September 2002
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  • This presentation focuses on the portions of the Act that impact audit committees and does not address every element of the Act. The discussion notes may not be distributed outside the Firm under any circumstances.
  • Contents of “certification” (continued) Signing officers are responsible for for establishing and maintaining internal controls Such internal controls are designed to ensure that material information relating to company and consolidated subsidiaries is made known to the signing officers by others within those entities Signing officers have evaluated the effectiveness of internal controls as of a date within 90 days prior to the report Signing officers present in the report their conclusions about effectiveness of internal controls based on evaluation Signing officers have disclosed to auditors and audit committee All significant deficiencies in design or operation of internal controls which could adversely affect ability to record, process, summarize and report financial data and have identified for auditors any material weaknesses in internal controls Any fraud that involves management or other employees with significant role in internal controls Signing Officers have indicated whether or not significant changes in internal controls or in other factors could affect internal controls subsequent to evaluation The penalties imposed under the Sarbanes-Oxley Act for knowing that a periodic report could subject individuals to fines of up to $5 million and imprisonment for not more than 20 years.
  • Contents of “certification” (continued) Signing officers are responsible for for establishing and maintaining internal controls Such internal controls are designed to ensure that material information relating to company and consolidated subsidiaries is made known to the signing officers by others within those entities Signing officers have evaluated the effectiveness of internal controls as of a date within 90 days prior to the report Signing officers present in the report their conclusions about effectiveness of internal controls based on evaluation Signing officers have disclosed to auditors and audit committee All significant deficiencies in design or operation of internal controls which could adversely affect ability to record, process, summarize and report financial data and have identified for auditors any material weaknesses in internal controls Any fraud that involves management or other employees with significant role in internal controls Signing Officers have indicated whether or not significant changes in internal controls or in other factors could affect internal controls subsequent to evaluation The penalties imposed under the Sarbanes-Oxley Act for knowing that a periodic report could subject individuals to fines of up to $5 million and imprisonment for not more than 20 years.
  • Contents of “certification” (continued) Signing officers are responsible for for establishing and maintaining internal controls Such internal controls are designed to ensure that material information relating to company and consolidated subsidiaries is made known to the signing officers by others within those entities Signing officers have evaluated the effectiveness of internal controls as of a date within 90 days prior to the report Signing officers present in the report their conclusions about effectiveness of internal controls based on evaluation Signing officers have disclosed to auditors and audit committee All significant deficiencies in design or operation of internal controls which could adversely affect ability to record, process, summarize and report financial data and have identified for auditors any material weaknesses in internal controls Any fraud that involves management or other employees with significant role in internal controls Signing Officers have indicated whether or not significant changes in internal controls or in other factors could affect internal controls subsequent to evaluation The penalties imposed under the Sarbanes-Oxley Act for knowing that a periodic report could subject individuals to fines of up to $5 million and imprisonment for not more than 20 years.
  • Contents of “certification” (continued) Signing officers are responsible for for establishing and maintaining internal controls Such internal controls are designed to ensure that material information relating to company and consolidated subsidiaries is made known to the signing officers by others within those entities Signing officers have evaluated the effectiveness of internal controls as of a date within 90 days prior to the report Signing officers present in the report their conclusions about effectiveness of internal controls based on evaluation Signing officers have disclosed to auditors and audit committee All significant deficiencies in design or operation of internal controls which could adversely affect ability to record, process, summarize and report financial data and have identified for auditors any material weaknesses in internal controls Any fraud that involves management or other employees with significant role in internal controls Signing Officers have indicated whether or not significant changes in internal controls or in other factors could affect internal controls subsequent to evaluation The penalties imposed under the Sarbanes-Oxley Act for knowing that a periodic report could subject individuals to fines of up to $5 million and imprisonment for not more than 20 years.
  • Contents of “certification” (continued) Signing officers are responsible for for establishing and maintaining internal controls Such internal controls are designed to ensure that material information relating to company and consolidated subsidiaries is made known to the signing officers by others within those entities Signing officers have evaluated the effectiveness of internal controls as of a date within 90 days prior to the report Signing officers present in the report their conclusions about effectiveness of internal controls based on evaluation Signing officers have disclosed to auditors and audit committee All significant deficiencies in design or operation of internal controls which could adversely affect ability to record, process, summarize and report financial data and have identified for auditors any material weaknesses in internal controls Any fraud that involves management or other employees with significant role in internal controls Signing Officers have indicated whether or not significant changes in internal controls or in other factors could affect internal controls subsequent to evaluation The penalties imposed under the Sarbanes-Oxley Act for knowing that a periodic report could subject individuals to fines of up to $5 million and imprisonment for not more than 20 years.
