New legislation helps to protect investors. (Law Firms).On July 30, 2002 President Bush signed into law The Sarbanes-Oxley Act of 2002. The Act effects sweeping changes in response to the recent well-publicized corporate scandals and stock market declines. Although various provisions of the Act will become effective at different times through the regulatory process, significant provisions of the Act are immediately effective. In addition, the Act has created a new regulatory watchdog for the accounting profession and strengthened the Securities and Exchange Commission's regulatory and enforcement hand. While in many instances the Act's provisions can be characterized as a restatement of current legal principles or the mandated adoption of current best practices, the Act also breaks new ground and lays open a clear field for broad new governmental and quasi-governmental regulation. The Act stands to considerably change the corporate landscape. To more clearly understand the Act, below are brief answers to some frequently asked questions. To whom does the Act apply? The Act is principally focused on public companies and their auditors. However, the Act's broad sweep includes new and amended statutes (with regulations to come) that will apply to: * Accounting firms * Law firms * Securities analysts/investment banks * Private companies and individuals * Boards and management of publicly-traded issuers, including foreign issuers with securities listed in the United States What are the principal components of the Act? The principal components of the Act include: * Increased issuer and management disclosure * Enhanced corporate governance rules and responsibilities * Mandated auditor independence * The creation of the Public Company Accounting Oversight Board * Addressing analyst conflicts of interest * New and enhanced fraud and criminal penalties * Increased SEC resources and authority * Mandated studies and reports What are the principal new crimes and penalties? The new or enhanced crimes and penalties are designed to prevent fraud, punish fraud, preserve evidence, and protect victims, and many apply in both the public and non-public company contexts. These crimes and penalties include those relating to: * Maintenance of corporate audit records * Obstruction of justice, including document shredding * Securities fraud * ERISA penalties * Mail and wire fraud * Retaliation against informers, two provisions * The statute of limitations for securities fraud * SEC asset freeze orders * Bankruptcy discharges What are the new rules for financial and other disclosures? In addition to the Act's general admonishment that there should be accurate and timely disclosure by public companies, the Act mandates the SEC to promulgate new regulations specifically addressing a number of issues that are familiar from recent corporate scandals and failures, including: * Disclosure of off-balance sheet transactions * Presentation and reconciliation of pro forma financial information * Reports on internal controls, attested by the issuer's outside audit firm * Disclosure regarding codes of ethics for senior financial officers * "Insiders" are required to disclose changes in beneficial ownership of their issuer's shares within two business days after the change Other disclosure regulations regarding trading by, loans to, and other activities by public company officers, directors and certain corporate "insiders." The Public Company Accounting Oversight Board: The New Sheriff? The Act importantly created the Public Company Accounting Oversight Board, a new quasi-governmental entity formed to oversee the financial audit of public companies. The Oversight Board will be formed by the SEC and will operate in an as yet undefined role beneath the SEC and above the Financial Accounting Standards Board. The principal and very broad mandate of the Oversight Board includes responsibility for: * Registration of public accounting firms * Auditing, quality control, ethics, independence, and other auditing standards * Inspections, investigations, and disciplinary proceedings of registered accounting firms What are the new restrictions to auditor independence? A significant thrust of the Act was to address the real and perceived deficiencies in public company auditor independence. The Act specifically prohibits a public company auditor from providing a broad range of delineated non-audit services to the audited company, many of which had become common- place. The new Public Company Accounting Oversight Board is authorized to identify and prohibit additional impermissible activities. Restrictions required by the Act to impose auditor independence, include: * Audit and reviewing partner rotation * A one-year cooling-off period for the CEO, CFO, controller, chief accounting officer, and similar officers * Public disclosure of the approval of any non-audit services * Accounting firm timely reporting to the audit committee all critical accounting polices and practices, all alternative treatments of financial information discussed with management, and other material written communications with management * Audit committee pre-approval of non-audit services, e.g., tax services Where the line between audit and non-audit services is drawn, and which firms will choose to be on which side of the line, can be expected to be an area of intense focus for the new Oversight Board, the Financial Accounting Standards Board, and the accounting profession as a whole. What are the reforms to audit committees? The Act's audit committee provisions amount to nothing less than a significant federalization of corporate law. The Act requires that audit committees be responsible for procedures relating to: * the auditor relationship * receiving reports directly from the auditors * the receipt, retention and treatment of complaints, including anonymous submissions from employees, related to accounting, internal accounting controls, or auditing matters * hiring independent counsel and other advisors * being composed solely of independent directors * receive no non-director compensation from the issuer or its affiliates The Act also mandates that the SEC adopt rules relating to: * delisting of non-compliant issuers * disclosure regarding the presence or absence of a "financial expert" on the committee How are CEO/CFOs being held accountable? An area of the Act that has attracted a significant amount of the spotlight are two sections requiring specific certifications from public companies' CEOs and CFOs. These certifications require: * Section 302--CEOs and CFOs must certify each filed annual and quarterly report * Section 906--a new criminal law requiring the CEO and CFO certify each filed periodic report containing financial statements What is clear is that public companies, their boards, management, and advisors will be subject to intense real-time and hindsight scrutiny. This atmosphere will mandate a focus on advance planning and structuring systems and safeguards to minimize the potential for exposure to the significantly enhanced civil and criminal penalties of the Act. RELATED ARTICLE: Bruce A. Hatkoff, A Law Corporation Contact: Bruce A. Hatkoff 16633 Ventura Blvd., Suite 940 Encino, CA 91436 818-990-5180 Fax: 818-990-2463 www.cl10.com/hatkoff bahhat@prodigy.net Chaumont Law Group, Inc. Contact: Lilianne G. Chaumont 23901 Calabasas Rd., Suite 2013 Calabasas, CA 91302 818-222-7345 Fax: 818-222-7309 chaumontlaw@earthlink.net Gaines & Stacey LLP Contact: Fred Gaines 16633 Ventura Blvd., Suite 1150 Encino, CA 91436 818-593-6355 Fax: 818-593-635 fgaines@gaineslaw.com www.gaineslaw.com Specializing in Real Estate, Land Use, Zoning and Environmental Law Greenberg & Bass Contact: Arthur A. Greenberg 16000 Ventura Blvd, Suite 1000 Encino, CA 91436 818-382-6200 www.greenbass.com aag@greenbass.com Full service business law firm; specialities: insolvency, transactional, litigation, estate planning, and franchise. Lewitt, Hackman, Shapiro, Marshall & Harlan, A Law Corporation Contact: Keith Zimmet, Esq., Managing Shareholder 16633 Ventura Blvd., 11th Floor Encino, CA 91436 818-990-2120 www.lewitthackman.com Practice areas: full-service business law firm, including all aspects of corporate and commercial finance Price Law Group Contact: Stuart Price 15760 Ventura Blvd., 11th Floor Encino, CA 91436 818-995-4540 Fax: 818-995-9277 info@pricelawgroup.com www.pricelawgroupapc.com Riordan & McKinzie Contact: Caroline L. Kuperstock Director of Administration & Business Development 300 South Grand Ave., Suite 2900 Los Angeles, CA 90071 213-229-8486 Fax: 213-830-8785 clk@riordan.com Rosenthal & Smith Contact: Richard Rosenthal 6345 Balboa Blvd., Suite 330 Encino, CA 91316 818-344-9900 Fax: 818-344-9986 rrosenthal@raslaw1.com Sheppard, Mullin, Richter & Hampton LLP Contact: Lawrence Braun 333 S. Hope St., 48th Floor Los Angeles, CA 90071 213-620-1780 www.sheppardmullin.com Sheppard Mullin, celebrating its 75th year is a full service law firm serving clients from Los Angeles, Santa Barbara, San Francisco, Orange County Del Mar and San Diego. Theodore R. Maloney is a Partner in the Corporate Practice Group at Sheppard, Mullin, Richter & Hampton's Santa Barbara office. He can be reached at 805.879.1812 or at tmaloney@sheppardmullin.com |
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