sarbanes-oxley act of 2002 -regulations affecting corporate responsibility and its disclosure-

SARBANES-OXLEY ACT OF SARBANES-OXLEY ACT OF 20022002

-Regulations Affecting Corporate -Regulations Affecting Corporate Responsibility and Its Disclosure-Responsibility and Its Disclosure-

Sarbanes-Oxley Act of 2002(SOA-Act)Sarbanes-Oxley Act of 2002(SOA-Act)-Regulations Affecting Corporate -Regulations Affecting Corporate Responsibility and Its Disclosure-Responsibility and Its Disclosure-

• Outline of the projectOutline of the project– First Chapter- First Chapter- Reasons behind the SOAReasons behind the SOA– Second Chapter- Second Chapter- General overview of major General overview of major

provisions and critics about the Actprovisions and critics about the Act– Third Chapter- Third Chapter- Focused on the responsibilities Focused on the responsibilities

and related disclosure requirements for and related disclosure requirements for companies` executives & attorney’s by companies` executives & attorney’s by referring related SEC Rules. In this chapter referring related SEC Rules. In this chapter discussions about each of the regulations are discussions about each of the regulations are also provided.also provided.

Reasons Behind The Sarbanes-Reasons Behind The Sarbanes-OxleyOxley– SOA was enacted soon after the significant corporate SOA was enacted soon after the significant corporate

scandalsscandals most popular ones are Enron and most popular ones are Enron and WorldCom,WorldCom,

– The environment triggering corporate scandalsThe environment triggering corporate scandals is is provided in the paper in summary;provided in the paper in summary;

•Take over movement, equity compensation linked Take over movement, equity compensation linked executives interest to the share price. executives interest to the share price.

•Motivations to meet market expectations among Motivations to meet market expectations among concerns.concerns.

•Long term bull market effect (1994-2000),Long term bull market effect (1994-2000),

•Specifically, the reasons for failure of gatekeepers Specifically, the reasons for failure of gatekeepers e.g. auditors, lawyers, analyst… in the scandals. e.g. auditors, lawyers, analyst… in the scandals. (deterrence, bubble) (deterrence, bubble)

• Investors` position in that environment is also Investors` position in that environment is also considered.considered.

Reasons Behind The Sarbanes-OxleyReasons Behind The Sarbanes-OxleyEnron CaseEnron Case

–As a main model to enlighten the objectives of the As a main model to enlighten the objectives of the SOA the short timeline of Enron’s fall and the SOA the short timeline of Enron’s fall and the comments about the role of participants provided.comments about the role of participants provided.

•EnronEnron when its stock price was $90 in August when its stock price was $90 in August 2000, was America’s 2000, was America’s 77thth largest company, largest company,•It went to chapter 11 (bankruptcy) on December It went to chapter 11 (bankruptcy) on December

2, 2001, promptly after restating their financial 2, 2001, promptly after restating their financial reports, as reports, as largest bankruptcy reorganization in largest bankruptcy reorganization in American historyAmerican history, the stock price at that time was 60 , the stock price at that time was 60 cents.cents.• The most highlighted event at the collapse of the The most highlighted event at the collapse of the

Enron Enron is its relations with limited partnerships is its relations with limited partnerships (Special Purpose Entity- SPEs),(Special Purpose Entity- SPEs),

- Executives got personal gains being on - Executives got personal gains being on both sides (Fastow -CFO-more than $ 30 million) both sides (Fastow -CFO-more than $ 30 million)

- Enron failed to disclose the extent of - Enron failed to disclose the extent of these relations (off-balance sheet and related party these relations (off-balance sheet and related party transaction)transaction)

Reasons Behind The Sarbanes-OxleyReasons Behind The Sarbanes-OxleyEnron Case (Cont’d)Enron Case (Cont’d)

•Special Committee founded to investigate the Special Committee founded to investigate the events, noted events, noted failures all levels of monitoring within failures all levels of monitoring within the companythe company including board. including board.•The The gatekeepers such as lawyersgatekeepers such as lawyers (Vinson & (Vinson &

