SARBOX

Background A Step Towards Right Direction Introduction to SARBOX Section: 302 Section: 401 Section: 404 Section: 409 Section: 802

3. BACKGROUND
In US and in many other industrialized countries in the 19th century the corporation laws enhanced the rights of the corporate boards to govern without unanimous consent of shareholders The rights of individual owners and shareholders became increasingly imitative The Wall Street Crash of 1929 (Global economic Crisis of 1929-1933) led social scientists and legal scholars (Austus Augustus Berle, Edmin Dodd, Gardiner C. Means) consider the changing role of modern corporation in society Berle and Means monograph the Modern Corporation and Private Property (1932) has considerable impact on CG concept.

4. BACKGROUND-2
After the Second World War US economy and politics strengthened and became globally more aggressive Reverse was true for the rest of the world, especially for Europe US ownership of multinational corporations rapidly increased and simultaneously the managerial class emerged

5. BACKGROUND-3
Many Harvard Business School management professors published monographs:
Myles Mace: Entrepreneurship Alfred D. Chandler Jr: Business History Jay Lorsch: Organizational Behavior Elizabeth MacLver: Organizational Behavior

Most of them suggested that:

Many large corporations had dominant control over business affairs without sufficient accountability or monitoring and control by BOD

6. BACKGROUND-4
In 1990s a wave of dismissal of CEO by BOD took place:
IBM Kodak Honeywell

The 1997 east Asian Financial Crisis severely affected economies of Thailand, Malaysia, Indonesia, South Korea and Philippines through the exit of foreign capital The corporate governance mechanisms in these countries highlighted the weakness of the institution in their economies

7. BACKGROUND-5: MAJOR SCANDALS

In 2000s, the massive bankruptcies of Enron and World Com Corporate scandals of Adelphia Communications, AOL, Arthur Andersen, Global Crossing, Tyco, etc. led to increased political interest in corporate governance. This led to the passage of the SarbanesOxley Act in 2002.

8. A STEP TOWARDS RIGHT DIRECTION-1

SARBOX is an important step in corporate governance because this Act demonstrates the responsiveness of the government at the backdrop of increasing integrity and confidence crises in CG area due to mass scale scandals Introduction of this Act by incorporating OECD principles and international best practices prompted creation of better and proper CG practice environment The mandatory character of the provisions of the Act served as the basis for the corporations to proceed with good practices, which they would have ignored in absence of the Act.

9. A STEP TOWARDS RIGHT DIRECTION-2 The then SEC Chairman William Donaldson, testifying in September 2003 before the Senate Committee on Banking, Housing, and Urban Affairs, said it has effected a dramatic change across the corporate landscape to reestablish investor confidence in the integrity of corporate disclosures and financial reporting. The Sarbanes-Oxley Act places considerable emphasis on correcting the most critical manifestations of slack corporate governance practices, including:

10. A STEP TOWARDS RIGHT DIRECTION-3

Management dealing in an environment full of pervasive conflicts of interest; Lack of strict transparency, reliability, and accuracy standards in financial reporting; Lack of independence between the key players in corporate governance (the board of directors, management, and auditors); Lack of adequate enforcement tools at the disposal of regulators; and Widespread conflicts of interest influencing securities market transactions.

11. INTRODUCTION TO SARBOX

Named after senator Sarbanes Paul and Representative Michael Oxley Introduced in 2002 Mandatory for all relevant organizations to comply with the Act Have 11 titles of which most relevant sections are: 302, 401, 404, 409 and 802

12. SECTION: 302

Periodic statutory financial reports are to include certificates that:
The signing officers have reviewed the report The report does not contain any material untrue statements or material omission or considered misleading The financial statements and related information fairly present the financial condition and the results in all material respects The signing officers are responsible for internal controls within the previous 90 days have reported on their findings A list of all deficiencies in the internal controls and information on any fraud that involves employees who are involved with internal activities Any specific significant changes in internal controls or related factors that could have a negative impact on the internal controls

13. SECTION: 401

This section is listed under Title IV of the Act: Enhanced Disclosures, and pertains to Disclosures in Periodic Reports. Summary of the section: The Financial Statements are:
to be accurate required to be presented in a manner that does not contain incorrect statements need to include all balance sheet liabilities, obligations or transactions

14. SECTION: 404

Also under Title 4, and pertains to Management Assessment of Internal Controls. Summary:
The issuers are required to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting The issued statements should also include assessment of the effectiveness of such internal controls and procedures

15. SECTION: 409

This pertains to Real time Issuer Disclosures under Title IV of the Act. Summary: The 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

16. SECTION: 802-1

Listed within Title VIII of SARBOX: Corporate and Criminal Fraud Accountability and pertains to Criminal Penalties for Altering Documents. Summary: Imposes penalties of fines or up to 20 years of imprisonment for:
Altering Destroying Mutilating Concealing Falsifying

Records, documents or tangible objects with the intent to:

Obstruct Impede, or Influence

A legal investigation.

17. SECTION: 802-2 This section also imposes penalties of fines and/or imprisonment up to 10 years on any account who knowingly and willfully violates the requirements of maintenance of all audit or review papers for a period of five years