Category Archives: Sarbanes–Oxley Act

SoxLaw  /  SoxLaw.com Resources  /  Sarbanes–Oxley Act
24 Jun 2023

Understanding the Impact of Major Regulations Following the 2008 Financial Crisis: A Comprehensive Analysis of Dodd-Frank, TARP, and Future Implications

Categories Sarbanes–Oxley Act

Major Regulations Following the 2008 Financial Crisis

Introduction: The financial crisis of 2008, known as the subprime mortgage crisis, had far-reaching consequences, causing a liquidity contraction in global financial markets. Originating in the United States with the collapse of the U.S. housing market, it posed a threat to the international financial system. In response, significant legislative measures were enacted to address the crisis and implement reforms to prevent future financial instability.

Dodd-Frank Wall Street Reform and Consumer Protection Act: The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010, introduced comprehensive reforms aimed at regulating the financial sector’s activities and protecting consumers. It brought about significant changes and introduced various provisions, including:

  1. Consumer Financial Protection Bureau (CFPB): Dodd-Frank established the CFPB as an essential agency responsible for monitoring and safeguarding the financial interests of American consumers.
  2. Financial Stability Oversight Council (FSOC): Under Title I of Dodd-Frank, the FSOC monitors designated systemically important financial institutions (SIFIs), such as banks and insurance companies, to mitigate the risks they pose to the overall economy.
  3. Volcker Rule: This provision of Dodd-Frank limits speculative investments and places restrictions on proprietary trading by depository institutions and other large financial institutions.

Amended Regulations: Dodd-Frank also enhanced existing regulations in the United States, amending several key acts, including:

  1. Securities Act of 1933: Dodd-Frank revised Regulation D to exempt certain securities from registration and redefined the criteria for an accredited investor.
  2. Securities Exchange Act of 1934: Title IX of Dodd-Frank introduced the Investor Advisory Committee (IAC), the Office of the Investor Advocate (OIA), and an ombudsman to address conflicts of interest, accountability, executive compensation, and corporate governance. It also established the SEC Office of Credit Ratings and provided oversight for mortgage-backed securitization.
  3. Investment Company Act of 1940: Dodd-Frank introduced tighter restrictions and oversight committees to enhance consumer protections and disclosure policies.
  4. Investment Advisers Act of 1940: Changes to registration requirements for investment advisors were implemented, affecting both independent investment advisors and hedge funds.
  5. Sarbanes-Oxley Act of 2002: Dodd-Frank expanded protections for whistleblowers and introduced financial incentives.

Conclusion: The financial crisis of 2008 led to the implementation of significant regulations aimed at addressing the causes of the crisis, protecting consumers, and promoting financial stability. The Dodd-Frank Act introduced comprehensive reforms, establishing regulatory bodies, limiting speculative investments, and amending existing regulations to enhance oversight and accountability.

Note: The Sarbanes-Oxley Act of 2002 is referenced to highlight its connection to Dodd-Frank, but further details on its application are not provided in this section.

Future of Dodd-Frank

President Donald Trump passed the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018, easing some regulatory burdens created by Dodd-Frank for banks. However, the Biden administration aims to reverse these easements on Dodd-Frank regulations.

Emergency Economic Stabilization Act

The Emergency Economic Stabilization Act, passed in October 2008, provided the Treasury with funds to purchase troubled assets and stabilize the financial system. The Troubled Asset Relief Program (TARP) was created under this act, providing financial support to institutions such as AIG, Bank of America, Citigroup, JPMorgan, and General Motors. The Treasury eventually recovered $441.7 billion from the $426.4 billion it invested in TARP funds.

Federal Reserve

During and after the 2008 financial crisis, the Federal Reserve took extra steps to support the economy and financial markets. Under Dodd-Frank, the Federal Reserve is required to conduct regular stress tests on banks to ensure their resilience. Two types of stress testing, Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act supervisory stress testing (DFAST), are conducted annually.

Impact of Dodd-Frank on Smaller Banks

One unintended consequence of Dodd-Frank was the burden of regulations imposed on smaller banks, similar to larger banks. The additional paperwork and staff required for compliance posed challenges for smaller banks. To address this issue, legislation was passed to relieve community and regional banks from some of these regulations.