Elkins), rating agencies severelyElkins), rating agencies severely criticized. criticized.•Some Some investment banksinvestment banks after the event alleged after the event alleged

aiding and abetting the securities fraud.aiding and abetting the securities fraud.•Enron’s both internal and outside auditor Enron’s both internal and outside auditor Arthur Arthur

AndersenAndersen, , indicted to obstruction of justice,indicted to obstruction of justice, shredding of Enron-related documents,shredding of Enron-related documents,•The whistle-blowerThe whistle-blower, vice president of Enron until , vice president of Enron until

resigned, Sharon Watkins, letter to the top of Enron resigned, Sharon Watkins, letter to the top of Enron highly emphasized by media.highly emphasized by media.

Reasons Behind The Sarbanes-OxleyReasons Behind The Sarbanes-OxleyOther Scandals way through legislation.Other Scandals way through legislation.

• March 2002- Enron demise followed byMarch 2002- Enron demise followed by over 30 over 30 Enron inspired bills and several Enron inspired bills and several regulatory responses regulatory responses from the SEC and SRO ’s.from the SEC and SRO ’s.

• June 25 2002,June 25 2002, WorldComWorldCom confessed that it had confessed that it had overstated its income by $3.8 billionoverstated its income by $3.8 billion, the , the announcement staggered financial world because of announcement staggered financial world because of the size and simplicity of overstatement,the size and simplicity of overstatement,

• On July 25 2002On July 25 2002, SOA passed the , SOA passed the SenateSenate, President , President signed into Law on signed into Law on July 30 2002.July 30 2002.

What Sarbanes-Oxley BringsWhat Sarbanes-Oxley Brings

Major Provisions of Sarbanes-OxleyMajor Provisions of Sarbanes-Oxley

The Act has 11 titles can be summarized within;The Act has 11 titles can be summarized within;

•Foundation of Public Company Accounting Oversight Foundation of Public Company Accounting Oversight BoardBoard

•Auditor independence provisions,Auditor independence provisions,

•A range of corporate governance measures,A range of corporate governance measures,

•Expanded financial disclosure requirements,Expanded financial disclosure requirements,

•Analyst`s potential conflict of interest,Analyst`s potential conflict of interest,

•Increase in SEC funding & enforcement power and Increase in SEC funding & enforcement power and direction of various studies and reports,direction of various studies and reports,

•Criminal penalties & fraud.Criminal penalties & fraud.



•Title I and II, regulates;Title I and II, regulates;-Foundation of PCAOB-empowered to set -Foundation of PCAOB-empowered to set

auditing quality, control and ethic standards, inspect auditing quality, control and ethic standards, inspect registered accountants, take disciplinary actions, registered accountants, take disciplinary actions,

- Funding of FASB changed by providing full - Funding of FASB changed by providing full financial independence from the accounting industry,financial independence from the accounting industry,

- Auditor independence from corporate - Auditor independence from corporate management supported by creating more separation management supported by creating more separation between auditing and consulting function, between auditing and consulting function, •Title III and IVTitle III and IV brought enclosed provisions about brought enclosed provisions about responsibility of public company officers and lawyers responsibility of public company officers and lawyers for the quality and accuracy of financial reporting, for the quality and accuracy of financial reporting, and some related disclosure requirements, provided and some related disclosure requirements, provided in detail in Chapter III.in detail in Chapter III.



•Title IV cited provisions aiming to enhance financial disclosure;Title IV cited provisions aiming to enhance financial disclosure;-Off-balance sheet transactions- -Off-balance sheet transactions- Sec. 401-Sec. 401-As a direct As a direct

response use of Enron SPEs to keep liabilities off balance-sheet, response use of Enron SPEs to keep liabilities off balance-sheet, SOA directs SEC to prepare regulations requiring companies to SOA directs SEC to prepare regulations requiring companies to disclose in their periodic reports all material off balance-sheet disclose in their periodic reports all material off balance-sheet information (including contingent obligations),information (including contingent obligations),

-Pro Forma Disclosure- -Pro Forma Disclosure- Requires SEC to adopt rules Requires SEC to adopt rules requiring the companies to publish Pro Forma data with a requiring the companies to publish Pro Forma data with a reconciliation to comparable data calculated according to GAAP.reconciliation to comparable data calculated according to GAAP.