  • Contents of “certification” (continued) Signing officers are responsible for for establishing and maintaining internal controls Such internal controls are designed to ensure that material information relating to company and consolidated subsidiaries is made known to the signing officers by others within those entities Signing officers have evaluated the effectiveness of internal controls as of a date within 90 days prior to the report Signing officers present in the report their conclusions about effectiveness of internal controls based on evaluation Signing officers have disclosed to auditors and audit committee All significant deficiencies in design or operation of internal controls which could adversely affect ability to record, process, summarize and report financial data and have identified for auditors any material weaknesses in internal controls Any fraud that involves management or other employees with significant role in internal controls Signing Officers have indicated whether or not significant changes in internal controls or in other factors could affect internal controls subsequent to evaluation The penalties imposed under the Sarbanes-Oxley Act for knowing that a periodic report could subject individuals to fines of up to $5 million and imprisonment for not more than 20 years.
  • Contents of “certification” (continued) Signing officers are responsible for for establishing and maintaining internal controls Such internal controls are designed to ensure that material information relating to company and consolidated subsidiaries is made known to the signing officers by others within those entities Signing officers have evaluated the effectiveness of internal controls as of a date within 90 days prior to the report Signing officers present in the report their conclusions about effectiveness of internal controls based on evaluation Signing officers have disclosed to auditors and audit committee All significant deficiencies in design or operation of internal controls which could adversely affect ability to record, process, summarize and report financial data and have identified for auditors any material weaknesses in internal controls Any fraud that involves management or other employees with significant role in internal controls Signing Officers have indicated whether or not significant changes in internal controls or in other factors could affect internal controls subsequent to evaluation The penalties imposed under the Sarbanes-Oxley Act for knowing that a periodic report could subject individuals to fines of up to $5 million and imprisonment for not more than 20 years.
  • Contents of “certification” (continued) Signing officers are responsible for for establishing and maintaining internal controls Such internal controls are designed to ensure that material information relating to company and consolidated subsidiaries is made known to the signing officers by others within those entities Signing officers have evaluated the effectiveness of internal controls as of a date within 90 days prior to the report Signing officers present in the report their conclusions about effectiveness of internal controls based on evaluation Signing officers have disclosed to auditors and audit committee All significant deficiencies in design or operation of internal controls which could adversely affect ability to record, process, summarize and report financial data and have identified for auditors any material weaknesses in internal controls Any fraud that involves management or other employees with significant role in internal controls Signing Officers have indicated whether or not significant changes in internal controls or in other factors could affect internal controls subsequent to evaluation The penalties imposed under the Sarbanes-Oxley Act for knowing that a periodic report could subject individuals to fines of up to $5 million and imprisonment for not more than 20 years.
  • Definition of Audit Committee in the Sarbanes – Oxley Act
  • “ Independent” is defined as not receiving, other than for service on the board, any consulting, advisory, or other compensatory fee from the issuer, and as not being an affiliated person of the issuer, or any subsidiary thereof. The SEC may make exemptions for certain individuals on a case-by-case basis. There is no definition of “affiliated person” in the Act.
  • The SEC to propose rules 90 days after enactment and issue final rules not later than 180 days after enactment (Sec. 407) Disclosures to be included in periodic filings pursuant to 13 (a) and 15 (d) of the Securities Exchange Act of 1934.
