Sarbanes-Oxley Act

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What are the basic provisions of the Sarbanes -Oxley Act?

• Rule 404 requires each company to adopt effective financial controls. • CEOs and CFOs must personally certify their company’s financial statements. These officers are subject to criminal penalties for violations. • All members of a board’s audit committee must be independent. • A company cannot make personal loans to its directors or officers. • If a company has to restate its earnings, its CEO and CFO must reimburse the company for any bonus or profits they have received from selling company stock within a year of the release of the flawed financials. • Each company must disclose if it has an ethics code and, if it does not, why not. • It is a felony to interfere with a federal investigation into fraud. • Whistle-blowing employees are protected. • A new Public Accounting Oversight Board has been established to oversee the auditing of public companies.

What are the rights of shareholders?

• Right to information • Right to vote • Right to dissent • Right to protection from other shareholders • Right to monitor

What recourse do shareholders have against corporations if shareholder rights are violated?

Shareholders are permitted to sue the corporation directly only if their own rights have been harmed.

What are the key provisions of the Securities Act of 1933?

The 1933 Act requires that, before offering or selling securities, the issuer must register the securities with the SEC, unless the securities qualify for an exemption.

What are the disclosure requirements of the Securities Act of 1933?

Elaborate registration statements; audited financials: • An initial, detailed information statement when the company first registers (similar to the filing required under the 1933 Act) • Annual reports on Form 10-K, containing audited financial statements, a detailed analysis of the company’s performance, and information about officers and directors • Quarterly reports on Form 10-Q, which are less detailed than 10-Ks and contain un-audited financials • Form 8-Ks to report any significant developments, such as bankruptcy, a change in control, a purchase or sale of significant assets, the resignation of a director as a result of a policy dispute, or a change in auditing firms

How did Sarbanes-Oxley change the disclosure requirements of the Securities Act of 1933?

It requires each company’s CEO and CFO to certify that: • The information in the quarterly and annual reports is true, • The company has effective internal controls, and • The officers have informed the company’s audit committee and its auditors of any concerns that they have about the internal control system.

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