-Required SEC prepare a study on SPEs,-Required SEC prepare a study on SPEs, -Enhanced SEC Review of Disclosure--Enhanced SEC Review of Disclosure- Sec. 408.-Sec. 408.-SEC must SEC must systemically review corporate filings at least once a three year. systemically review corporate filings at least once a three year. (Selection criterias e.g. stock price volatility, large market (Selection criterias e.g. stock price volatility, large market capitalization…)capitalization…) -Rapid Disclosure of Financial Change-Sec. 409--Rapid Disclosure of Financial Change-Sec. 409-Disclosure of Disclosure of additional information concerning material changes in financial additional information concerning material changes in financial conditions or operations on a rapid and current basis.conditions or operations on a rapid and current basis.



•Title V seeks to limit and expose toTitle V seeks to limit and expose to public possible public possible conflict of conflict of interest effecting securities analystsinterest effecting securities analysts, in that respect; Sec. 501 of , in that respect; Sec. 501 of the Act obliged, SEC or on the SEC’s direction exchanges, designed the Act obliged, SEC or on the SEC’s direction exchanges, designed regulations;regulations;

-Restricting the pre-publication clearance of research or -Restricting the pre-publication clearance of research or recommendation by other staff,recommendation by other staff, -Limiting supervision and compensation of analysts to one other -Limiting supervision and compensation of analysts to one other than investment banking,than investment banking, -Protects analysts from retaliation or threats.-Protects analysts from retaliation or threats.

•Title VI is related to SEC’s resources and authority and Title VII Title VI is related to SEC’s resources and authority and Title VII requires some studies and reports to be conducted;requires some studies and reports to be conducted; - Increased SEC funding;- Increased SEC funding;

-Codified SEC’s authority to censure and deny temporarily -Codified SEC’s authority to censure and deny temporarily or permanently preparing and practicing before,or permanently preparing and practicing before,

-To reduce the migration of fraud, SEC was authorized to -To reduce the migration of fraud, SEC was authorized to bar securities industry employees barred from other financial bar securities industry employees barred from other financial sectors,sectors,



Title VI is related to SEC’s resources and authority Title VI is related to SEC’s resources and authority and Title VII requires some studies and reports to be and Title VII requires some studies and reports to be conducted;conducted;

-Required special studies;-Required special studies;

-Sec. 701-Consolidation of public accounting firms -Sec. 701-Consolidation of public accounting firms (Comptroller General)(Comptroller General)

-Sec. 702-Role of credit rating agency in the -Sec. 702-Role of credit rating agency in the operation of securities markets (SEC)operation of securities markets (SEC)

-Sec. 705-Role of investment bankers and financial -Sec. 705-Role of investment bankers and financial advisers in assisting public companies manipulation advisers in assisting public companies manipulation of their earnings (GAO)of their earnings (GAO)



SOA imposes new criminal penalties for fraud and SOA imposes new criminal penalties for fraud and other wrongful act;other wrongful act;

-Creates a new federal criminal violation, called -Creates a new federal criminal violation, called securities fraud, violation of this statue will be securities fraud, violation of this statue will be punishable by fine and imprisonment upto 25 years,punishable by fine and imprisonment upto 25 years,

-Strengthens the existing penalties of mail and wire -Strengthens the existing penalties of mail and wire fraud,fraud,

-Direct respond to Arthur Andersen`s shredding -Direct respond to Arthur Andersen`s shredding event, creates new document destruction crime,event, creates new document destruction crime,

-Contains federal protection for whistle blowers -Contains federal protection for whistle blowers when act lawfully to disclose information,when act lawfully to disclose information,

-Increases statue of limitation in private lawsuits,-Increases statue of limitation in private lawsuits,


Critics of Sarbanes-OxleyCritics of Sarbanes-Oxley

•An election year is not proper to overhaul a complicated An election year is not proper to overhaul a complicated area like securities regulation. area like securities regulation.

