Networking: A Beginner's Guide
In a nutshell, two items are mandated by Section 404:
The management of a company must set up an adequate system of internal
controls and regularly report its assessment of the effectiveness of the internal
controls in the company's annual report.
The company's auditors must examine the system of internal controls and
attest to their adequacy.
Later in this appendix, you'll learn more about what Section 404 means in practice.
Section 405 exempts registered investment companies from Sections 401, 402, and 404.
Section 406 requires that a code of ethics be established for senior financial officers
of a company, and enumerates several items that must be part of the code of ethics.
Section 407 requires that each audit committee have at least one member who
qualifies as a "financial expert."
Section 408 requires the SEC to review the disclosures made by public companies
and their financial statements.
Finally, Section 409 requires that any material financial changes be disclosed to the
public on a rapid and current basis, in plain English.
Titles V, VI, and VII
Titles V, VI, and VII are not applicable to most public companies. Title V, "Analyst
Conflicts of Interest," concerns conflicts of interest for stock analysts. You may recall
that during the stock market bubble, stock analysts often spoke favorably about
offerings that were being handled by their firm, and in some cases received bonuses
based on how they moved the stock price. This, of course, is illegal besides being
Title VI, "Commission Resources and Authority," discusses how the PCAOB is
Title VII, "Studies and Reports," calls for a number of studies and reports of various
federal agencies, including the following:
The U.S. Government Accounting Office (GAO) must conduct a study
examining the consolidation of public accounting firms.
The PCAOB must conduct a study regarding the role of credit rating agencies
and how they affect the stock market.
The PCAOB must study violations and violators of federal securities laws from
January 1, 1998, to December 31, 2001.
The PCAOB must study all SEC enforcement actions involving reporting
The GAO must conduct a study of investment banks and financial advisors,
and whether those parties helped companies manipulate their earnings and
hide their true financial condition.