 Oh, and welcome to the session in which you would look at the Sarbanes-Oxley Act of 2002, which came after the major fraud that took place at Wartcom, Enron, Tyco, Global Crossing as well as other companies. Now personally, I lived through those events because I was starting my career at that point and I lived through, I was watching the news and I saw how these all events unfolded. Matter of fact, this is what led me to study accounting further because my undergraduate was finance. So when these fraud took places, I was a finance major. Matter of fact, I was working at Merrill Lynch as a stockbroker and that raised my interest in accounting and I started to follow accounting. So this topic is close to my heart, basically you can say this, but I'm going to cover Sarbanes-Oxley as it relates to the CPA exam. So if you're a CPA candidate, obviously I strongly suggest you check out my website, farhatlectures.com. I don't replace your CPA review course. That's not my intent. 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So these are the provisions that we're going to be working on about Sarbanes-Axley now Sarbanes-Axley will have much more, much more details. All we're concerned about is what you're going to be tested on on the CPA exam. So we'll go over these topics starting with the audit committee and there's a reason basically I'll try to kind of talk a little bit about every, every provision we talk about the audit committee is came about because we want to have independent and independent arm of the company hiring the auditor. Therefore, the audit committee is a basically a subcommittee in the board of directors hires compensate and oversees the work of the independent auditor. And the reason is you don't want management to hire the auditor because if management hires the auditor, then management will have some undue influence because they hire them. So what we do is we create a subcommittee of the board of directors called the audit committee, they would hire and compensate and oversees the auditor in this way, at least from an appearance perspective, if not in reality, someone independent in the company hires the audit committee. The audit committee's job is also to track, record and follow any complaints about internal control, IC or auditing issue that's part of their job. They need to handle any anonymous report of employee about accounting and auditing practices because part of WorldCom and Enron, what would break things is people inside the company said something. And now what we wanted to do, we wanted to make sure that the company, they have safe routes for those whistleblowers. So they are responsible for making sure those complaints remain anonymous. The members of the committee must be independent of the member of the board of directors must be independent members. It means not affiliated with the issuer. This is what independent is. And they are compensated only for the services on the board, so not compensated extra. The committee has to be composed of three, at least three, could be more than three, fully independent members. The members has to be independent. And one of the three has to be a financial expert. Now, if that's not the case, we need to disclose this. Now, what does it mean being a financial expert? Well, yeah, that's important. Well, how do we define this is you understand gap and financial statement. You understand the application of gap. You understand internal control and you understand your role, understand your function as part of the audit committee and simply put, all these fits the qualification of a CPA as well as somebody other than a CPA, maybe a CMA, but simply put, if you're a CPA, a qualified CPA with experience, you know, you should be able to be considered a financial expert. You don't have to be a CPA, but what I'm trying to say is by the fault CPA should be considered a financial expert. The second thing we're going to look at is the PCAOB, the public company accounting oversight board basically oversees the audit of public companies, basically the audit of the accounting firms. So every year they come up with their report and everybody wait this report because the PCAOB audit companies like KPMG audit companies like EY audit companies like PWC, it's the audit of the audit firms. So somebody needs to audit the audit firms. So what was happening before 2002? So before the Sarbanes-Axley, who was auditing those accounting firms? They were auditing each other. So PWC will be audited by EY. EY will be audited by KPMG, so on and so forth. So we said, well, that's not acceptable. After Arthur Anderson occur, we want an independent board. This is the PCAOB that audit committee also issues accounting standard for public companies, enforces those standards, enforce professional standard, enforces SOCs overall, and any relevant securities. So basically it oversees the accounting firms. Now the accounting firms must register with the PCAOB and there's a fee to register, you have to register. And the PCAOB prohibits certain non audit services. And this is important because Arthur Anderson, the company that audited Enron, the company that audited Enron, they did the audit for Enron and they did consulting work for them. So the total fee per year that they paid Arthur Anderson, they paid them per year, 52 million between the two. Part of it was 27 million was for consulting and I don't know, 25 million was for audit and think about it. Arthur Anderson was providing both consulting services and auditing services for Enron and what happened is, well, you're not really, you're no longer independent because as an auditor, you have to be independent as a consultant. You don't, you should not be independent. So what happening, Arthur Anderson was really auditing themselves. So that's not acceptable anymore. So you cannot provide any consulting, actuarial