Act language and concepts. David T. Mittelman

Transcription

1 The Sarbanes-Oxley Act language and concepts David T. Mittelman

2 The Sarbanes-Oxley Act of 2002 Public Company Accounting Reform and Corporate Responsibility Generally seen as the most comprehensive revision to the federal securities laws since the original 1933 and 1934 Acts Promotes an institutional, process-oriented approach

3 Direct impacts Accountants Issuers Officer and Directors Stock Exchanges Investment Banks Attorneys

4 Broader influence Customers Capital markets Non-public companies Best practices Corporate governance Security holders

5 Investment Banks Separation of underwriters and analysts Global Settlement Regulation AC Gatekeeper role remains critical

6 Stock Exchanges NYSE, NASDAQ, AMEX not OTC Bulletin Board, Pink Sheets Listing standards Corporate Governance Independent directors Majority of the Board of Directors Entirely form Audit & Comp Committees Controlled Company exception

7 Audit Committee composition Independent director Exchange standard from auditor as well as issuer Section 10A-3 parallel SEC standard No compensation (except as director) Not affiliated with issuer All members must be financially literate At least one member a financial expert

8 Audit Committee role Responsibility Oversee financial statements audit Ensure auditor independence Approve non-audit services Compliance and internal complaints Statutory power Appoint and compensate auditor Hire independent legal counsel

9 PCAOB Public Company Accounting Oversight Board Government-sponsored private agency overseen by the SEC Auditor registration and inspection Auditor independence Auditor rotation Auditing standards (e.g., AS5)

10 Principal Officers Principal Executive Officer (PEO) and Principal Financial Officer (PFO) typically, but always, the CEO and CFO Other classifications: Management (Named) Executive Officers Senior Financial Officers

11 Management morality standards Prohibitions Coercing or misleading auditor Trading during blackout periods Loans from issuer Forfeiture of bonuses Misconduct-based restatements Code of Ethics

12 Disclosure enhanced standards Real-time reporting Accelerated 10-K and 10-Q deadlines Accelerated and expanded 8-K events 2-day/EDGARized insider trading reports Financial information SEC rules Off-balance sheet transactions Pro forma/non-gaap measurements

13 Evaluations Management, with participation of PEO and PFO, must perform three evaluations: Effectiveness of disclosure controls and procedures as of end of fiscal quarter Any change in internal control over financial reporting during fiscal quarter Effectiveness of internal control over financial reporting as of end of fiscal year

14 Section 404 of Sarbanes-Oxley SEC shall prescribe rules requiring an internal control report in each 10-K: Stating management is responsible for establishing & maintaining internal control Containing an assessment of the effectiveness of internal controls The auditor shall attest and report on management s internal control structure

15 Controls and Procedures Internal Controls over Financial Reporting Provide reasonable assurance as to reliability of financial reporting and external financial statements in accordance with GAAP Disclosure Controls and Procedures Process to allow for timely reporting up to management and then public reporting to shareholders in 1934 Act reports

16 Overlap in Controls and Procedures Internal Controls Disclosure Controls

17 Internal Controls background General notion of ensuring 1934 Act reports and financial statements are accurate 1977 Foreign Corrupt Practices Act Mandated internal accounting controls 2002 SOX: designed to compliment existing requirements for reporting companies to establish and maintain systems of internal accounting controls for financial reporting

18 Section 404 phase-in period Filer Status Management Report Auditor s Attestation (Large) Accelerated Domestic Filer Already complying (Annual Reports for FY ending on/after November 15, 2004) Already complying (Annual Reports for FY ending on/after November 15, 2004) Non-Accelerated Domestic Filer Annual Reports for FY ending on/after December 15, 2007 Annual Reports for FY ending on/after December 15, 2008

19 Section 404 phase-in period Filer Status Management Report Auditor s Attestation Foreign Filers Annual Reports for FY ending on/after range July 15, 2006/7 and December 15, 2007/8 Initial Filers Second Annual Report

20 Section Interpretive Guidance How to evaluate and assess Committee of Sponsoring Organizations (COSO) is framework to establish internal controls over financial reporting Approach Risk-based, top-down assessment Emphasizes management experience Allows flexibility for smaller registrants

21 Internal Controls adverse examples Accounting application failure (GAAP) Problems in accounting documentation, policy, or procedures Material and/or numerous auditor year-end adjustments Accounting personnel resources, training, competency issues Restatement or non-reliance on financial statements

22 Assessment Conclusion may not be effective except Effective or not effective Consider if clarifying explanation appropriate Why did you find disclosure/internal controls and procedures not effective? Why did you find disclosure/internal controls and procedures effective despite apparent evidence to contrary?

23 Certifications PEO & PFO Section 302 civil Report contains no material misstatements or omissions Financial statements fairly presented Responsible for controls and procedures Section 906 criminal Report fully complies with 1934 Act Fairly presents issuer condition

24 Section 906 Certification penalty Criminal sanctions Knowing violation fine of up to $1 million and/or up to 5 years imprisonment Willful violation fine of up to $5 million and/or up to 20 years imprisonment Department of Justice oversees (not SEC) HealthSouth Corporation (March 2003)

25 Enforcement Criminalization of securities fraud 25 years imprisonment Extended statute of limitations Destruction of audit records Prohibit discharge in bankruptcy of debt arising from securities fraud penalty Increased officer and director bars (upon SEC finding of unfitness )

26 Whistleblowers Bars retaliation against informants and witnesses (including employees) Specific provisions for issuers Department of Labor notice and inquiry Participation with government agency or company designee with authority to investigate misconduct General criminal sanctions Ten years imprisonment and fine

27 Attorneys standards of conduct Report up-the-ladder Evidence of material securities violation SEC did not adopt noisy withdrawal Outside counsel the client is the issuer Audit committee Qualified Legal Compliance Committee Chief Legal Officer

28 SEC Implementation and oversight Enhanced review of issuer reports Various study mandates Fair Funds for Investors Greater agency funding

29 Result cause & effect (?) Compliance officers Fewer restatements Less securities class action litigation Rise of private equity buyouts Fewer IPOs Flight of capital offshore SEC changes to foreign issuer and smaller company regulations

30 Contact Information For questions or comments, please contact Reed Smith Counsel, David Mittelman