This compact presentation elucidates the key elements of the Public Company Accounting Reform & Investor Protection Act, and contemporary inquires related to it, such as steps the corporations should take to comply with the Act and whether or not, the Act has solved all the problems it was intended to address? DOI: 10.13140/RG.2.1.1049.9923

1. SARBANES - OXLEY ACT (SOXA)SARBANES - OXLEY ACT (SOXA)::
CORPORATE DUTIES & DISCLOSURE
Naira R. Matevosyan, MD, PhD, JSM
Master of Science in Jurisprudence

2. CORE INQUIRIESCORE INQUIRIES
Why was the SOXA enacted ?
The key elements of this legislation
Steps the corporations should take to
comply with the SOXA
Has the SOXA solved the problems it
was intended to address ?
(4 - 9)
(10)
(11 -13)
(15 -18)

3. CONTENTSCONTENTS
Definition
Coverage
Key Differences Between the Corporation,
Partnership, & Sole Proprietorship
Exceptions
The Route to the SOXA
Elements of the SOXA
Steps to Comply & Corporate Duty
Enhanced Financial Disclosures
Corporate Whistleblower Protection
Penalties
Costs & Benefits
Notable Cases
Parting Thoughts
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4. DEFINITIONDEFINITION
In 2002, the U.S. Congress passed a Sarbanes - Oxley Act
(SOXA). Known as the "Public Company Accounting
Reform & Investor Protection Act,” this federal law was
signed to:

protect shareholders and the general public from
accounting errors and fraudulent practices in the
enterprise;

improve the accuracy of corporate disclosures.[1, 2]
(1) Pub.L. 107–204
(2) Kohn SM, Kohn MD, Colapinto DK (2004). Whistleblower Law:
A Guide to Legal Protections for Corporate Employees. Praeger 44

5. THE TARGETTHE TARGET
In order to understand a law, one needs to appreciate
the coverage. With all extensions, the SOXA provisions
apply to the:

U.S. public company boards

corporations

management and public accounting firms

privately held companies that may willfully destruct
evidence to impede a Federal investigation.
What about the partnerships, sole proprietorship, non-
profits, and international business associations?
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6. Key Differences Between Corporations, Partners, & Sole Proprietors
- are based on three features: liability distribution, taxation, and
transferability.
CorporationsCorporations are organizational forms utilized by most the U.S. businesses
and provide "limited liability" (LLC) for their owners. If a corporation is sued,
the owner risks losing the investment. Unlike sole proprietors or partners, in
LLC the shareholders are only held liable for their actual investment, and they
do not risk personal assets because the corporation is a separate legal entity.
Major Corporations, like IBM, Apple, are PUBLICLY HELD (their shares can be
sold or exchanged in the stock market). The ones that are not publicly held,
like KOCH Brothers, are CLOSELY HELD.
Sole proprietorshipSole proprietorship has no legal identity separate from its owner.
PartnershipsPartnerships are legally distinct for some purposes but owners retain personal
liability for partnership debts. Partners are liable for all debts and legal
responsibilities and personal assets may be used to handle this.
Principle liability applies only to the genuine corporations.genuine corporations. If a corporation
is a sham:
- the shareholders lose the protection of limited liability;
- creditors may "pierce the corporate veil" to recover corporate debts
from the owners' personal assets. 66

7. EXCEPTIONSEXCEPTIONS:
In certain situations [3, 4] courts may ignore the limited
liability status of a corporation and hold the latter's
officers, directors, shareholders, and members
personally liable for the debts. This is known as
“piercing the corporate veil.”
(3) United States v. Bestfoods, 524 US 51 - Supreme Court 1998
(4) Morris v. Dept. of Taxation, 623 NE 2d 1157 - NY: Court of Appeals
1993 77

8. The Long Road to the SOXAThe Long Road to the SOXA
1900: New York Stock Exchange (NYSE) requires distribution of
annual reports to the stockholders
1909: NYSE requires annual meeting of the stakeholders
1926: NYSE adopts “one share, one vote” standard
1929: Stock market crashes
1932: Increased financial disclosure & independent audits become
mandatory
1934: U.S. Securities and Exchange Commission (SEC) is formed
1955: Shareholder approvals are required for certain corporate
acquisitions
1968: American Stock Exchange (AMEX) publishes the first guide
establishing listing standards
1977: NYSE requires establishment of an audit committee
comprised of independent directors
(continued) 88

