This paper has been written as a guide to The Sarbane-Oxley Act (SOA). The use of the enclosed material may be used to introduce students to the legislation. Corporate governance is very important especially after the scandals U. S. businesses recently endured. Armed with the knowledge of SOA, the reader will be assisted with understanding the sections, compliance and some implications of the act. The student will then be able to conduct further study with this knowledge and assist their corporation in the methods of compliance through further research.
Compliance of this Act is non-negotiable, all publicly traded companies will comply with the legislation by June 2004. There are useful references given throughout the paper, this will assist the student in deriving a management plan and or choosing a vendor to provide the external controls that are required by SOA. Methods of retrieving information were derived from personal interviews with account managers at large corporations, (who asked not to be named), heavy use of the Securities Exchange Commission’s web-site and a thorough review of the 89 pages of the Sarbane-Oxley legislation.
The SOA should not be taken lightly, the prudent company will have already taken measures to comply with this important legislation. “The Public Company Accounting Reform and Investor Protection Act” was signed into law by President Bush on July 30, 2002. The law is now known as The Sarbane-Oxley Act (SOA). The SOA has eleven titles within the act and numerous sections, pertaining to ethics, accounting, financial reporting, responsibilities of officers, whistleblower protection, and increased criminal penalties built upon prior securities laws.
SOA is the most comprehensive securities legislation written since the 1940s. In the early part of the twentieth century companies did not have the sophistication and abilities of the modern company in regard to information technology, number of accountants, advisors and analysts. This legislation is a big step toward keeping U. S. law up to date with modern business practices. The Sarbane-Oxley Act was necessary to protect the U. S. economy and restore investor confidence after the many years of dishonest business practices by ENRON, WORLDCOM, TYCO and other companies.
The practitioners of shady accounting and greed brought about a collapse in stock prices, shook investor confidence and hurt the credibility of all publicly traded companies. A mass “bail-out” by large stockholders ensued; however the average small investor held on, hoping that the stock would stabilize and believing the reassurances of companies, that claimed they were financially well-off when they were actually worth less than what they owed. In the end, investors and lower-rung employees of these companies were devastated financially.
The underhandedness and greed of these corporate officers had the potential to hurl the U. S. economy out of control. The small investors, who are registered voters demanded action. This paper will review the sections of The Sarbane-Oxley Act, highlight their broad implications and discuss compliance. Compliance will cost all publicly traded companies a great deal of money. “Deloitte’s Point of View” will be used to illustrate that compliance, when embraced properly and approached positively can bring rewards for companies in the long term.
The sections that follow are a simplification of the Sarbane-Oxley legislation. There are many niches that will require attorneys, accountants and advisors. Keep in mind all prior SEC (securities exchange commission) legislation such as (The Securities Act of 1933, Securities Exchange Act of 1934, Public Utility Holding Company Act of 1935, Trust Indenture Act of 1939, Investment Company Act 1940, and The Investment Advisors Act of 1940) are all still in effect. All securities legislation can be found at: www. sec. gov/about/laws. shtml.
Sections 302, 304, 306, 402, 403 and 406 are designed to improve the “Tone at the Top” of companies. The sections are primarily geared towards the CFOs, CEOs and other company officers. An example is under section 302; the CEO and CFO need to personally certify financial documents pertaining to annual and quarterly reports. Section 304 forces management to return bonuses earned if the financial documents were inaccurate as a result of misconduct. Section 306 states company officers cannot trade during pension fund blackout periods. Section 402 prohibits insider loans.
Section 403 mandates electronic filing of insider transactions. In other words, if the CFO decides he should sell his stock, the immediacy of the sale would have to be reported or filed with the SEC. Section 406 forces a company to have a written code of ethics for the CEO, CFO and the staff. www. sec. gov/news/press/2003-89a. htm. Further scrutiny of the legislation also reveals that section 1106 allows increased criminal penalties under the Securities Exchange Act of 1934, this changes the maximum of 10 years to 20 years imprisonment and the $1,000,000. 00 fine to a $5,000,000. 00 fine.
The tone of leadership is important for the wellness of an organization. As stated, “Tone at the Top” is a start, the leaders must be ethical and act accordingly in order to run a well organized, disciplined business. The goal is for employees and customers to view the corporate executive not as a greedy, self-centered entity trying to cheat investors and employees out of their investments or pensions. Instead the intent of the SOA is to foster trust and confidence to ensure prosperity in American businesses; this cannot be done without the full compliance of a company’s leadership.
The “Tone at the Top” sections are the behavioral components of the legislation. Take section 304, which monetarily hurts management if they break the law, however if management complies and acts honestly, they will be able to retain monetary rewards. Improving Disclosures and Financial Reporting are sections 401(a), (b) 404 and 408. Section 401 requires a company to disclose all information from its balance sheets and governs use of non-GAAP (generally accepted accounting principles) financial measures. Section 408 requires that the SEC review Exchange Act reports at least once every three ears.
The Exchange act reports are the following: Requirement of Annual Reports, Special Financial Report, Reports for Depositary Shares Registered on Form F-6, Reporting by Form 40-F Registrants, Reporting by Successor Issuers Suspension of Duty to File Reports, Transition Reports, Current Reports on Form 8-K, Quarterly Reports on Form 10-Q, and Form 10-QSB Certification Of Disclosure In Annual And Quarterly Reports, Controls and Procedures Reports of Foreign Private Issuers on Form 6-K. Improvements of the “Gatekeepers” sections are 301, 407, 307 and 501.
Section 301 forces Self-Regulatory Organization (SRO) to list standards for audit committees. Section 407 requires disclosure of financial experts on the audit committee. Section 307 requires that attorneys have a standard of conduct if they practice or appear before the commission. Section 501 provides the authority for the SRO to govern research analyst conflicts of interest. In other words the analyst cannot take money or compensation without disclosing, they must also certify their reports. “Enforcement Tools”, rules and regulations mean nothing if there is no enforcement.
Sections 106, 305, 308, 602, 603, 703, 704, 803, 1103 and 1105 discuss enforcement and ability to enforce. Section 106 allows the SEC to audit foreign work papers. Section 305 sets standards for penalties. Section 308 establishes that civil penalties can be added to a disgorgement fund for investors. Section 602 gives the SEC authority over professionals who appear or practice before the commission; this is an overlap of 307. Section 603 gives the federal courts the ability to bar practitioners from selling penny stock. Section 704 adds an aiding and abetting liability under federal securities laws.
Section 704 establishes enforcement actions that involve securities violations. Section 803 does not allow a company to hide debts behind bankruptcy if the debts were incurred as a result of fraud. Section 1103 allows the SEC to freeze payments made to violators. Section 1105 gives the SEC the authority to bar persons from serving as officers or directors. www. sec. gov/news/press/2003-89a. htm. An example of section 1105 in action would be The Martha Stewart’s case. Ms. Stewart stepped down as CEO voluntarily, however the SEC could have barred her from serving as an officer in her company under SOA.