•Simply follows headlines from Enron and others with Simply follows headlines from Enron and others with little appreciation for systemic problemslittle appreciation for systemic problems

•The efforts of SEC and other SROs is not taken into The efforts of SEC and other SROs is not taken into account by Congress. account by Congress.

•Little appreciation for markets` response to the scandals.Little appreciation for markets` response to the scandals.

•Many provisions are simply delegations of authority to Many provisions are simply delegations of authority to the SEC to adopt rules, some of them involve the SEC or the SEC to adopt rules, some of them involve the SEC or the other SROs had already undertaken rulemaking the other SROs had already undertaken rulemaking initiatives. initiatives.

•May cause long-term systemic harm to the May cause long-term systemic harm to the competitiveness of US capital markets.competitiveness of US capital markets.

Regulations of Sarbanes-OxleyRegulations of Sarbanes-Oxley Affecting Corporate Responsibility and Its DisclosureAffecting Corporate Responsibility and Its DisclosureAudit CommitteesAudit CommitteesSec. 301-SEC Proposed Rule ”Standards Relating to Listed Sec. 301-SEC Proposed Rule ”Standards Relating to Listed Company Audit Committees”Company Audit Committees”•Sec. 301 requires the SEC toSec. 301 requires the SEC to direct the exchanges and NASD direct the exchanges and NASD to prohibit the listing of securities of companies not to prohibit the listing of securities of companies not complying with certain audit committee requirements.complying with certain audit committee requirements.

•Definition- Definition- A committee (or equivalent body) established by A committee (or equivalent body) established by and composed of members of an issuer’s board of directors to and composed of members of an issuer’s board of directors to oversee the accounting and financial reporting processes and oversee the accounting and financial reporting processes and audits of the financial statementsaudits of the financial statements. If the issuer does not . If the issuer does not establish such a committee, the entire board of directors establish such a committee, the entire board of directors serves in that capacity.serves in that capacity.

•The Responsibilities of Audit Committees cited as;The Responsibilities of Audit Committees cited as;-Relationships to auditors-Relationships to auditors-Audit committee independence-Audit committee independence-Authority and funding to hire advisers-Authority and funding to hire advisers-Procedures to address complaints regarding -Procedures to address complaints regarding

accounting, internal accounting controls, or auditing mattersaccounting, internal accounting controls, or auditing matters

Audit CommitteesAudit Committees

•SEC rule details the audit committee responsibilities SEC rule details the audit committee responsibilities and add some disclosure requirements to ensure the and add some disclosure requirements to ensure the investors are informed about the composition. investors are informed about the composition. • Relationships to auditors-Relationships to auditors- directly responsible directly responsible for the appointment, compensation, and oversight of for the appointment, compensation, and oversight of the registered audit firm’s work, including the the registered audit firm’s work, including the resolution of disagreements over financial reporting. resolution of disagreements over financial reporting. •Independence-Independence-Two criterias were set for the Two criterias were set for the independence;independence; -Compensation--Compensation-They can’t accept any consultation They can’t accept any consultation fee other than for their service as a board member fee other than for their service as a board member

-Affiliated person--Affiliated person-Not being an affiliated person Not being an affiliated person of the issuer (controls the issuer or under common of the issuer (controls the issuer or under common control)-(A safe harbor provision defined for affiliated control)-(A safe harbor provision defined for affiliated person definition by Rule)person definition by Rule)


•Authority and funding to hire advisor- Authority and funding to hire advisor- For auditors For auditors and other outside advisors funding will be determined and other outside advisors funding will be determined by audit committee.by audit committee.