services, bookkeeping services. You cannot design and implement or accounting information system. No valuation or appraisal services. You cannot perform any internal control services. Any management function, they always ask for management function. You cannot perform any management function or HR function. You cannot be their broker dealer, investment advisor, investment banking, anything like this. You cannot provide any expert service advice unrelated, unrelated to the audit, like legal services. Now, can you provide tax services? They might ask about this tax services, maybe allowed as long as it's pre approved by the audit committee. Now, also this topic, you'd learn about SOC when you took your audit course. So basically this lesson overlap with the auditing section of the CPA exam. So this is basically mainly what you need to know about the PCAOB. The other thing you want to know about SOCs is the reporting, which is section 302. And this is basically came about after the executives. I believe this is the executive, the SEO of WordCom. They kind of, they plead ignorance. They said, we don't know, we don't know accounting. We certified the financial statements without really knowing what's in them. So going forward after Surveillance, actually SEO and the CFO must certify the annual report and the quarterly report, the 10K and the 10Q, OK, that they reviewed the report, that you cannot claim ignorance anymore, that as far as you know, to the best of your knowledge, they are free of material and statement. Again, the key is not to plead ignorance down the road. You have to take explicit responsibility for the internal control system and it was evaluated and it's working effectively. And you have to kind of basically make sure you communicated all significant deficiencies and any fraud, notice here, any fraud to the audit committee, not material or immaterial. Any fraud has to be reported to the audit committee. We talked about the audit committee earlier. Section 404 of the Sarbanes-Axley deals with management assessment of internal control. Now, the annual report must contain management is responsible for establishing and maintaining those two words, adequate internal control over financial report. And remember, always they try to test you on this. Management is responsible for that. You have to tell us which standard you use in the US. Mostly we use the COSO standard. And if you want to learn about the COSO standards, I have four or five recording about this. The assessment of the independent public accounting firm, which is part of the PCAOB, they have to tell us whether the internal control was effective or not. Various other provisions, loan to executives and directors, because, you know, because part of the fraud, especially and around the company, was giving loans to executives. Loans to executives and officers is generally prohibited. Certain exceptions apply like a home improvement loan or a small consumer credit loan, that's fine. Code of ethics companies must have, issuers must have a code of ethics for senior financial officers. And if they don't, they have to disclose why they don't have that. Now penalties, penalties are important. First, you want to provide production against whistleblowers. And if you, if the company penalized the whistleblower, there is a fine and up to 10 years in prison or both. Okay. And the fine, I don't know if, you know, the fine is substantial for that. You have to be very careful. Fine and up to 20 years in prison for destroying, covering up force of fine journal entries to impede US investigation. And what Arthur Anderson did when they were caught, they started to shred the paperwork when the investigation took place. He also certifying non-compliant filing. So if you did certify, if you said, yeah, the numbers are good. The reports is good. Now, sometimes you may do it with prior knowledge and sometimes you might do it without prior knowledge. So if you did it with prior knowledge, which is bad, really bad, there's a fine up to 5 million in 20 years to prison. If you did it without knowledge, without knowledge is by error, by mistake. Now who determines whether you did it with or without knowledge? Obviously, someone, the judge, the jury, because you have to go through through investigation, you have to go through the legal system. But if you did it with prior knowledge, obviously the fine is higher and the term in prison is higher. You also have to forfeit any bonus profit from selling the stock, any incentive-based compensation for the past 12 years. If as a result of something you did certifying the financial statement and now you have to do a restatement due to a misconduct, then you basically have to give back the money because you profited from that. OK, and the SEC, what's going to happen if you are involved in this, they can prohibit you, censor you from serving as a director or as an officer for other public companies. So there are quite a few penalties if you were caught under the Sarbanes axley and I still remember a cousin of mine, he was a CFO of a public company and as I was switching careers from finance to accounting, I used to talk to him on a regular basis. And he used to tell me like 2003, 2004, he said they wish they can take their company private because Sarbanes axley was requiring a lot of a lot of a lot of regulations, a lot of compliance and compliance is constantly and they were even thinking about going private, going private this way, they don't have to comply with all these Sarbanes axley act. At the end of this recording, I'm going to remind you about farhatlectures.com. I can be a useful addition to your CPA review course. That's what I can do. You know, I can help you pass the exam. I can help you understand the material differently. If you're interested, please take a look at my website. Study hard. Good luck. The CPA is.