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David Kohrell: Sox Fundamentals – Part 2 – Corporate Responsibility

Number of View: 6958

As mentioned in Part 1, Section 302 concerns assigning responsibility to corporate officers for establishing, maintaining, and auditing of internal controls to ensure that fiscal reporting is accurate. If nothing else, it is this section that someone who is more than casual observer assumes Sarbanes Oxley does in the post dot com, 9/11, telecommunications bubble burst and Hurricane Katrina era.

Section 302 has two prongs:

1. corporate officers attest that financial reports are accurate
2. corporate officers attest to the effectiveness of the process to make those reports

Those prongs help to break down the seventy plus year separation of corporate officers from personal liability. Implemented in the 1930’s, that separation was helpful to businesses as they grow from sole proprietor to a corporate board structure. The Global Depression of the 1930’s was much more extreme then what has been witness during our recent economic recession and recovery (from quarter two of 2001 (pre- 9/11) to mid 2002 to 2005) The Great Depression choked many ingredients of business growth; one vital ingredient was business formation. Why? Unless cleverly charted, if a large company tanked so did its corporate officers. The following Acts promulgated from 1933 to 1940 helped clarify the corporate officer, board and stockholder responsibilities.

  • The Securities Act of 1933 (15 USC § 77a et seq.)
    • General rules and regulations promulgated under the Securities Act of 1933 (17 CFR Part 230) Selected forms prescribed under the Securities Act of 1933 The Securities Exchange Act of 1934 (15 USC § 78a et seq.)
    • – General rules and regulations promulgated under the Securities Exchange Act of 1934 (17 CFR Part 240) Selected forms prescribed under the Securities Exchange Act of 1934
  • The Investment Company Act of 1940 (15 USC § 80a-1 et seq.)
    • Rules and regulations promulgated under the Investment Company Act of 1940 (17 CFR Part 270)
  • The Investment Advisers Act of 1940 (15 USC § 80b-1 et seq.)
    • Rules and regulations promulgated under the Investment Advisers Act of 1940 (17 CFR Part 275)

So what does SOX 302 do and what was the motivation?

The motivation lies in the actions (or inaction) of the following corporate leaders:

1. Kenneth Lay – ERON (former CEO, current minimum prison club pro)
2. Richard Scrushy – HealthSouth (former CEO)
3. Dennis Kozlowski – Tyco (former CEO)
4. Frank Quattrone – Credit Suisse First Boston (investment banker)
5. John Rigas – Adelphia Communications (founder and former CEO)
6. Sam Waksal – ImClone Systems (former CEO)
7. Franklin C. Brown -Rite Aid (former general counsel and vice chairman)
8. Bernard Ebbers – WorldCom (former CEO)
9. Joseph Nacchio – Qwest (former CEO) 10. Alfred Taubman – Sotheby’s (former Chairman)

The perception has been that those corporate leaders used the ‘corporation’ as a shield from criminal libability for wrongful actions. Section 302 re-establishes the direct connection between corporate officer and corporate behavior. (Section 9 and 10 specify how criminal penalties are applied to corporate officers). Raid the corporation, build a new executive mansion.

Its’ primary tool is the external audit(s). The Public Company Accounting Oversight Board (PCAOB) is a SOX creation that provides oversight and coordination for all public company auditing; with emphasis on external auditors. For more information go to http://www.pcaobus.org/

PCAOB Auditing Standard No. 2 discusses the external auditor’s responsibilities: 1. The auditor’s responsibility as it relates to management’s quarterly certifications on internal controls for financial reporting are different. 2. The auditor should perform limited procedures quarterly to provide basis to determine if any material modifications to financials need to be disclosed.


As we will see although Section 404 and 409 appear to provide a close connection to project management; the impact of 302 is no less profound. Accurate information generated, collected and analyzed by project managers is a valuable input to the external audit process. Misses on project(s), programs and portfolios often make or break the financial reporting of a public company.

So yes, it’s a part of SOX for project managers to learn about.

In Part III we will explore the two sections that appear to have a more project management direct impact.

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