Sarbanes-Oxley Act of 2002 Promises Far-Reaching Implications for Public Companies 

July, 2002 - Arthur S Berner

To Our Public Company Clients: The Sarbanes-Oxley Act of 2002 (the “Act”) was signed into law by President Bush on July 30 in an attempt to help eliminate accounting fraud and restore confidence in the nation’s financial markets. The Act makes some of the most significant changes in decades in laws affecting directors, officers, and corporate reporting obligations. The Act contains significant amendments to federal securities laws, including expanded CEO/CFO certification requirements for annual and quarterly reports filed with the SEC, increased current reporting requirements, enhanced enforcement, increased civil and criminal penalties, and increased review of periodic filings by the SEC. The Act establishes a new Accounting Oversight Board responsible for regulating accounting firms that audit companies filing financial reports with the SEC. A few of the Act’s provisions are immediately effective, or become effective very soon. The Act leaves many of the critical details and the implementation of the Act to the rule-making authority of the SEC over the next several months. Public companies should give immediate attention to compliance with the Act. EXECUTIVE SUMMARY OF THE SARBANES-OXLEY ACT Some important features of the Act which affect public companies and insiders are as follows: CEO and CFO Certifications – Effective immediately, CEOs and CFOs are required to certify their company’s financial reports in Forms 10-Q and 10-K. Code of Ethics – Companies will be required to disclose in their periodic reports whether or not (and if not, why not) the company has a code of ethics for senior management. Ban on Personal Loans to Executives – Effective immediately, most personal loans by a company to directors and executive officers are prohibited. Existing loans may continue, but may not be modified or renewed. Faster Disclosure of Insider Transactions – Effective 30 days after enactment, insiders will be required to report insider stock trades to the SEC within two business days of the transaction instead of the current ten day period. No Insider Trading During Benefit Plan Blackouts – During any blackout periods in which at least 50% of the employees participating in an issuer benefit plan are prohibited from trading the company’s securities through their benefit plans, directors and executive officers will be prohibited from trading equity securities of the issuer, if they acquired the securities in connection with their service or employment as a director or executive officer. New Corporate Disclosure Requirements – Effective immediately, additional information regarding material changes in financial condition or operations must be disclosed on “a rapid and current basis”; the SEC will adopt rules requiring annual management and independent auditor assessments of internal controls, and certain disclosures about these assessments; there will be additional regulation of the use of pro forma financial information; there will be additional SEC rules requiring disclosure of off-balance sheet transactions, and further inquiries by the SEC and other governmental agencies concerning the use of “off-balance sheet financing” and special purpose entities. Audit Committee Regulations – The SEC will adopt rules requiring that audit committee members must be independent directors, who will be responsible for the appointment, compensation and oversight of the auditors. Companies will also be required to disclose in their periodic reports whether or not (and if not, why not) the company has a “financial expert” on its Audit Committee. New Accounting Oversight Board – A new Accounting Oversight Board will be appointed by the SEC. Accounting firms that audit public companies will be required to register with the Board. The Board will be responsible for establishing auditing and attestation standards, as well as ethics and quality control standards, for accounting firms who audit public companies. The Board will regulate and supervise not only domestic accounting firms, but also foreign accounting firms that audit financial statements of companies under U.S. laws. Auditor Independence – Auditors of public companies will be prohibited from providing legal services and certain other non-audit services which have customarily been provided by accounting firms, such as bookkeeping, systems design, valuation services, and various management services. A discussion of the above provisions, together with other relevant provisions of the Act, is set forth below.


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