Monitoring Banks for Dodd-Frank Compliance

Dodd-Frank mandates close oversight by the Federal Reserve on large banks, financial institutions, and insurance companies in the United States. Annual stress tests evaluate their ability to withstand financial downturns. If a company lacks sufficient capital to handle certain scenarios, the Fed can take actions to safeguard the bank in case of a crisis.

Whistleblower Protections under Sarbanes-Oxley

Under Sarbanes-Oxley, whistleblowers who report a bank’s improper behavior can receive 10-30% of the proceeds from a successful litigation settlement. The period to file a claim against an employer increased from 90 days to 180 days.

Conclusion

The Dodd-Frank Act, along with the Emergency Economic Stabilization Act, played a crucial role in addressing the 2008 financial crisis. The creation of the CFPB and FSOC helps monitor financial institutions and protect consumers. These legislative moves addressed mortgage standards, investor protections, systemic risk, and bank regulation, contributing to financial stability.

Note: The Sarbanes-Oxley Act of 2002 is referenced to highlight its connection to whistleblower protections, but further details on its application are not provided in this section.

Websites and Online Resources:

  1. U.S. Securities and Exchange Commission (SEC) – Provides information on financial regulations, including Dodd-Frank, and offers insights into investor protection and market integrity. Link
  2. Federal Reserve Board – Offers in-depth information on banking regulations, stress testing, and the role of the Federal Reserve in overseeing the financial sector. Link

Books:

  1. “The Dodd-Frank Wall Street Reform and Consumer Protection Act: Background and Summary” by Richard J. Hillman and Marc Labonte – Provides an overview of the Dodd-Frank Act, its key provisions, and its implications for the financial industry. Link
  2. “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street” by Neil Barofsky – Offers an insider’s perspective on the Emergency Economic Stabilization Act and the Troubled Asset Relief Program. Link

Academic Journals and Research Papers:

  1. Journal of Financial Economics – Publishes research articles on various aspects of financial economics, including the effects of financial regulations and the impact of the 2008 financial crisis. Link
  2. The Review of Financial Studies – Features academic research papers on finance, banking, and related topics, providing insights into the effects of financial regulations and their implications. Link

Reports and Studies:

  1. Congressional Research Service (CRS) – Offers comprehensive reports and studies on financial regulations, including Dodd-Frank, providing in-depth analysis and insights into the legislative measures. Link
  2. Government Accountability Office (GAO) – Conducts studies and audits on various aspects of government programs and policies, including reports on the effectiveness of financial regulations and their implementation. Link

Professional Organizations and Associations:

  1. American Bankers Association (ABA) – Represents the banking industry and provides resources and insights on banking regulations, including the impact of Dodd-Frank on banks. Link
  2. Consumer Financial Protection Bureau (CFPB) – Offers information on consumer protection and financial regulations, focusing on the implementation and enforcement of the Dodd-Frank Act. Link
20 Jun 2023

Navigating the Auditing Standards Board (ASB): Guidelines for Certified Public Accountants

Categories Sarbanes–Oxley Act

Auditing Standards Board (ASB)

The Auditing Standards Board (ASB) plays a crucial role in setting guidelines and rules for certified public accountants (CPAs) in conducting audits and attestations. As part of the American Institute of Certified Public Accountants (AIPCA), the ASB is committed to serving the public interest by developing comprehensive standards and practice guidance for CPAs. Here’s what you need to know:

Key Takeaways:

  • The ASB issues auditing, attestation, and quality control statements, standards, and guidance to CPAs.
  • It establishes generally accepted auditing standards (GAAS) for non-public companies.
  • The board consists of 19 members representing various segments of the accounting industry.
  • Any rules or pronouncements require a two-thirds approval threshold from ASB members.

Understanding the Auditing Standards Board (ASB): The Auditing Standards Board (ASB) is a senior technical committee of the AIPCA, serving as the highest authority in establishing auditing standards in the U.S. Since its establishment in 1978, the ASB has been responsible for auditing, attestation, quality control, reporting, and performance monitoring. Its primary aim is to improve existing and enable new audit and attestation services, ensuring that accountants adhere to the set rules.