•Procedures to handling complaints- Procedures to handling complaints- Requires the Requires the audit committee establish procedures for complaints audit committee establish procedures for complaints of employees and others, about accounting, internal of employees and others, about accounting, internal control and audit. (Anonyms also to make sure to control and audit. (Anonyms also to make sure to enable whistle blowing)enable whistle blowing)

•Some exemptions are also provided by Rule (IPO, Some exemptions are also provided by Rule (IPO, holding companies etc.),holding companies etc.),

• For foreign private issuers limited exemptions For foreign private issuers limited exemptions enabled (permission for employee etc), enabled (permission for employee etc),


•Exchanges’ Situation;Exchanges’ Situation;-SEC rule only sets a base line, exchanges expected to add -SEC rule only sets a base line, exchanges expected to add

information on implementation and enforcement,information on implementation and enforcement,-Issuers must notify the exchanges or associations in case of -Issuers must notify the exchanges or associations in case of

material non-compliance material non-compliance -Exchanges expected to establish procedures for correcting -Exchanges expected to establish procedures for correcting

problems and de-listingproblems and de-listing-Exchanges must adopt the rules’ provisions no later than the -Exchanges must adopt the rules’ provisions no later than the

anniversary of Final Rule. anniversary of Final Rule.

Financial Expertise of Audit Committee MemberSec. 407 –SEC Final Rule “Disclosure Required by Sec. 406 and 407 of Sec. 407 –SEC Final Rule “Disclosure Required by Sec. 406 and 407 of Sarbanes-Oxley ActSarbanes-Oxley Act

• Role of audit committee member requires financial expertise, the Sec. Role of audit committee member requires financial expertise, the Sec. 407 directs SEC to issue Rules that 407 directs SEC to issue Rules that require a company to discloserequire a company to disclose whether or not, and if not, the reasons why not, the audit committee of whether or not, and if not, the reasons why not, the audit committee of that company is comprised of at least one member who is a financial that company is comprised of at least one member who is a financial expert at annual reports. expert at annual reports. •Rules had a detail definition for ‘audit committee financial expert’,Rules had a detail definition for ‘audit committee financial expert’, regulating attributes of financial expert, how it is expected to be regulating attributes of financial expert, how it is expected to be acquired,acquired,(Definition is among the controversial areas-whether have direct (Definition is among the controversial areas-whether have direct expertise at the preparation of financial statements)expertise at the preparation of financial statements)


Financial Expertise of Audit Committee MemberFinancial Expertise of Audit Committee Member• A safe harbor generated by Rule: Mentioning this title do not A safe harbor generated by Rule: Mentioning this title do not impose any additional duty, obligation or liability.impose any additional duty, obligation or liability.

Discussions about Audit Committee RegulationsDiscussions about Audit Committee Regulations-Before the SOA exchanges had already have audit committee -Before the SOA exchanges had already have audit committee requirements including their financial expertise. NYSE and requirements including their financial expertise. NYSE and NASDAQ has already proposed changes to their corporate NASDAQ has already proposed changes to their corporate governance listing requirements which is waiting for SEC governance listing requirements which is waiting for SEC approval. approval. -One of the benefits of SOA: Common regulation base for audit -One of the benefits of SOA: Common regulation base for audit committees (Financial expertise requirements used with a committees (Financial expertise requirements used with a diverse interpretation by exchanges)diverse interpretation by exchanges)-The financial expertise regulation do not include any penalty so -The financial expertise regulation do not include any penalty so its efficiency is limited to the investors’ awareness to that kind of its efficiency is limited to the investors’ awareness to that kind of information. information. -Key issue for the effectiveness of new audit committee -Key issue for the effectiveness of new audit committee regulations is lied in the exchanges attributes to the violations. regulations is lied in the exchanges attributes to the violations. Since before the SOA they are unwilling to use delisting threatSince before the SOA they are unwilling to use delisting threat


Discussions about Audit Committee RegulationsDiscussions about Audit Committee Regulations

-The Rule’s exemptions for audit committee requirements for -The Rule’s exemptions for audit committee requirements for foreign issuers is restricted when compared with the exchange’s foreign issuers is restricted when compared with the exchange’s listing rules in the past, so the effect of these regulations to the listing rules in the past, so the effect of these regulations to the competitiveness of the US capital markets are among concerns,competitiveness of the US capital markets are among concerns,

-During the corporate scandals whistle blowers role for -During the corporate scandals whistle blowers role for dissemination of information about irregularities emphasized, dissemination of information about irregularities emphasized, the requirement for establishing procedures for handling the requirement for establishing procedures for handling anonyms complaints is a result of that. But its success is limited anonyms complaints is a result of that. But its success is limited with the company’s approach towards these cases.with the company’s approach towards these cases.

