AUDITS AND AUDITORS

1. Establishes Public Company Accounting Oversight Board

• Five initial full-time members to be appointed by SEC within 90 days of enactment


• Board to be operational within 270 days of enactment


• Funded by issuers


• SEC has oversight authority of Oversight Board, including power to approve and amend rules, review disciplinary sanctions and censure and remove Oversight Board members for cause


• Independent public accounting firms conducting audits of public companies must register with the Oversight Board within 180 days of the Board becoming operational


• Registered public accounting firms must periodically report to Oversight Board


• Registered public accounting firms will be subject to inspection (at least every three years) and discipline by the Oversight Board


• Oversight Board may adopt accounting and auditing standards


• Mandatory cooperation of accountants with investigation by Oversight Board, including testimony and document production

2. Mandates rotation of lead audit partner and reviewing audit partner at least every five years

3. Prohibits auditing firm that provides auditing services for an “issuer” from performing specified non-audit services and requires Audit Committee approval of non-audit services not expressly forbidden (effective 180 days after the Board becomes operational)

• “Issuer” is defined to include a company that has securities registered under Section 12 of the Exchange Act, or is required to file reports under Section 15(d) or has a pending Securities Act registration statement

4. Prohibits an audit firm from providing audit services to a public company if any member of senior management of the issuer had been associated with the auditing firm for at least one year

5. Adopts Public Company Audit Committee Standards

• Responsible for appointment, compensation and oversight of auditing firm
• Must preapprove all auditing and non-auditing services to be provided by auditing firm except for de minimus exceptions
• Mandatory disclosure of non-auditing services to shareholders
• Committee members must be independent

       - May not (except in capacity of member of the board or any board committee) accept any
          consulting, advisory or other compensatory fee from the issuer and may not be an
          affiliated person of the issuer or any subsidiary of the issuer
• Auditing firm must report to Audit Committee on specified matters
• Must establish procedures for complaints regarding accounting, internal accounting controls and auditing matters and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters
• Must have authority to engage independent advisers

FINANCIAL REPORTING

1. Immediately effective requirement for CEO and CFO to certify annual and quarterly reports, subject to criminal and fines and imprisonment

2. Directs SEC to adopt an expanded CEO and CFO certification requirement rule for annual and quarterly reports within 30 days (this is in addition to #1)

• The SEC has already proposed a Certification Rule for which the public comment period expires August 19, 2002

3. Requires CEO and CFO to forfeit bonuses, compensation and any stock sale profits if a restatement of financial statements is required because of material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws

4. SEC may bar officers and directors if “unfit to serve” (lowers standard from “substantially unfit”)

5. Prohibits director or executive officer trading during blackout periods and imposes strict liability for any trading profits; amends ERISA regarding blackout periods (amendments effective in 180 days)

6. Prohibits personal loans (including extensions and renewals) to executives

• Exceptions for home improvements and manufactured housing loans and credit cards or credit plans made available in the ordinary course of business, on terms no more favorable than those offered to the public
• Prohibition does not apply to loans made by FDIC insured depository institutions subject to insider lending restrictions
• Grandfathering for existing loans but not their amendment or renewal

7. Reduces Section 16 securities transaction reporting periods to 2 business days unless SEC adopts another rule because it determines 2-day period is not feasible in any case - previously 10 days after the end of the month (effective in 30 days)

8. Enhanced SEC review of public company’s filings (at least once every 3 years)

9. Mandates “real time” disclosures of such additional information concerning material changes in financial condition or operations, in plan English, as the SEC determines, by rule, is necessary or useful for protection of investors and the public interest

MANDATES ADDITIONAL SEC RULES DEALING WITH:

• Disclosure of off-balance sheet transactions (within 180 days)
• Proforma presentations (within 180 days)
• Unlawful influence on audits (must be proposed within 90 days and finalized within 270 days)
  Inclusion of an internal control report and assessment with an issuer’s annual reports (to be reported on and attested to by auditors)
• Code of ethics for senior financial officers and immediate Form 8-K reporting of waivers and changes in the code of either (must be proposed within 90 days and finalized within 180 days)
  Disclosure of whether a “financial expert” is on the Audit Committee (must be proposed within 90 days and finalized within 180 days)
• Minimum standards of professional responsibility for attorneys representing issuers, including a rule to report wrongdoing to in-house counsel, CEO or board (within 180 days)
• Analyst conflicts (rules must be adopted within 1 year)
• Blackout periods

OTHER CHANGES

• Whistleblower protection
• Nondischargeability of some securities laws related debt in bankruptcy
• Enhanced white collar crime penalties, including for interference with an audit or investigation
• Enhanced securities laws violation penalties
• Penalties for document destruction
• Authority to sanction any person practicing before the Commission in any way
• Increased statute of limitation to earlier of 2 years after discovery or 5 years after the violation
• Expresses the “sense of the Senate” that the federal income tax return should be signed by CEO

MANDATES STUDIES ON:

1. Adoption of a principles-based accounting system for U.S. (SEC)

2. Audit firm rotation (GAO)

3. Off-Balance Sheet transactions (SEC)

4. Consolidation in the accounting industry (GAO)

5. Credit rating agencies (SEC)

6. Violation by securities professionals (SEC)

7. Restatement of financial statements (SEC)

8. Investment banks and financial advisers roles in earnings manipulation (GAO)

9. Civil penalties and disgagement funds for relief of investors (SEC)

For more information concerning the Sarbanes-Oxley Act of 2002 and its impact on your business, please contact Charles J. Ferry, Dean H. Dusinberre, or Paul F. Wessell at (717) 233-5731.

August 2, 2002                   

The information contained in this article is provided for general informational purposes only and should not be construed as legal advice. It is a summary only and may not be complete. Making this article available does not create nor constitute any attorney-client relationship.