9. The RoadThe Road (continues)(continues)
1985: National Association of Securities Dealers Automated Quotations
(NASDAQ) initiates its first corporate governance listing standards
1987: Committee of Sponsoring Organizations (COSO) to Treadway
Commission is established to define responsibilities of the auditor in
detecting and preventing fraud
1999: NYSE/AMEX/NASDAQ adopt new rules based on the Blue Ribbon
Committee on Improving the Effectiveness of Audit Committees
2002: U.S. Congress passes the Sarbanes-Oxley Act (July 30th) in
response to the accounting scandals of early 2000s: Adelphia, Enron,
Peregryne Systems, Tyco International, WorldCom.
2002 to present:present: In the effort to tougher financial governance, SOXA - type
laws are subsequently enacted in Canada (C-SOX, 2002), Germany (German
Corporate Gov. Code, 2002), South Africa (King Report on Corporate Gov.,
2002), France (Loi sur la Sécurité Financière, 2003), The Netherlands (Code
Tabaksblat, 2003), Australia (CLERP, 2004), India (Clause 49, 2005),
Japan (J-SOX, 2006), Italy (L262, 2006), Israel (AEC Bachar Law, 2010), and
Turkey (TC-SOX 11, 2014). 99

10. ELEMENTS OF THE SOXAELEMENTS OF THE SOXA
Title I (Sec. 101-109) - Public Company Accounting Oversight
Board (PCAOB)
Title II (Sec. 201-209) - Auditor Independence
Title III (Sec. 301-308) - Corporate Responsibility
Title IV (Sec. 401-409) - Enhanced Financial Disclosures
Title V (Sec. 501) - Analyst Conflicts of Interest
Title VI (Sec. 601-604) - Commission Resources and Authority
Title VII (Sec. 701-705) - Studies and Reports
Title VIII (Sec. 801-807) - Corporate and Criminal Fraud
Accountability
Title IX (Sec. 901-906) - White Collar Crime Penalty Enhancement
Title X (Sec. 1001) - Corporate Tax Returns
Title XI (Sec. 1101 - 1107)- Corporate Fraud Accountability
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11. STEPS TO COMPLYSTEPS TO COMPLY
Formerly, auditing firms were self-regulated. Since
2002, Title I (PCAOB) requires:
- Registering public accounting firms;
- Establishing auditing standards;
- Inspecting registered public accounting firms;
- Conducting investigations and disciplinary
proceedings with ability to sanction auditors and
audit firms. [5]
(5) Kimmel PD, Weygandt JK, Donald E (2011). Financial Accounting,
6th Edition. Wiley
1111

12. CORPORATE DUTY & GOVERNANCECORPORATE DUTY & GOVERNANCE
Audit Committee = Independent Directors
Duties of the Audit Committee:
- to appoint, compensate, and oversee public accounting firm
performing the audit;
- to resolve disagreements over financial reporting between
management and external auditors;
Duties of the Board:
- to establish “whistle-blower” procedures, as well as new
penalties for retaliation against them;
- to reimburse bonuses and profits if public was misled;
- to remove “substantial unfitness” standard;
- to ban trading during a pension “blackout” period.
Minimum attorney standard (both in-house and offshore):
- any reimbursed funds from guilty parties must be added to a
fund for the benefit of victims.
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13. ENHANCED FINANCIAL DISCLOSURESENHANCED FINANCIAL DISCLOSURES
- Off-balance sheet arrangements and obligations
- Prohibition of the loans to executives and directors
- Insider trades within two business days
- Adoption of the code of ethics for senior financial officers
and requirements
- At least one member of the audit committee must be an
“Audit Committee Financial Expert.” [6, 7]
(6) Bernhard K (2008) The Sarbanes Oxley Act: "Big Brother is watching" you, or
Adequate Measures of Corporate Governance Regulation? 5 Rutgers Business Law
Journal; 64–95
(7) SEC-Press Release on 401(c) (2005). Sec.gov. 2005-06-15. 1313