  • It shall be “unlawful” for a registered public accounting firm to provide the following non-audit services to an audit client issuer: (1) bookkeeping or other services related to the accounting records or financial statements of the audit client; (2) financial information systems design and implementation ; (3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports; (4) actuarial services; (5) internal audit outsourcing services ; (6) management functions or human resources; (7) broker or dealer, investment adviser, or investment banking services; (8) legal services and expert services unrelated to the audit; (9) any other service that the Board determines, by regulation, is impermissible. The bill reaffirms that an accounting firm can “engage in any non-audit service, including tax services ,” that is not specifically prohibited if the activity is pre-approved by the audit committee. De Minimus Exception - The pre-approval requirement is waived with respect to the provision of non-audit services for an issuer if (1) the aggregate amount of all such non-audit services provided to the issuer constitutes less than 5 % of the total amount of revenues paid by the issuer to its auditor (calculated on the basis of revenues paid by the issuer during the fiscal year when the non-audit services are performed); (2) such services were not recognized by the issuer at the time of the engagement to be non-audit services; and (3) such services are promptly brought to the attention of the audit committee and approved prior to completion of the audit.   The authority to pre-approve services can be delegated to 1 or more members of the audit committee, but any decision by the delegate must be presented to the full audit committee at each of its scheduled meetings. Disclosure required in “periodic reports” filed pursuant to section 13(a)
  • It shall be “unlawful” for a registered public accounting firm to provide the following non-audit services to an audit client issuer: (1) bookkeeping or other services related to the accounting records or financial statements of the audit client; (2) financial information systems design and implementation ; (3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports; (4) actuarial services; (5) internal audit outsourcing services ; (6) management functions or human resources; (7) broker or dealer, investment adviser, or investment banking services; (8) legal services and expert services unrelated to the audit; (9) any other service that the Board determines, by regulation, is impermissible. The bill reaffirms that an accounting firm can “engage in any non-audit service, including tax services ,” that is not specifically prohibited if the activity is pre-approved by the audit committee. De Minimus Exception - The pre-approval requirement is waived with respect to the provision of non-audit services for an issuer if (1) the aggregate amount of all such non-audit services provided to the issuer constitutes less than 5 % of the total amount of revenues paid by the issuer to its auditor (calculated on the basis of revenues paid by the issuer during the fiscal year when the non-audit services are performed); (2) such services were not recognized by the issuer at the time of the engagement to be non-audit services; and (3) such services are promptly brought to the attention of the audit committee and approved prior to completion of the audit.   The authority to pre-approve services can be delegated to 1 or more members of the audit committee, but any decision by the delegate must be presented to the full audit committee at each of its scheduled meetings. Disclosure required in “periodic reports” filed pursuant to section 13(a)
  • Member terms for initial appointees will be from 1 to 5 years to create a staggered Board.
  • Auditing standards. The Board will be required to “cooperate on an on-going basis” with designated professional groups of accountants (FASB is not named but is assumed to be one of these groups) and any advisory groups convened in connection with standard-setting and, although the Board can “to the extent that it determines appropriate” adopt standards proposed by those groups, the Board will have the authority to amend, modify, repeal, and reject any standards suggested by the groups. The Board must report on its standard-setting activity to the Commission on an annual basis. Annual quality reviews (inspections) must be conducted for firms that audit more than 100 issuers, all others must be conducted every 3 years. The SEC and/or the Board may order a special inspection of any firm at any time. The SEC is to study a “principles – based” accounting model for the U.S. and must report results of the study to Congress within one year of enactment.  
  • The Board must require registered public accounting firms to “prepare, and maintain for a period of not less than 7 years, audit work papers, and other information related to any audit report, in sufficient detail to support the conclusions reached in such report.”   The Board will require a 2 nd partner review and approval of audit reports. Registered accounting firms will be required to adopt quality control standards.  
  • The PCAOB must adopt an audit standard to implement the internal control review required by section 404(b). This standard must require the auditor evaluate whether the internal control structure and procedures include records that accurately and fairly reflect the transactions of the issuer, provide reasonable assurance that the transactions are recorded in a manner that will permit the preparation of financial statements in accordance with GAAP, and a description of any material weaknesses in the internal controls. This would be be classified as an audit service (vs. non-audit).
  • The PCAOB must adopt an audit standard to implement the internal control review required by section 404(b). This standard must require the auditor evaluate whether the internal control structure and procedures include records that accurately and fairly reflect the transactions of the issuer, provide reasonable assurance that the transactions are recorded in a manner that will permit the preparation of financial statements in accordance with GAAP, and a description of any material weaknesses in the internal controls. This would be be classified as an audit service (vs. non-audit).