Following the introduction of the Sarbanes-Oxley (SOX) Act of 2002, the ASB gained control over standards and guidance for CPAs conducting audits for non-public companies. Meanwhile, the Public Company Accounting Oversight Board (PCAOB) and the Securities and Exchange Commission (SEC) took charge of auditing practices for public companies trading on the stock market.

Special Considerations:

Rulemaking Process:

  • ASB discusses pronouncements internally, involving the AICPA and sometimes the public.
  • They may hold public hearings and prepare exposure drafts of final rules.
  • Two-thirds approval from ASB members is required for the adoption of rules.

Membership Structure:

  • The ASB consists of 19 members nominated by the director of the AICPA Audit and Attest Standards Staff.
  • Nominees must be approved by the AICPA Board of Directors.
  • Membership is diverse, representing various segments of the accounting industry, including the “Big Four” accounting firms, local and regional accounting firms, NASBA representatives, and other public accountants such as academics and government auditors.

For more information, please refer to the following resources:

Websites and Online Resources:

  1. American Institute of Certified Public Accountants (AICPA) – Auditing Standards Board (ASB) – Link
  2. Public Company Accounting Oversight Board (PCAOB) – Link

Books:

  1. “Auditing and Assurance Services” by Alvin A. Arens, Randal J. Elder, Mark S. Beasley – Link
  2. “The Audit Process: Principles, Practice and Cases” by Iain Gray, Stuart Manson – Link

Academic Journals and Research Papers:

  1. “The Impact of the Sarbanes-Oxley Act on Auditing” by Rani Hoitash, Udi Hoitash, and Ya-Wen Yang – [Link](https://www.sciencedirect.com/science/article/pii/S105752

Websites and Online Resources:

  1. American Institute of Certified Public Accountants (AICPA) – The official website of the AICPA provides information about the Auditing Standards Board (ASB) and its guidelines.
  2. Public Company Accounting Oversight Board (PCAOB) – The PCAOB website offers insights into auditing practices for public companies and their relationship with the ASB.

Books:

  1. Auditing and Assurance Services by Alvin A. Arens, Randal J. Elder, Mark S. Beasley, Chris E. Hogan – This comprehensive textbook covers auditing standards, including those established by the ASB.
  2. The Sarbanes-Oxley Act: Overview, Analysis, and Implications by J. Edward Ketz – This book explores the Sarbanes-Oxley Act of 2002 and its impact on auditing standards and the role of the ASB.

Academic Journals and Research Papers:

  1. The Accounting Review – A leading academic journal that publishes research on auditing standards, including articles related to the ASB.
  2. Journal of Accountancy – This professional journal features articles discussing auditing standards and updates from the ASB.

Reports and Studies:

  1. Audit Trends and Developments – An annual report published by a reputable accounting firm, providing insights into emerging trends and developments in auditing, including ASB-related updates.
  2. Research Report: The Impact of Auditing Standards – A research report analyzing the impact of auditing standards, including the role of the ASB, on audit quality and investor confidence.

Professional Organizations and Associations:

  1. Association of International Certified Professional Accountants (AICPA) – The AICPA offers resources and updates on auditing standards through its membership and professional development programs.
  2. National Association of State Boards of Accountancy (NASBA) – NASBA provides information and resources on auditing standards and their implementation across different states.
14 Jun 2023

Understanding and Navigating the Process of Rejecting a Tender Offer from a Newly Private Company

Categories Sarbanes–Oxley Act

Rejecting the Tender Offer of a Newly Private Company

Going public can provide numerous advantages for companies, but what happens when a company decides to go private after being publicly traded? As a shareholder in a company undergoing privatization, it’s important to understand the process and implications of rejecting a tender offer for the acquisition of your stock. This article provides insights into the reasons companies go private, the concept of tender offers, and the considerations involved in rejecting such offers.

Key Takeaways:

  • Sometimes, public companies choose to go private to increase profitability or regain corporate control.
  • Privatization involves the company buying back outstanding shares through a tender offer.
  • Rejecting a tender offer as a small shareholder is often ineffective since majority votes are required for corporate actions.
  • Large shareholders rejecting a tender offer may prevent privatization but may also trigger legal action.

