Republic of the Philippines

Polytechnic University of the Philippines

Sta. Maria, Bulacan

TOPIC VI
Standard setting, best practices and corporate governace
reform

6.3 Legislative Initiatives And Proposals

(Sarbanes-Oaxley Act)

Mauricio, Armand C.
BSA 3-1
May 2, 2015
Mrs. Carolina C. Guerrero

INTRODUCTION
President Bush signed into law Sarbanes-Oxley Act of 2002 also known as the Public
Company Accounting Reform and Investor Protection Act of 2002 and commonly called
Sarbanes-Oxley , Sarbox Or SOX is a United States federal law enacted on July 30, 2002 and
introduced major changes to the regulation of financial practice and corporate governance. The
legislation set new or enhanced standards for all U.S. public company boards, management and
public accounting firms. The act contains 11 titles, or sections, ranging from additional corporate
board responsibilities to criminal penalties. The Act mandated a number of reforms to enhance
corporate responsibility, enhance financial disclosures and combat corporate and accounting
fraud, and created the "Public Company Accounting Oversight Board," also known as the
PCAOB, to oversee the activities of the auditing profession.

The Benefits of the Sarbanes-Oxley Act of 2002

While the direct costs associated with the implementation of and compliance with SOX can be
quantified and we can at least enumerate some of the indirect costs of compliance, when the
discussion turns to benefits it quickly becomes apparent that the benefits are more subjective in
nature and are much more difficult to measure and quantify. The initial problem involves
capturing and quantifying all of the benefits. Numerous empirical studies and surveys have
indicated that SOX has improved the reliability of financial reporting, effectiveness of corporate
governance, corporate and investor liquidity and has resulted in a reduction of financial
statement fraud.

(1) Reliability of Financial Information:

The original purpose behind the effort that produced SOX was to restore public confidence in the
financial statements prepared by public companies. One of the main of objectives of the internal
control must be to produce reliable financial information as the more effective internal controls
are, the more reliable the information produced will be. As one of SOXs requirements is the
maintenance of effective internal controls one should reasonably expect that reliable information
would be produced. Support for this expectation can be found in several studies.
(2) Strengthening Corporate Governance:
Organizations possessing strong corporate governance provide discipline for employees and a
tacit structure for the company as a whole. The presence of ethical values and of a business
culture of honesty results in better bottom line performance. Prentice and Spence (2007) show
significant positive correlation between corporate governance and financial performance.
Governance Metrics International (2005) found in a study of 2500 international companies that
SOX led to a 10% improvement in corporate governance performance of U.S. companies versus
their foreign counterparts.
(3) Reduction of Financial Statement Fraud:
Again, a major impetus behind the Sarbanes-Oxley Act was deliberate financial statement fraud.
When committed on a large scale (as was the case with Enron and WorldCom), billions of dollars
can be lost and investor confidence in financial market will be reduced. Since SOX was enacted,
there has not been a major domestic corporate financial scandal uncovered other than the options
back-dating scandal that occurred before July 2002 (Prentice, 2007). Further, evidence suggests

that the incidence of fraud has declined relative to the pre-SOX era (Cornerstone Research
2007). Finally, with respect to this topic, in a review of SEC enforcement releases, Deloitte
(2007) reported a decline in fraud incidences. This can only be interpreted as suggesting that
SOX has had a positive impact.
(4) Model for private and nonprofit companies:
SOXs requirements have attracted many private and nonprofit companies to implement its
provisions as best practice. This is the case even though SOX was never intended for non-public
and nonforprofit companies. In a survey of the fastest-growing private US companies conducted
by PriceWaterhouseCoopers' (2005), thirty percent (30%) of the companies surveyed indicated
that they were impacted or would be impacted in the near future by SOX.

Eleven Titles of SOX, sections in each Title

SECTION 1. SHORT TITLE; TABLE OF CONTENTS

(a) SHORT TITLE.This Act may be cited as the Sarbanes- Oxley Act of 2002.
(b) TABLE OF CONTENTS.The table of contents for this Act is as follows:
Sec. 1. Short title; table of contents.
Sec. 2. Definitions.
Sec. 3. Commission rules and enforcement.

TITLE IPUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD

Sec. 101. Establishment; administrative provisions.

Sec. 102. Registration with the Board.
Sec. 103. Auditing, quality control, and independence standards and rules.
Sec. 104. Inspections of registered public accounting firms.
Sec. 105. Investigations and disciplinary proceedings.
Sec. 106. Foreign public accounting firms.
Sec. 107. Commission oversight of the Board.
Sec. 108. Accounting standards.
Sec. 109. Funding.

