11 titles in SOX
SOX consists of 11 titles, with each title having multiple sections.
Title I
Title I of SOX created a Public Company Accounting Oversight Board (PCAOB) that has extensive authority to regulate the auditors and audits of publicly held companies. The PCAOB is a nonprofit organization with strong ties to the SEC. Partial funding for the PCAOB comes from the SEC, the SEC has the power to appoint the PCAOB’s chairperson and members, and the SEC must approve all rules and standards established by the PCAOB. Only accounting firms that have been accepted for registration with the PCAOB will be allowed to prepare or audit reports for companies registered with the SEC. Approval for registration with the PCAOB is based on a detailed application that requires the accounting firm to provide information regarding its audit clients, internal quality control policies and procedures, accounting personnel, licensure, and financial standing. In addition, approved firms must agree to undergo periodic inspections and provide annual reports to the PCAOB. Additional funding for the PCAOB will come from fees paid by the registered accounting firms.
The PCAOB has the authority to establish standards and rules regarding the content of audits, the accounting firm’s internal quality control policies and procedures, and the length of time that documents related to an audit must be retained. While the PCAOB does not have the direct power to set accounting standards, a separate accounting standards organization will develop the standards that the PCAOB will use.
Nonprofits currently don’t have a government-sponsored watchdog like the PCAOB, and the PCAOB currently has no authority over nonprofit organizations. The word currently is an important word in the previous sentence. Public and governmental policymakers have a growing concern about the performance and integrity. As discussed earlier, some states are already discussing SOX-like legislation that would cover nonprofits. The nonprofit industry just may end up with a watchdog similar to the PCAOB.
Title II
Title II of SOX details the rules to establish independence of the auditor from the company being audited. It defines which additional services the auditing firm may and may not provide, defines and prohibits conflicts of interest between auditors and the audited company, requires that the audited firm rotate its auditors on a regular basis, and requires the auditing committee of the audited company to be responsible for the oversight of its auditors.
Titles III and IV
Titles III and IV of SOX detail the responsibilities and roles the audited company plays in regard to the audit and reports. For example, the principal executive and financial officers of the company are directly responsible for certifying that the information in the annual or quarterly reports required by the SEC Act of 1934 is accurate, complete, and fairly presented. In addition, there are rules regarding insider trading, and the professional responsibility for attorneys to report violations of securities law or breech of fiduciary duty. The titles also outline the disclosure requirements of relevant financial information, such as off-balance-sheet arrangements and relationships.
Titles V, VI, and VII
Titles V, VI, and VII primarily provide details regarding security analysts, appropriations, and various studies and reports performed by the GAO and others. While these titles are important in terms of establishing and implementing SOX, they are not directly relevant to the “best practices” that can be gleaned from the legislation. These titles will thus not be discussed in any detail.
Titles VIII, IX, X, and XI
Titles VIII, IX, X, and XI outline the penalties for securities fraud, document destruction or alteration; create whistleblower protection for employee informants; and establish corporate responsibility for financial reports. Title IX provides that each periodic report containing financial statements filed with the SEC must be accompanied by a written statement by the issuer’s CEO and CFO certifying that the report fully complies with the 1934 Act and that information contained in the periodic report “fairly presents, in all material respects, the financial condition and results of operations of the issuer.
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