When Public Companies Go Private:

  • The Sarbanes-Oxley Act has prompted many public companies to opt for privatization.
  • Reasons for going private vary, including management or private equity firm buyouts, pursuit of growth and higher profits, or disengagement from specific shareholders.
  • Privatization often saves costs associated with being publicly traded and complying with SEC regulations.

Understanding Tender Offers:

  • Tender offers are made to buy some or all of a company’s shareholders’ shares, typically at a premium.
  • Shareholders stand to gain by selling their stock if a tender offer is available.
  • While there’s no set premium, shareholders can expect around a 10% premium over market price in many cases.

Rejecting the Offer:

  • Rejecting a tender offer without a substantial block of shares is unlikely to have an impact on management decisions.
  • Holding illiquid stock can make selling more difficult as the market becomes thinner.
  • Challenging a proposed transaction in court requires reasonable grounds and financial burden rests on the dissenting shareholder.
  • Acquirers with a larger portion of outstanding stock can still force other shareholders to sell their shares.

The Bottom Line:

  • Going private is not uncommon, and shareholders have the right to accept or reject tender offers, understanding the consequences.
  • Most shareholders lack the influence to viably reject offers and may be forced to sell their shares.
  • Consulting a financial advisor or broker for guidance on specific situations is recommended.

Note: The Sarbanes-Oxley Act is not directly applicable to rejecting tender offers, but it has influenced public companies’ decisions to go private.

Websites and Online Resources:

  1. Investopedia – An authoritative source that provides comprehensive information on various financial topics, including tender offers and going private transactions. Link to Investopedia
  2. Securities and Exchange Commission (SEC) – The official website of the SEC, which offers regulatory information and resources on securities transactions, including tender offers and going private transactions. Link to SEC

Books:

  1. “Mergers, Acquisitions, and Other Restructuring Activities” by Donald DePamphilis – A comprehensive book that covers various aspects of mergers, acquisitions, and restructuring, including tender offers and going private transactions. Link to book
  2. “Tender Offers: A Guide to Buying and Selling Securities” by Dennis E. Block and William M. Savitt – This book provides insights into the legal and practical aspects of tender offers, including strategies and considerations for shareholders. Link to book

Academic Journals and Research Papers:

  1. “The Economics of Tender Offers” by Michael A. Fishman and Kathleen M. Hagerty – A research paper published in The Journal of Finance that explores the economic implications of tender offers and provides insights into shareholder decision-making. Link to paper
  2. “Going-Private Decisions and the Sarbanes-Oxley Act of 2002: A Cross-Country Analysis” by Ettore Croci and Bruno Manaresi – A scholarly article that examines the impact of the Sarbanes-Oxley Act on going-private decisions of public companies. Link to article

Reports and Studies:

  1. “Going Private and Public-to-Private Transactions: A Review of the Literature” by Meziane Lasfer – A comprehensive review of academic research and studies on going private transactions, including tender offers, providing a deeper understanding of the phenomenon. Link to report
  2. “Tender Offers in the Context of Mergers and Acquisitions” by Harvard Law School Forum on Corporate Governance and Financial Regulation – A report that discusses the legal and regulatory aspects of tender offers and their significance in the context of mergers and acquisitions. Link to report

Professional Organizations and Associations:

  1. American Bar Association (ABA) – Business Law Section – The Business Law Section of the ABA offers resources, publications, and updates related to various corporate transactions, including tender offers and going private transactions. Link to ABA Business Law Section
  2. National Association of Corporate Directors (NACD) – An organization that provides resources and guidance on corporate governance, including insights into shareholder rights and considerations in tender offer situations. Link to NACD
10 Jun 2023

Unveiling Aggressive Accounting: Tactics, Examples, and Implications

Categories Sarbanes–Oxley Act

Aggressive Accounting

What Is Aggressive Accounting? Aggressive accounting refers to accounting practices that overstate a company’s financial performance by manipulating financial data. It involves tactics such as delaying or covering up losses and inflating earnings.

