There's a new Sheriff in town: Sarbanes-Oxley. (An Advertising Supplement).On July 30, 2002 President Bush signed into law The Sarbanes-Oxley Act See SOX. 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 This list of the world's largest law firms by revenue is taken from The Lawyer and The American Lawyer and is ordered by 2006 revenue:[1]
* 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 United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. What are the principal components of the Act? The principal components of the Act include: * Enhanced corporate governance Corporate Governance The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy, and rule of law. rules and responsibilities * Increased issuer and management disclosure * Mandated auditor independence * The creation of the Public Company Accounting Oversight Board The Public Company Accounting Oversight Board (or PCAOB) (sometimes called "Peekaboo") is a private-sector, non-profit corporation created by the Sarbanes-Oxley Act, a 2002 United States federal law, to oversee the auditors of public companies. * 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 relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc : * Maintenance of corporate audit records * Obstruction of justice A criminal offense that involves interference, through words or actions, with the proper operations of a court or officers of the court. The integrity of the judicial system depends on the participants' acting honestly and without fear of reprisals. , including document shredding * Securities fraud * ERISA See Employee Retirement Income Security Act. ERISA See Employee Retirement Income Security Act (ERISA). penalties * Mail and wire fraud * Retaliation against informers, two provisions * The statute of limitations A type of federal or state law that restricts the time within which legal proceedings may be brought. Statutes of limitations, which date back to early Roman Law, are a fundamental part of European and U.S. law. 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 To officially announce, to publish, to make known to the public; to formally announce a statute or a decision by a court. 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 As a matter of form or for the sake of form. Used to describe accounting, financial, and other statements or conclusions based upon assumed or anticipated facts. The phrase 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 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 Financial Accounting Standards Board (FASB) Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP). . 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 commonplace. The new Public Company Accounting Oversight Board is authorized to identify and prohibit additional impermissible im·per·mis·si·ble adj. Not permitted; not permissible: impermissible behavior. im activities. Restrictions required by the Act to impose auditor independence, include: * Audit and reviewing partner rotation * A one-year cooling-off period An interval of time during which no action of a specific type can be taken by either side in a dispute. An automatic delay in certain jurisdictions, apart from ordinary court delays, between the time when Divorce papers are filed and the divorce hearing takes place. for the CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. , CFO See Chief Financial Officer. , 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. Because so much of the Act relies on SEC rule-making for final implementation and so many additional regulatory initiatives are underway--including the SEC's shortening of quarterly and annual reporting deadlines for "seasoned" larger public companies and the securities exchanges' pending regulatory initiatives--the final impact of the Act and the frenzied environment from which it came can not yet be fully judged. 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. Theodore R. Maloney is a Partner in the Corporate Practice Group at Sheppard, Mullin, Richter & Hampton's Santa Barbara Santa Barbara (săn'tə bär`brə, –bərə), city (1990 pop. 85,571), seat of Santa Barbara co., S Calif., on the Pacific Ocean; inc. 1850. office. He can be reached at 805.879.1812 or at tmaloney@sheppardmullin.com |
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