TITLE IIAUDITOR INDEPENDENCE

Sec. 201. Services outside the scope of practice of auditors.

Sec. 202. Preapproval requirements.
Sec. 203. Audit partner rotation.
Sec. 204. Auditor reports to audit committees.
Sec. 205. Conforming amendments.
Sec. 206. Conflicts of interest.
Sec. 207. Study of mandatory rotation of registered public accounting firms.
Sec. 208. Commission authority.
Sec. 209. Considerations by appropriate State regulatory authorities.

TITLE IIICORPORATE RESPONSIBILITY

Sec. 301. Public company audit committees.

Sec. 302. Corporate responsibility for financial reports.
Sec. 303. Improper influence on conduct of audits.
Sec. 304. Forfeiture of certain bonuses and profits.
Sec. 305. Officer and director bars and penalties.
Sec. 306. Insider trades during pension fund blackout periods.
Sec. 307. Rules of professional responsibility for attorneys.
Sec. 308. Fair funds for investors.

TITLE IVENHANCED FINANCIAL DISCLOSURES

Sec. 401. Disclosures in periodic reports.

Sec. 402. Enhanced conflict of interest provisions.
Sec. 403. Disclosures of transactions involving management and principal
stockholders. H. R. 37632
Sec. 404. Management assessment of internal controls.
Sec. 405. Exemption.
Sec. 406. Code of ethics for senior financial officers.
Sec. 407. Disclosure of audit committee financial expert.
Sec. 408. Enhanced review of periodic disclosures by issuers.
Sec. 409. Real time issuer disclosures.

TITLE VANALYST CONFLICTS OF INTEREST

Sec. 501. Treatment of securities analysts by registered securities associations

and national securities exchanges.

TITLE VICOMMISSION RESOURCES AND AUTHORITY

Sec. 601. Authorization of appropriations.

Sec. 602. Appearance and practice before the Commission.
Sec. 603. Federal court authority to impose penny stock bars.
Sec. 604. Qualifications of associated persons of brokers and dealers.

TITLE VIISTUDIES AND REPORTS

Sec. 701. GAO study and report regarding consolidation of public

accounting firms.
Sec. 702. Commission study and report regarding credit rating agencies.
Sec. 703. Study and report on violators and violations
Sec. 704. Study of enforcement actions.
Sec. 705. Study of investment banks.

TITLE VIIICORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY

Sec. 801. Short title.

Sec. 802. Criminal penalties for altering documents.
Sec. 803. Debts nondischargeable if incurred in violation of securities fraud laws.
criminal fraud.
Sec. 806. Protection for employees of publicly traded companies who provide
evidence of fraud.
Sec. 807. Criminal penalties for defrauding shareholders of publicly traded
companies.

TITLE IXWHITE-COLLAR CRIME PENALTY ENHANCEMENTS

Sec. 901. Short title.

Sec. 902. Attempts and conspiracies to commit criminal fraud offenses.
Sec. 903. Criminal penalties for mail and wire fraud.
Sec. 904. Criminal penalties for violations of the Employee Retirement Income
Security Act of 1974.
Sec. 905. Amendment to sentencing guidelines relating to certain white-collar
offenses.
Sec. 906. Corporate responsibility for financial reports.

TITLE XCORPORATE TAX RETURNS

Sec. 1001. Sense of the Senate regarding the signing of corporate tax returns by
chief executive officers.

TITLE XICORPORATE FRAUD AND ACCOUNTABILITY

Sec. 1101. Short title.

Sec. 1102. Tampering with a record or otherwise impeding an official proceeding.
Sec. 1103. Temporary freeze authority for the Securities and Exchange
Commission.
Sec. 1104. Amendment to the Federal Sentencing Guidelines.
Sec. 1105. Authority of the Commission to prohibit persons from serving as
officers or directors.
Sec. 1106. Increased criminal penalties under Securities Exchange Act of 1934.
Sec. 1107. Retaliation against informants.

Contents of SOX Act in general

Sarbanes Oxley Act Establishes new standards for Corporate Boards and Audit
Committees

Sarbanes Oxley Act Establishes new accountability standards and criminal penalties for
Corporate Management

Sarbanes Oxley Act Establishes new independence standards for External Auditors

Sarbanes Oxley Act Establishes a Public Company Accounting Oversight Board

(PCAOB) under the Security and Exchange Commission (SEC) to oversee public
accounting firms and issue accounting standards.

Restore public confidence in the nations capital markets by strengthening corporate

accounting controls.

The act also covers issues such as auditor independence, corporate governance, internal
control assessment, and enhanced financial disclosure.