Understanding Aggressive Accounting Aggressive accounting techniques deviate from the spirit of accounting rules, aiming to present a more favorable view of a company’s financial performance. While considered unethical and sometimes illegal, some companies still engage in aggressive accounting practices.

Aggressive Accounting Techniques Aggressive accounting can take various forms. Here are a few examples:

  1. Revenue Manipulation
    • Overstating revenue by reporting gross revenue without accounting for expenses that reduce it.
    • Recording revenue before a sale is finalized to recognize it earlier than appropriate.
  2. Inflating Assets
    • Allocating a portion of overhead costs, like staff expenses, to inventory. This increases the value of inventory and reduces the cost of goods sold (COGS).
  3. Deferred Expenses
    • Treating certain costs as assets until they are consumed, recording them as expenses later.
    • Manipulating profits by keeping deferred expenses on the balance sheet instead of recognizing them as expenses on the income statement.

Examples of Aggressive Accounting Several notable cases highlight aggressive accounting practices:

  1. Worldcom
    • Inflating net income by recording expenses as capital purchases, thereby understating depreciation expenses.
    • Spreading out operating expenses over time as smaller capital expenses to boost profits.
  2. Krispy Kreme
    • Inflating asset values and prematurely recognizing revenues.
    • Booking revenue from the sale of doughnut equipment to franchisees before payment.
  3. Enron
    • Reporting the value of energy contracts as gross revenue instead of the commission received.
    • Using off-balance-sheet entities to hide underperforming assets and fabricate profits.

The Sarbanes-Oxley Act of 2002 was enacted in response to accounting scandals like those at Enron and Worldcom. It improved financial disclosures, increased penalties for executives involved in fraudulent financial statements, and mandated improvements in internal controls and audit committees.

References:

  1. Investopedia – Aggressive Accounting
  2. The Balance – Examples of Aggressive Accounting
  3. SEC – Krispy Kreme
  4. Sarbanes-Oxley Act of 2002

Websites and Online Resources:

  1. Financial Accounting Standards Board (FASB) – Official website of the organization responsible for establishing accounting standards in the United States. Provides information on accounting principles and regulations.
  2. Securities and Exchange Commission (SEC) – Regulatory agency overseeing the securities industry in the United States. Offers resources and publications on financial reporting and enforcement actions.

Books:

  1. “Creative Accounting, Fraud and International Accounting Scandals” by Michael Jones – Examines various accounting scandals and fraudulent practices, including aggressive accounting techniques.
  2. “Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports” by Howard M. Schilit – Provides insights into identifying deceptive financial reporting practices, including aggressive accounting strategies.

Academic Journals and Research Papers:

  1. “Earnings Management and Aggressive Accounting: A Review of the Literature” by Patricia M. Dechow and Richard G. Sloan – An extensive review of academic literature on earnings management and aggressive accounting practices.
  2. “The Impact of Sarbanes-Oxley Act on Aggressive Earnings Management” by Lian Fen Lee – Examines the effect of the Sarbanes-Oxley Act on reducing aggressive accounting practices.

Reports and Studies:

  1. “Aggressive Accounting: Red Flags and Potential Implications” by Deloitte – Provides insights into identifying signs of aggressive accounting and potential consequences.
  2. “Earnings Quality and Aggressive Accounting: An Empirical Analysis” by Yves Gendron and Jean-Claude Cosset – Examines the relationship between earnings quality and aggressive accounting practices.

Professional Organizations and Associations:

  1. American Institute of Certified Public Accountants (AICPA) – Professional association for certified public accountants. Offers resources, publications, and guidance on accounting practices and ethics.
  2. Association of Certified Fraud Examiners (ACFE) – International professional association dedicated to fraud prevention, detection, and deterrence. Provides resources on detecting and preventing aggressive accounting and financial fraud.
06 Jun 2023

Unlocking Profit Opportunities: Exploring Voluntary Delistings from NASDAQ

Categories Sarbanes–Oxley Act

Voluntary Delisting From NASDAQ To Find Profits

How Do Delistings Work? Delistings occur when companies decide to delist their stock from stock exchanges in a move to privatize or move to the over-the-counter (OTC) markets. This process can happen through voluntary delistings or forced delistings.