  • Section 401(a): Disclosures In Periodic Reports; Disclosures Required. “ Each annual and quarterly financial report . . . shall disclose all material off-balance sheet transactions” and “other relationships” with “unconsolidated entities” that may have a material current or future effect on the financial condition of the issuer. The SEC shall issue rules providing that pro forma financial information must be presented so as not to “contain an untrue statement” or omit to state a material fact necessary in order to make the pro forma financial information not misleading. Section 402(a): Prohibition on Personal Loans to Executives. Generally, it will be unlawful for an issuer to extend credit to any director or executive officer. Consumer credit companies may make home improvement and consumer credit loans and issue credit cards to its directors and executive officers if it is done in the ordinary course of business on the same terms and conditions made to the general public. Existing loans may not have a material change in terms. This prohibition is also waived for loans made by FDIC entities if the loan is subject to the insider lending restrictions of section 22(h) of the Federal Reserve Act. Section 409: Real Time Disclosure. Issuers must disclose information on material changes in the financial condition or operations of the issuer on a rapid and current basis.
  • Directs the SEC to require each issuer to disclose whether it has adopted a code of ethics for its senior financial officers and the contents of that code. The nature of the SEC rule making is not currently known—disclosure in which filings, etc. Directs the SEC to revise its regulations concerning prompt disclosure on Form 8-K to require immediate disclosure “of any change in, or waiver of,” an issuer’s code of ethics.

September 2002 Presentation Transcript

  • 1. Corporate Governance: Can You Afford To Wait? September 2002 The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. ©2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss association. All rights reserved.
  • 2.
    • Accounting and legal perspectives on the Sarbanes-Oxley Act of 2002
    • Houston Dallas
    • Eric Blumrosen Randy Ray
    • Partner, Gardere Wynne Sewell LLP Partner, Gardere Wynne Sewell LLP
    • eblumrosen @ gardere .com [email_address]
    • Clyde Pehl Glen Davison
    • Partner, KPMG LLP Partner, KPMG LLP
    • cpehl @ kpmg .com gdavison @ kpmg .com
  • 3. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Corporate Responsibility for Financial Reports (302)
    • Final rules adopted by SEC on August 27 and released August 29 (33-8124)
      • Certifications must be in all annual and quarterly reports, including annual and quarterly reports of small business issuers and annual reports of foreign private issuers.
      • Statements involving disclosure controls and procedures and internal controls required as part of certifications only with respect to reports that cover periods ending on or after August 29, 2002.
      • Certifications will follow report signatures
      • Adds new Item 307 to Regulation S-K regarding controls and procedures
  • 4. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Corporate Responsibility for Financial Reports (302)
      • Rule 13a-14 and Rule 15d-14
      • * * * *
      • (b) The certification included in each report specified in paragraph (a) of this section must be in the form specified in the report and consist of a statement of the certifying officer that:
        • (1) He or she has reviewed the report being filed;
        • (2) Based on his or her knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report;
        • (3) Based on his or her knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in the report;
  • 5. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Corporate Responsibility for Financial Reports (302), continued
      • (4) He or she and the other certifying officers are responsible for establishing and maintaining disclosure controls and procedures (as such term is defined in paragraph (c) of this section) for the issuer and have:
        • (i) Designed such disclosure controls and procedures to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the periodic reports are being prepared;
        • (ii) Evaluated the effectiveness of the issuer's disclosure controls and procedures as of a date within 90 days prior to the filing date of the report ("Evaluation Date"); and
        • (iii) Presented in the report their conclusions about the effectiveness of the disclosure controls and procedures based on their evaluation as of the Evaluation Date;
  • 6. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Corporate Responsibility for Financial Reports (302), continued
      • (5) He or she and the other certifying officers have disclosed, based on their most recent evaluation, to the issuer's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function):
        • (i) All significant deficiencies in the design or operation of internal controls which could adversely affect the issuer's ability to record, process, summarize and report financial data and have identified for the issuer's auditors any material weaknesses in internal controls; and
        • (ii) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal controls; and
      • (6) He or she and the other certifying officers have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
  • 7. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Corporate Responsibility for Financial Reports (302)
    • Final SEC Regulations Adopted
      • Disclosure controls and procedures
        • Designed to ensure required information is recorded, processed, summarized and reported timely
        • Complements existing internal controls over financial reporting by ensuring commensurate procedures for gathering, analyzing and disclosing all information required to be disclosed in Exchange Act reports
        • Should capture information that is relevant to an assessment of the need to disclose developments and risks to issuer’s business
  • 8. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Corporate Responsibility for Financial Reports (302), continued
      • Regulation S-K
      • Item 307 Controls and Procedures.