14. CORPORATE WHISTLEBLOWER PROTECTIONCORPORATE WHISTLEBLOWER PROTECTION
The SOXA protects corporate whistleblowers with its diverse civil,
criminal and administrative provisions:
(1) It requires that all publicly traded corporations create internal and
independent “audit committees” and procedures for employees to
file internal whistleblower complaints.
(2) It sets forth new ethical standards for attorneys who practice before
the SEC. This requires from the attorneys, under the circumstances,
to blow the whistle on their employer or “client.”
(3) It amended the federal obstruction of justice statute and
criminalized retaliation against whistleblowers who provide
“truthful information” to a “law enforcement officer” about the
“commission or possible commission of any Federal offense.” This
provision covers every employer nationwide.
(4) Section 3(b) of the SOXA enforces every clause of the Act. It states
that “a violation by any person of the SOXA shall be treated for all
purposes in the same manner as a violation of the SEC of 1934.” This
section grants jurisdiction to the SEC to enforce every aspect of the
SOXA and provides for criminal penalties for any violation,
including the whistleblower-related wrongs.
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15. PENALTIESPENALTIES
The SOXA has civil, administrative, and criminal
provisions:
ADMINISTRATIVEADMINISTRATIVE - 42 U.S. Code § 7524 (101-103)
CIVILCIVIL - 15 U.S.C. § 7241 (302)
CRIMINALCRIMINAL - 18 U.S.C. § 1350 (902-906)
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16. COSTS & BENEFITSCOSTS & BENEFITS
BenefitsBenefits::
The CEO and CFO are required to unequivocally take
ownership for their financial statements under Section
302.
SOXA helps restore trust in the U.S. markets by
increasing accountability, speeding up reporting, and
making audits more independent.
SOXA helps improve investor confidence in financial
reporting.
CostsCosts::
Excessive executive compensation can be tamed by
Compensation Committees.
Directors must be selected and appraised by
independent Nominating Committees.
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17. NOTABLE CASESNOTABLE CASES
In 2006, Free Enterprise Fund v. Public Company Accounting Oversight Board
constitutionally challenged the PCAOB, claiming that “because the PCAOB
has regulatory powers over the accounting industry, its officers should be
appointed by the President, rather than by the SEC.” [8] The District Court
dismissed the claim. The DC Court of Appeals reversed in part and
remanded. The U.S. Supreme Court affirmed for defendants, holding that
“the Board's appointment is consistent with the Appointments clause.”
In 2014's Lawson v. FMR LLC, the U.S. Supreme Court rejected a narrow
reading of the SOXA whistleblower protection and held that “anti-
retaliation protection of the SOXA also applies to employees of a public
company's private contractors and subcontractors.” [9]
In 2010's Free Ent. Fund v. Public Co. ACCTG. Oversight BD, the U.S. Supreme
Court held that “the dual for-cause limitations on the removal of Board
members contravene the Constitution's separation of powers.” [10]
In 2015's Yates v. United States, the U.S Supreme Court sided with defendant
by reversing the previous judgment and reasoning that "in the physical
world not all objects can use to record or preserve information,” and that
“the fish is not a tangible object in the context of the SOXA.” [11]
(8) 561 U.S. 477, 130 S. Ct. 3138, 177 L. Ed. 2d 706 (2010)
(9) Lawson v. FMR LLC, 134 S. Ct. 1158 – 2014
(10) Free Ent. Fund v. Public Co. ACCTG., 130 S. Ct. 3138 - Supreme Court 2010
(11) Yates v. United States, 574 U.S. (2015)
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18. PARTING THOUGHTSPARTING THOUGHTS
Nearly all of the SOXA provisions apply to publicly traded
corporations. Yet, some state Attorneys General have
proposed elements of the Sarbanes-Oxley Act be applied
to nonprofit organizations.
Nonprofit leaders should carefully visit the SOXA provisions
and determine whether their organizations ought to
deliberately adopt particular governance practices.
Lastly: the SOXA instituted “claw-back” provisions require
CEOs and CFOs return ill-gotten gains to their employer.
Today's online social-media anarchy creates a need to
revisit the SOXA in terms of the ROI and net profit
accountability of the websites in the category of hate-sites
or indie “journalism,” that thrive on the traffic indices.
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