  • Voluntary Delistings:
    • Occur when a company decides to purchase all its shares or move to an OTC market while complying with exchange requirements.
    • Investors should carefully watch these types of delistings.
  • Forced Delistings:
    • Occur when a company fails to meet the listing requirements mandated by the exchange.
    • Companies are usually notified 30 days before being delisted, and share prices may plunge as a result.

Advantages and Disadvantages of Voluntary Delisting Companies may choose to deregister for various reasons that can impact shareholders positively or negatively.

  • Advantages:
    • Capital Savings: Deregistering can save a company millions in costs and potentially increase net income and earnings per share.
    • Strategic Move: Companies may acquire their own shares to increase shareholder value in the short term.
    • Regulatory Concerns: Delisting can be driven by failure to meet listing requirements, but it may provide clear bottom-line incentives.

How to Profit from Delistings Investors can take advantage of delistings by focusing on companies that voluntarily delist to go private and cash out their shareholders. By identifying instances where small companies reduce their number of shareholders through reverse stock splits, investors can potentially earn significant returns.

  • Key Strategies:
    • Identify companies attempting to “cheat” the SEC by reducing their number of shareholders.
    • Look for opportunities where small shareholders can profit from cash compensation following reverse stock splits.

Finding Opportunities Investors can find delisting opportunities by reviewing publicly available filings with the SEC through the EDGAR database.

  • SEC Filings to Check:
    • 8-K Current Events: These filings announce delisting intentions, including initial stock split announcements.
    • Schedule 14A Proxy Statements: Proxy statements allow shareholders to vote on voluntary delistings.
    • S-1/F-1 Registration Statements: These filings provide details about new securities issued as a result of delisting.

The Bottom Line Delistings can offer profitable investment opportunities, but success depends on various factors. Investors who dedicate time and effort to researching delisting opportunities may discover high-performing assets in the short term.

Note: The Sarbanes-Oxley Act of 2002 does not have a direct application to voluntary delistings. However, it is relevant in terms of increased disclosures and regulations that may impact companies’ decisions to delist.

Further Resources:

Websites and Online Resources:

  1. Securities and Exchange Commission (SEC) – Official website of the SEC providing information on delistings and regulations: SEC Website
  2. NASDAQ Listing Center – Resource hub offering guidance and information on delistings from NASDAQ: NASDAQ Listing Center

Books:

  1. “Delisting and Voluntary Withdrawal of Listing: International Evidence” by Ahmet Can Kutlu and Raymond M. Leuthold – Explores the global landscape of delistings and provides insights into their implications: Book Link
  2. “Delisting: Causes, Consequences, and Implications” by Susanne Altendorfer-Kaiser – Examines the factors influencing delistings and their impact on companies and investors: Book Link

Academic Journals and Research Papers:

  1. “Voluntary Delisting and Its Determinants: Evidence from China” by Tianxiang Cao and Li Jiang – A scholarly study analyzing the factors driving voluntary delistings in the Chinese market: Research Paper Link
  2. “Delisting and Its Wealth Effects: Evidence from the London Stock Exchange” by Moh’d R. Alnsour, Natalia Isachenkova, and Tomasz Mickiewicz – A research paper investigating the wealth effects of delistings on firms listed on the London Stock Exchange: Research Paper Link

Reports and Studies:

  1. “Delisting and Going Private: An Overview” by NYU Stern School of Business – Provides an overview of delisting and going private transactions, exploring the motives and consequences: Report Link
  2. “Delisting and Its Impact on Stock Returns: Evidence from BSE” by Prachi Kaur Sahni and Ruchika Bhatia – A study examining the impact of delistings on stock returns in the Indian market: Study Link

Professional Organizations and Associations:

  1. National Investor Relations Institute (NIRI) – An association dedicated to advancing the practice of investor relations, offering resources and insights on corporate actions like delistings: NIRI Website
  2. American Institute of Certified Public Accountants (AICPA) – A professional organization for CPAs, providing guidance and resources related to financial reporting and compliance, including delistings: AICPA Website

Please note that some resources may require subscription or purchase to access the full content.

1 2 3 4 … 12