      • (a) Evaluation of disclosure controls and procedures . Disclose the conclusions of the registrant’s principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, about the effectiveness of the registrant’s disclosure controls and procedures (as defined in 240.13a-14(c) and 240.15d-14(c)) based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of the quarterly or annual report that includes the disclosure required by this paragraph.
      • (b) Changes in internal controls. Disclose whether or not there were significant changes in the registrant’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
  • 9. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Corporate Responsibility for Financial Reports (302), continued
    • Section 906 also has a certification requirement for CEOs and CFOs
      • “ the periodic report containing the financial statements fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 . . . and that information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer.”
      • Effective July 30, 2002
      • Appears to apply only to annual and quarterly reports (especially given final SEC rules on Section 302 certifications)
  • 10. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Corporate Responsibility for Financial Reports (302), continued
    • Section 906 also has a certification requirement for CEOs and CFOs
      • Criminal penalties—
        • If officer certifies knowing that the report does not comport with all the requirements in the certification, penalties of not more than $1 million fine or prison for not more than 10 years, or both
        • If officer willfully certifies knowing that the report does not comport with all the requirements in the certification, penalties of not more than $5 million fine or prison for not more than 20 years, or both
      • Given final SEC rules on Section 302 certifications, placement should probably follow Section 302 certifications after report signatures
  • 11. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Audit Committee Defined
    • A committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing –
      • the accounting and financial reporting processes of the issuer; and
      • audits of the financial statements of the issuer.
  • 12. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Public Company Audit Committee (301)
    • Audit Committee is “directly responsible for the appointment, compensation and oversight” of the auditor
        • Audit Committee responsible for resolving disagreements between management and the auditor regarding financial reporting
        • Auditor reports directly to the audit committee
  • 13. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Public Company Audit Committee (301), continued
      • Act establishes independence definition for audit committee members
        • No fees to members other than for board service
        • May not be an “affiliated person” of the issuer or any subsidiary
        • NYSE proposal matches this tightened definition
  • 14. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Public Company Audit Committee (301), continued
      • Audit Committees to establish protocol to address “whistle blower” communications
        • Receipt, retention and treatment of complaints to Company regarding accounting, internal controls, or auditing matters
        • Confidential and anonymous submissions by employees of concerns regarding questionable accounting or auditing matters
      • Must have authority and funding to engage independent counsel and outside advisors
  • 15. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
      • Disclosure of Audit Committee Financial Expert (407)
      • SEC to require disclosure that the audit committee has at least 1 financial expert, or if not, why not
      • Financial expert to be defined by the SEC considering the following elements
        • Public Accountant or Auditor
        • CFO, Controller, CAO or similar
        • Understanding of GAAP and financial statements
        • Experience in
          • Preparation or auditing of financial statements of similar issuers
          • Accounting for estimates, accruals and reserves
          • Internal controls
        • An understanding of Audit Committee functions
  • 16. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
      • Non-Audit Services (201-202)
        • Act reaffirms that firms can provide tax and other non-audit services that are not “prohibited”
        • Unlawful for firms to provide audit clients “Prohibited Services” and “any other service Audit Committee has not approved in advance”
        • De minimus exception
        • Audit Committee must preapprove all permissible non-audit services and disclose approval in periodic reports
  • 17. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
      • The Act identifies eight categories of “Prohibited Activities” (201)
      • Bookkeeping and related services
      • Financial information systems
      • Appraisals & valuations
      • Actuarial services
      • Internal audit outsourcing
      • Management functions or human resources
      • Broker, dealer or investment advisor services
      • Legal services & expert services
    • In addition, the Board may adopt regulations prohibiting other services
  • 18. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • The Act established the Public Company Accounting Oversight Board to oversee audits of companies subject to securities laws and other matters
    • The board is a nonprofit D.C. corporation
      • Not an agency of U.S. Government
    • Board Structure and Policies
