After a prolonged period of corporate scandals involving large public companies from 2000 to 2002,

the Sarbanes-Oxley Act was enacted in July 2002 to restore investors' confidence in markets and close
loopholes for public companies to defraud investors. The act had a profound effect on corporate
governance in the United States. The Sarbanes-Oxley Act requires public companies to strengthen audit
committees, perform internal controls tests, set personal liability of directors and officers for accuracy
of financial statements, and strengthen disclosure. The Sarbanes-Oxley Act also establishes stricter
criminal penalties for securities fraud and changes how public accounting firms operate their
businesses.
One direct effect of the Sarbanes-Oxley Act on corporate governance is the strengthening of audit
committees at public companies. The audit committee receives wide leverage in overseeing the
company's top management accounting decisions. The audit committee members must be independent
of the top management and gain new responsibilities such as approving numerous audit and non-audit
services, selecting and overseeing external auditors, and handling complaints regarding the
management's accounting practices.
The costliest part of the Sarbanes-Oxley Act is Section 404, which requires public companies to
perform extensive internal control tests and include an internal control report with their annual audits.
Testing and documenting manual and automated controls in financial reporting requires enormous
effort and involvement of not only external accountants, but also experienced IT personnel. The
compliance cost is especially burdensome for companies that heavily rely on manual controls. The
Sarbanes-Oxley Act encouraged companies to make their financial reporting more efficient, centralized
and automated.
The Sarbanes-Oxley Act changes management's responsibility for financial reporting significantly. The
act requires that top managers personally certify the accuracy of financial reports. If a top manager
knowingly or willfully makes a false certification, he can face 10 to 20 years in prison. If the company
is forced to make a required accounting restatement due to management's misconduct, top managers
can be forced to give up their bonuses or profits made from selling the company's stock. If the director
or officer is convicted in securities law violation, he can be prohibited from serving in the same role at
the public company.
The Sarbanes-Oxley Act significantly strengthens the disclosure requirement. Public companies are
required to disclose any material off-balance sheet arrangements, such as operating leases and special
purposes entities. The company is also required to disclose any pro forma statements and how they
would look under the generally accepted accounting principles (GAAP). Insiders must report their
stock transactions to the Securities and Exchange Commission (SEC) within two business days as well.
The Sarbanes-Oxley Act imposes harsher punishment for obstructing justice and securities fraud, mail
fraud and wire fraud. The maximum sentence term for securities fraud increased to 25 years, and the
maximum prison time for obstruction of justice increased to 20 years. The act increased the maximum
penalties for mail and wire fraud from five to 20 years of prison time. Also, the Sarbanes-Oxley Act
significantly increased fines for public companies committing the same offense.
The Sarbanes-Oxley Act affected corporate governance of public companies as well as external
auditors. The act established the Public Company Accounting Oversight Board, which promulgates
standards for public accountants, limits their conflicts of interest and requires lead audit partner rotation
every five years for the same public company.
www.investopedia.com/what-impact-did-sarbanesoxley-act-have-corporate-govern...
under what conditions an auditor will depart from issuing an unqualified report.

After a prolonged period of corporate scandals involving large public companies from 2000 to 2002,
the Sarbanes-Oxley Act was enacted in July 2002 to restore investors' confidence in markets and close
loopholes for public companies to defraud investors. The act had a profound effect on corporate
governance in the United States. The Sarbanes-Oxley Act requires public companies to strengthen audit
committees, perform internal controls tests, set personal liability of directors and officers for accuracy
of financial statements, and strengthen disclosure. The Sarbanes-Oxley Act also establishes stricter
criminal penalties for securities fraud and changes how public accounting firms operate their
businesses.

www.investopedia.com/what-impact-did-sarbanesoxley-act-have-corporate-govern...

Under what conditions will an auditor depart from issuing an unqualified report?

The three conditions requiring a departure from an unqualified opinion are:

The scope of the audit has been restricted. One example is when the client will not permit the auditor to
confirm material receivables. Another example is when the engagement is not agreed upon until after
the client's year-end when it may be impossible to physically observe inventories.
The financial statements have not been prepared in accordance with generally accepted accounting
principles. An example is when the client insists upon using replacement costs for fixed assets.
The auditor is not independent. An example is when the auditor owns stock in the client's business.
A qualified opinion states that there has been either a limitation on the scope of the audit or a departure
from GAAP in the financial statements, but that the auditor believes that the overall financial
statements are fairly presented. This type of opinion may not be used if the auditor believes the
exceptions being reported upon are extremely material, in which case a disclaimer or adverse opinion
would be used.
An adverse opinion states that the auditor believes the overall financial statements are so materially
misstated or misleading that they do not present fairly in accordance with GAAP the financial position,
results of operations, or cash flows.
A disclaimer of opinion states that the auditor has been unable to satisfy him or herself as to whether or
not the overall financial statements are fairly presented because of a significant limitation of the scope
of the audit, or a nonindependent relationship under the Code of Professional Conduct between the
auditor and the client.
https://pcaobus.org/Standards/Auditing/pages/au508.aspx