Corporate Responsibility: Congress Adopts Broad New Requirements

Prompted by a wave of corporate scandals, Congress has passed legislation imposing broad new corporate responsibility obligations on public companies, which the president has signed. For publicly held converters, their suppliers, and customers, the Sarbanes-Oxley Act of 2002 creates new requirements regarding financial disclosures and corporate fraud, and imposes an independence standard on corporate audit committees and certification obligations on chief executive and financial officers. Private companies, while not subject to the specific reporting and structural obligations, also should be conversant with the requirements as they stand to be affected in a sale or acquisition situation. While affected entities should review it in detail, some of the key elements of the corporate responsibility provisions are as follows.

  • Corporate audit committees must be directly responsible for the appointment, compensation, and oversight of an independent auditor. Auditors must report to the audit committee, and the audit committee must have the power to engage counsel and other advisors as necessary.

  • Corporate audit committees must be composed solely of independent directors, who are barred from accepting consulting or other fees (apart from fees for sitting on the board or committee) from the company. The Securities and Exchange Commission (SEC) may adopt appropriate exemptions.

  • Audit committees must adopt procedures to protect whistle blowers and address complaints regarding auditing and accounting issues.

  • CEOs and CFOs must submit written statements to the SEC regarding the accuracy and completeness of previously filed reports. Although the act requires the SEC to issue regulations addressing the certification obligations, it details some of the specifics of the certifications. The officers must certify that: They have reviewed the report; it does not contain a material misstatement or omission; the financial statements fairly present the condition and results of operations; they are responsible for maintaining internal controls to assure that management is made aware of material information; and other specifics.

  • Directors, officers, and their agents are prohibited from taking any action to fraudulently influence, coerce, manipulate, or mislead an account conducting an audit of a company's financial statements.

  • The act adopts special limits on trading by officers and directors during “blackout periods,” and requires the SEC to issue new rules on attorneys practicing before the SEC. In particular, attorneys are required to report evidence of material breaches of securities laws or fiduciary obligations to the general counsel or CEO and, if they fail to respond “appropriately,” must report to the audit committee or other independent body.

In addition to the corporate responsibility provisions, the act includes new requirements for financial disclosures affecting both the content and timing of the disclosures, new civil and criminal penalties on companies and their key officers, mandatory document preservation requirements, and new reporting and other obligations on auditors. The act also creates a new oversight board that will have the authority to set standards, including ethical standards, on auditing firms and to impose sanctions for violations.

Sarbanes-Oxley demonstrates the speed with which Congress can act when propelled by external events. Early political debates on aspects of the law gave way to broad agreement as politicians on both sides of the aisle recognized a paramount need to respond to the crisis of confidence by shareholders. While the substance of the act is critically important, this is a lesson the business community should remember.

Sheila A. Millar, a partner with Keller and Heckman LLP, counsels both corporate and association clients. Contact her at 202/434-4143; This email address is being protected from spambots. You need JavaScript enabled to view it.;

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