The end-of August return to the office is always a shock to the system. This year, the shock is apt to be worse than ever, thanks to the US Sarbanes-Oxley Act of 2002, which President Bush signed into law on July 30.
Some have charged that the Act is no more than a legislative spasm. They contend it is a knee-jerk response by the US Congress to the recent well-publicised accounting and corporate scandals. I disagree, and believe that the Act will largely achieve its intended goals.
Take the Act’s certification requirement. Under the Act, chief executive officers and chief financial officers must personally certify the accuracy of the financial statements and other disclosures their companies make public. Miscertifying can lead to 20 years in jail and a $5m fine. Lawmakers seem to have taken Dr Samuel Johnson’s observation to heart that ‘when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully’.
This is exactly what the first wave of certifications has shown. While most public companies in the US have been able to vouch for their financial statements, a handful have decided that, upon reflection, they have to restate or revise their accounts in various ways. So, score one for the Act (or Dr Johnson).
But the Act is far more than certification. For example, it strengthens the power, importance and independence of audit committees. It also establishes a new body, the Public Company Accounting Oversight Board, with broad powers to regulate accountants.
Unlike certification, it is too early yet to gauge the impact of the Act’s broader provisions, many of which have not yet taken effect. But it is clear that the Act attacks problems in financial disclosure, corporate governance and auditing that were at the heart of the various corporate scandals.
In fact, I think the Act has a significant potential to establish global best practices that public company investors will come to demand.
- Alex Cohen is a corporate partner at law firm Latham & Watkins
President Bush signed the Sarbanes-Oxley Act into law as the headlines trumpeted the ‘new’ obligation for directors to certify the accounts of their companies. But is the obligation really such a big deal?
The requirement being imposed on CEOs and CFOs of companies whose shares trade on the US stock exchange is simply to sign quarterly statements that their financial results are ‘fairly presented’ in all material respects ‘to the best of the officer’s knowledge’.
Perhaps little more than an appropriate concentration of minds where minds should always have been concentrated. Forcing CEOs to get involved with the accounting practices of their companies – whatever next!
Some would say this is clearly necessary as the attitude of one or two CEOs involved in recent scandals seem to have been ‘Accounts? not my call’.
Ok, 20-year prison sentences and $5m fines are new but should relative lengths of prison sentences or fines ever be factors for CEOs in taking responsibility for accounts? Harry S Truman famously had on his desk a sign saying ‘the buck stops here’.
Surely it’s time to remind everyone that this is a reasonable principle of corporate governance.
The ‘What’s the big deal?’ response could also be said to apply to the new prohibition on loans to directors and the need to report share dealings promptly – a basic UK requirement for some time.
So what about auditors? Here perhaps there is greater cause for concern.
Under the terms of the Act the normal auditing services that accountancy firms provide are restricted as regards for example valuation services and expert services unrelated to the audit. This has previously been the position in certain areas but perhaps most importantly the prohibitions can now be extended by audit committees.
Where will this stop? Tax advice itself could be under threat. Quite how this applies to UK accountancy practices preparing information for their UK (but US listed) clients remains to be seen.
A big development for CEOs on big salaries? Hardly. Something that accountants need to look at pretty closely? Certainly.
- Martin Winter is a corporate partner at law firm Taylor Wessing.
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