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SOX Section 401:
Disclosures in Periodic Reports
Section 401 (listed under Title IV "Enhanced Financial Disclosures") of the Sarbanes Oxley Act deals with financial statements and their requirement to be accurate and presented in a manner that does not contain incorrect statements or admit to state material information. Such financial statements should also include all material off-balance sheet liabilities, obligations, and transactions. A direct excerpt from the Sarbanes-Oxley Act of 2002 report for Section 401:
(a) DISCLOSURES REQUIRED.
Section 13 of the Securities Exchange
Act of 1934 (15 U.S.C. 78m) is amended by adding at the
end the following:
(i) ACCURACY OF FINANCIAL REPORTS.
Each financial report
that contains financial statements, and that is required to be prepared
in accordance with (or reconciled to) generally accepted accounting
principles under this title and filed with the Commission
shall reflect all material correcting adjustments that have been
identified by a registered public accounting firm in accordance with
generally accepted accounting principles and the rules and regulations
of the Commission.
(j) OFF-BALANCE SHEET TRANSACTIONS.
Not later than 180
days after the date of enactment of the Sarbanes-Oxley Act of 2002,
the Commission shall issue final rules providing that each annual
sion shall disclose all material off-balance sheet transactions, arrangements,
obligations (including contingent obligations), and
other relationships of the issuer with unconsolidated entities or
other persons, that may have a material current or future effect on
financial condition, changes in financial condition, results of operations,
liquidity, capital expenditures, capital resources, or significant
components of revenues or expenses.
(b) COMMISSION RULES ON PRO FORMA FIGURES.
Not later
than 180 days after the date of enactment of the Sarbanes-Oxley Act
fo 2002, the Commission shall issue final rules providing that pro
forma financial information included in any periodic or other report
filed with the Commission pursuant to the securities laws, or in any
public disclosure or press or other release, shall be presented in a
manner that
(1) does not contain an untrue statement of a material fact
or omit to state a material fact necessary in order to make the
pro forma financial information, in light of the circumstances
under which it is presented, not misleading; and
(2) reconciles it with the financial condition and results of
operations of the issuer under generally accepted accounting
principles.
(c) STUDY AND REPORT ON SPECIAL PURPOSE ENTITIES.
(1) STUDY REQUIRED.
The Commission shall, not later
than 1 year after the effective date of adoption of off-balance
sheet disclosure rules required by section 13(j) of the Securities
Exchange Act of 1934, as added by this section, complete a
study of filings by issuers and their disclosures to determine
(A) the extent of off-balance sheet transactions, including
assets, liabilities, leases, losses, and the use of special
purpose entities; and
(B) whether generally accepted accounting rules result
in financial statements of issuers reflecting the economics of
such off-balance sheet transactions to investors in a transparent
fashion.
(2) REPORT AND RECOMMENDATIONS.
Not later than 6
months after the date of completion of the study required by
paragraph (1), the Commission shall submit a report to the
President, the Committee on Banking, Housing, and Urban Affairs
of the Senate, and the Committee on Financial Services of
the House of Representatives, setting forth
(A) the amount or an estimate of the amount of off-balance
sheet transactions, including assets, liabilities, leases,
and losses of, and the use of special purpose entities by,
issuers filing periodic reports pursuant to section 13 or 15
of the Securities Exchange Act of 1934;
(B) the extent to which special purpose entities are used
to facilitate off-balance sheet transactions;
(C) whether generally accepted accounting principles or
the rules of the Commission result in financial statements
of issuers reflecting the economics of such transactions to
investors in a transparent fashion;
(D) whether generally accepted accounting principles
specifically result in the consolidation of special purpose
has the majority of the risks and rewards of the special
purpose entity; and
(E) any recommendations of the Commission for improving
the transparency and quality of reporting off-balance
sheet transactions in the financial statements and disclosures
required to be filed by an issuer with the Commission.