sarbanes-Oxley Act are more
U.S Sarbanes-Oxley Act and Philippine Law on Governance June 2004 12 onerous for willful certification
as compared to those imposed under the Philippine Tax Code for willful falsification or essential
misstatement in financial reports. Under the National Internal Revenue Code of the Philippines, in case of
willful falsification of any report or statement bearing on any examination or audit for tax purposes by any
financial officer, he will be subject, upon conviction, to a fine of not less than P50,000 but not more than
P100,000 and imprisonment of not less than 2 years but not more than 6 years. The same penalties are
imposed in case of certification of financial statements containing essential misstatement of facts or
omission in respect of the transactions, taxable income, deduction and exemption.

Source: http://www.dlsu.edu.ph/research/centers/cberd/pdf/papers/Working%20Paper%202004-05.PDF