      • Consists of five members appointed by SEC
        • In consultation with Secretary of Treasury and Chairman of Federal Reserve Board
        • Two (but no more than two) of five Board members must be CPA’s
        • All members serve on a full time basis
        • Members’ terms in office are for 5 years (limited to two terms)
  • 19. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
      • Duties of the Board are to (101):
      • Oversee the audit of public companies
      • Register public accounting firms that prepare audit reports for SEC issuers
      • Establish or adopt auditing, quality control, ethics, independence and other standards related to the preparation of audit reports
  • 20. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
      • Duties of the Board are to (continued) (101):
      • Conduct inspections of registered public accounting firms
      • Conduct investigations and disciplinary proceedings involving registered public accounting firms and associated members and, where justified, impose sanctions
  • 21. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
      • Employment of auditing firm personnel (206)
        • Unlawful for registered public accounting firm to perform an audit if the company’s CEO, CFO, CAO, Controller (or equivalent) was employed by the audit firm and participated in the company’s audit during the 1- year period preceding the date of initiation of the current audit
  • 22. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Management Assessment of Internal Controls (404)
      • Annual report must contain a report from management on internal control that
        • States management’s responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting
        • Contains an assessment of the effectiveness of internal control related to financial reporting
      • External auditor to attest to management's assertion concerning its assessment of internal control as part of audit
      • Exemption for investment companies registered under section 8 of 1940 Investment Company Act
  • 23. Corporate Governance: Can You Afford to Wait? Sarbanes-Oxley Act of 2002
    • Rules of Professional Responsibility for Attorneys (307)
    • Requires attorney to report evidence of following to chief legal counsel or CEO:
    • - a “material violation of securities laws” or
    • - a “breach of fiduciary duty or similar violation by the company or an agent
    • If there is not an appropriate response, attorney must report the evidence to the audit committee, another committee composed of independent directors, or the full board
    • Applies to attorneys “appearing and practicing before the Commission in any way in the representation of issuers”
    • Not effective until SEC adopts implementing rules
    • - Will not know full impact until rules are adopted
    • - Final rules are required by January 26, 2003
  • 24. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Disclosure in Periodic Reports (401)
      • GAAP financial statements required in financial reports filed with the SEC must reflect all material correcting adjustments identified by a registered public accounting firm
      • Annual and quarterly financial reports must disclose all material off-balance sheet transactions, arrangements, obligations, and other relationships with unconsolidated entities or other persons that have a material current or future effect (—subject to new SEC rules)
      • Pro forma financial information included in any periodic or other report filed with SEC, or in other public disclosure or press or other release, must be presented in a manner that—
        • does not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the pro forma financial information, in light of the circumstances under which it is presented, not misleading; and
        • reconciles it with the financial condition and results of operations of the issuer under GAAP
        • (—subject to new SEC rules)
  • 25. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
    • Other provisions
      • SEC to review company filings on a regular basis, but at least every 3 years (408)
      • “ Real Time” disclosure of material changes in financial condition required (409)
  • 26. Corporate Governance: Can You Afford To Wait? Sarbanes-Oxley Act of 2002
      • Disclosures of Transactions Involving Management and Principal Stockholders (403)
      • Final rules adopted by SEC on August 27 and released August 29
      • Effects stock transactions by directors, executive officers, and 10% stockholders
      • Transactions must be reported in two business days
        • Replaces old 10th day of following month
        • Must be received by SEC on second business day after transaction
      • All transactions with the issuer must now be reported on Form 4 (instead of Form 5)
      • Electronic filing will not be required until July 30, 2003, but encouraged in order to meet quick filing deadline
  • 27. The new criminal sanctions for actions by public companies, their management, or their directors under Sarbanes-Oxley
    • Thomas Hagemann
    • Partner, Gardere Wynne Sewell LLP
    • thagemann @ gardere .com
  • 28. A public company perspective on Sarbanes-Oxley
    • Houston
    • Greg Armstrong,
    • Chairman and CEO
    • Plains All American Pipeline L.P.
    Dallas Edward W. Rose, President Cardinal Investment Company, Inc.
  • 29.
    • An open discussion among the panel and audience of Sarbanes-Oxley and corporate governance issues faced by public companies, management and directors.
    • Moderated by
    • Edward Rhyne
    • Partner, Gardere Wynne Sewell LLP
    • erhyne @ gardere .com