Important Sections in SOX

Section 302- Corporate Responsibility for Financial Reports

Section 302 of the Act mandates a set of internal procedures designed to ensure accurate
financial disclosure. The signing officers must certify that they are "responsible for establishing
and maintaining internal controls" and "have designed such internal controls to ensure that
material information relating to the company and its consolidated subsidiaries is made known to
such officers by others within those entities, particularly during the period in which the periodic
reports are being prepared."

Section 401- Disclosures in Periodic Reports

Financial statements are published by issuers are required to be accurate and presented in a
manner that does not contain incorrect statements or admit to state material information. These
financial statements shall also include all material off-balance sheet liabilities, obligations or
transactions. The Commission was required to study and report on the extent of off-balance
transactions resulting transparent reporting. The Commission is also required to determine
whether generally accepted accounting principals or other regulations result in open and
meaningful reporting by issuers.

Section 404- Management Assessment of Internal Controls

Requires each annual report of an issuer to contain an internal control report, which shall:

State the responsibility of management for establishing and maintaining an

adequate internal control structure and procedures for financial reporting; and

Contain an assessment, as of the end of the issuers fiscal year, of the

effectiveness of the internal control structure and procedures of the issuer for
financial reporting.

Section 409- Real Time Issuer Disclosures

Issuers are required 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 terms that are

easy to understand supported by trend and qualitative information of graphic presentations as

appropriate.

Section 802- Penalties for altering documents

Section 802 (a) of the SOX, states

Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false
entry in any record, document, or tangible object with the intent to impede, obstruct, or influence
the investigation or proper administration of any matter within the jurisdiction of any department
or agency of the United States or any case filed under title 11, or in relation to or contemplation
of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or
both.

Section 906- Corporate Responsibility for Financial Reports

Section 906 states: Failure of corporate officers to certify financial reports

Certification of Periodic Financial Reports.

Content.

Criminal Penalties.

Section 1107 - Criminal penalties for retaliation against whistleblowers

Section 1107 of the SOX states:

Whoever knowingly, with the intent to retaliate, takes any action harmful to any person,
including interference with the lawful employment or livelihood of any person, for providing to a
law enforcement officer any truthful information relating to the commission or possible
commission of any federal offense, shall be fined under this title, imprisoned not more than 10
years, or both.
The Act Applies to all public companies in the U.S. and international companies that have
registered equity or debt securities with the SEC and the accounting firms that provides auditing
services to them.

Philippine Laws and Regulations in Comparison to SOX Act

In relation to the enactment of the Sarbanes Oxley act in the US. The Philippines, in order to
solve the accounting scandals that arise here has enacted laws through the Securities and
Exchange Commission by the issuance of a Code of Corporate Governance and Rules 68 and
68.1 implementing the Securities Regulation Code summarized in a Financial Disclosures
checklist.

The Sarbanes Oxley act includes the creation Of the PCAOB which is the Public Company
Accounting Oversight Board, 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. In terms of the auditors independence, Sarbanes Oxley Act has
prohibited Auditors to perform Non audit services to the client such as advisory services,
however, 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. In SOX act, Section 302 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 whereas 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 Managements Responsibility certifying, among others, that: financial
statements have been prepared in conformity with generally accepted accounting standards;
management maintains a system of accounting and reporting which provides for the necessary
internal controls; management has disclosed to the audit committee and to its external auditor
significant weaknesses in internal controls; and its board of directors has reviewed the financial
statements. Criminal penalties for altering documents Section 802 of the Sarbanes-Oxley Act
imposes a fine and a maximum imprisonment of 20 years for the destruction, alteration or
falsification of records in Federal investigations.

The same section imposes a fine and a

maximum imprisonment of 10 years for the destruction of corporate audit records and work

papers (to be kept for a period of 5 years from the end of the fiscal period in which the audit or
review was conducted). The imposition of higher penalties under the Sarbanes-Oxley Act for
destruction, alteration falsification of records of listed companies under investigation took into
consideration their potential adverse effect on the public.
Under Philippine law, section 172 of the Revised Penal Code of the Philippines imposes a
fine of P5,000 and the penalty of prison correctional in its medium and maximum periods
(ranging from 2 years, 4 months and 1 day to 6 years) for the crime of falsification by private
individuals and the use of falsified documents. Falsification of documents is considered as a
less grave felony under Art. 9 and is, thus, imposed a correctional (not an afflictive) penalty, as
defined under Article 25 of the Philippines Revised Penal Code. 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.

Lastly,

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.

As previously mentioned, 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.

http://www.sec.gov/about/laws/soa2002.pdf
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