Sarbanes-Oxley Act: Compensation-This Provision Relates To Situations When An Issuer Restates Its
Sarbanes-Oxley Act: Compensation-This Provision Relates To Situations When An Issuer Restates Its
Sarbanes-Oxley Act: Compensation-This Provision Relates To Situations When An Issuer Restates Its
The act amends certain provisions of the Securities Act of 1933 (Securities Act) and
the Securities Exchange Act of 1934 (Exchange Act). The act also amends certain
sections of the Investment Company Act of 1940 (Investment Act) and the
Investment Advisors Act of 1940 (Advisors Act).
The provisions of the act regarding corporate governance, disclosure, auditors and
related matters generally apply to "issuers." The term "issuer" means an issuer of
any securities registered under the Exchange Act that (1) is required to file reports
under §15(d) of the Exchange Act or (2) has filed a registration statement under
the Securities Act that has not yet become effective. Some of the provisions of the
act, such as the requirement for notice of blackout periods and certain of the
criminal penalties, have broader application.
The act establishes a new Public Company Accounting Oversight Board. The
Oversight Board will be a nonprofit corporation subject to SEC oversight (similar to
the way the SEC has oversight of self-regulatory organizations such as the stock
exchanges). The Oversight Board will be funded by fees assessed against issuers in
amounts to be determined by the Oversight Board. Individual assessments will be
proportionate to each issuer's relative equity market capitalization.
1. register public accounting firms that prepare audit reports for issuers,
2. issue rules relating to auditing, quality control, ethics, independence and other
standards relating to the preparation of audit reports for issuers,
3. conduct inspections of registered public accounting firms (1) annually for a firm
that audits more than 100 public companies and (2) every three years for
other firms,
4. conduct investigations and disciplinary proceedings concerning registered
public accounting firms and their partners, shareholders, principals,
accountants and other professional employees,
5. perform such other duties as the Oversight Board or the SEC determines
appropriate (1) to promote high professional standards and improve the quality
of audit services, (2) to protect investors, or (3) to further the public interest,
and
6. enforce compliance by registered public accounting firms with the act, the
Oversight Board rules, accounting professional standards and the securities
laws relating to (1) the preparation and issuance of audit reports and (2)
accountants' obligations and liabilities.
Auditor Independence
The act contains a series of provisions intended to enhance public accounting firm
auditor independence. As part of these provisions, a public accounting firm may not
provide the following services to its audit clients:
1. The aggregate amount of such services does not exceed five percent of the
total revenues paid to the auditor in the year in which the non-audit services
were provided;
2. The issuer did not recognize at the time of the auditor's engagement that the
services were non-audit services; and
3. The non-audit services are promptly brought to the attention of, and approved
by, the audit committee before completion of the audit.
Any such pre-approval must be disclosed in the issuer's periodic reports filed with
the SEC. The audit committee may delegate the authority to grant pre-approvals to
one or more of its members.
Certification of Periodic Financial Reports
The act contains two separate provisions regarding the certification of periodic
financial reports filed under the Exchange Act. In the first provision, the act
requires that each periodic report filed with the SEC that contains financial
statements be "accompanied" by a written statement signed by both the CEO and
the CFO. That written statement must certify that:
1. The report complies with the requirements of §13(a) or 15(d) of the Exchange
Act; and
2. The information contained in the report fairly presents, in all material respects,
the issuer's financial condition and results of operations.
In the second provision, the act directs the SEC to issue rules requiring the issuer
CEO and CFO to certify, in each quarterly or annual report, that:
Any report filed with the SEC that contains financial statements required to be
presented in accordance with generally accepted accounting principles (GAAP) must
reflect all material correcting adjustments that have been identified by the issuer's
public accounting firm.
The act directs the SEC to issue rules to ensure that each quarterly or annual report
filed with the SEC disclose (1) all material off-balance sheet transactions, (2)
arrangements, obligations or other relationships with unconsolidated entities or
other persons that may have a material current or future effect on financial
condition, (3) changes in financial condition, (4) results of operations, (5) liquidity,
(6) capital expenditures and (7) significant revenue and expense components.
The act directs the SEC to issue rules regarding pro forma financial information
included in any SEC filing, any public disclosure, and any press or other release.
The new rules are intended to ensure that the pro forma financial information:
1. not contain an untrue statement of a material fact or omit to state a material
fact necessary to make the pro forma financial information (in light of the
circumstances under which it is presented) not misleading, and
2. be reconciled with the issuer's financial condition or results of operations
prepared in accordance with GAAP.
The act directs the SEC to issue rules requiring that each issuer's annual report
include a statement of (1) management's responsibilities for establishing and
maintaining (i) an adequate internal control structure and (ii) financial reporting
procedures, and (2) management's assessment of the effectiveness of such
structure and procedures. The issuer's auditor must attest to and report on
management's assessment.
The act directs the SEC to issue rules requiring an issuer to disclose in its periodic
reports whether it has adopted a code of ethics for senior financial officers, and if
not, the reasons why not. The new SEC rules must require an issuer to report
immediately any change in or waiver from its code of ethics.
The act directs the SEC to issue rules requiring an issuer to disclose in its periodic
reports (1) whether or not its board of directors audit committee includes at least
one member who is a "financial expert" (to be defined by the SEC) and (2) if not,
why not. In its definition of a "financial expert," the SEC is directed to consider
whether a person, through education and experience (1) as a public accountant or
auditor or (2) as a senior financial officer, has:
The following provisions of the act are effective as of July 30, 2002:
1. auditor independence
2. prohibition against improper audit influence
3. periodic financial report certifications by CEOs and CFOs
4. CEO/CFO reimbursement to the issuer following accounting restatements
5. lower standard for barring directors and officers, and equitable relief
6. ban on personal loans to issuer officers and directors
7. whistleblower protections
8. expanded financial disclosure
9. new and enhanced enforcement provisions
10. provisions affecting the SEC resources and authority
The SEC appointed the Accounting Oversight Board and must determine by April
26, 2003, that the Oversight Board is duly organized and capable of performing its
duties. Public accounting firms are required to be registered within 180 days after
the SEC makes the public determination that the oversight is fully functional.
The following provisions of the act are effective as of Oct. 28, 2002: code of ethics
for senior financial officers and the disclosure of audit committee financial expert.
The following provisions of the act are effective as of Jan. 26, 2003: notices of and
prohibition against insider trading during a benefit fund blackout period.
Conclusion
In the wake of massive public company audit failures, periodic report disclosure
errors and omissions, and financial statement accounting restatements, Congress
intended the Sarbanes-Oxley Act of 2002 to address systemic weaknesses in public
company financial disclosures/corporate governance and public company/auditor
relationships. This discussion affects all of the major provisions of the act and
summarized the provisions that are most relevant to valuation analysts. Valuation
practitioners who perform bankruptcy analyses should be aware of how the act
increases the reliability and thoroughness of public company financial disclosures.