-The recent decisions about the audit committee members -The recent decisions about the audit committee members (accepting them as control person- e.g. Lernout&Hauspie) (accepting them as control person- e.g. Lernout&Hauspie) represent the increased risk, new regulations can affect to find represent the increased risk, new regulations can affect to find eligible audit committee members because of increased risk. eligible audit committee members because of increased risk. Safe harbor for audit committee financial expert’s would be Safe harbor for audit committee financial expert’s would be helpful.helpful.

Regulations of Sarbanes-OxleyRegulations of Sarbanes-Oxley Affecting Corporate Responsibility and Its DisclosureAffecting Corporate Responsibility and Its Disclosure

Professional Responsibility of AttorneysProfessional Responsibility of Attorneys Sec. 307 - SEC Final Rule “Implementation of Standard of Professional Conduct Sec. 307 - SEC Final Rule “Implementation of Standard of Professional Conduct for Attorneys”for Attorneys”•Reflecting the critics about the lawyers` role in scandals, Reflecting the critics about the lawyers` role in scandals, Sec. 307 requires and Sec. 307 requires and gives authority SEC to adopt rules establishing minimum standards of gives authority SEC to adopt rules establishing minimum standards of professional conduct for attorneysprofessional conduct for attorneys appearing and practicing before the SEC appearing and practicing before the SECThe Rule defines appearing and practicing before the SEC expansively includingThe Rule defines appearing and practicing before the SEC expansively including in-house and outside attorneys (even advising an issuer to whether a statement in-house and outside attorneys (even advising an issuer to whether a statement required under the securities laws or the SEC`s Rule)required under the securities laws or the SEC`s Rule)

•Up-To-Ladder Reporting Up-To-Ladder Reporting -Report evidence of a material violation of securities law or breach of a fiduciary -Report evidence of a material violation of securities law or breach of a fiduciary duty or similar violation by the company or one of its agents to the chief legal duty or similar violation by the company or one of its agents to the chief legal officer or the CEO of the company. officer or the CEO of the company. -If they does not appropriately respond to the evidence, attorney must report the -If they does not appropriately respond to the evidence, attorney must report the evidence to the board’s audit committee or to another board committee evidence to the board’s audit committee or to another board committee comprised solely of directors not employed directly or indirectly by the company comprised solely of directors not employed directly or indirectly by the company or to the board of directors. or to the board of directors.

• Alternative procedureAlternative procedure-Rules establish a new term “Qualified Legal Compliance Committee” as an -Rules establish a new term “Qualified Legal Compliance Committee” as an alternative to the reporting evidence. Disclosure to QLCC relieves attorney’s alternative to the reporting evidence. Disclosure to QLCC relieves attorney’s reporting requirements mentioned above. reporting requirements mentioned above. -This committee has at least one member of the issuers audit committee or -This committee has at least one member of the issuers audit committee or equivalent committee of independent directors and two or more independent equivalent committee of independent directors and two or more independent board members.board members.

Professional Responsibility of Professional Responsibility of AttorneysAttorneysDisclosure of Confidential Information Disclosure of Confidential Information

- Rules contains a “self-defense” exception to issuer - Rules contains a “self-defense” exception to issuer confidentialityconfidentiality

- Allow an attorney to reveal to the SEC, without issuer - Allow an attorney to reveal to the SEC, without issuer consent, confidential information related to the attorney’s consent, confidential information related to the attorney’s representation of the issuer to the extent he or she reasonably representation of the issuer to the extent he or she reasonably believes necessary to prevent (e.g. a material violation by the issuer believes necessary to prevent (e.g. a material violation by the issuer that is likely to cause substantial injury to the issuer or investors)that is likely to cause substantial injury to the issuer or investors)

•Rules Rules do not create a private cause of actiondo not create a private cause of action and that authority. and that authority.

•Proposed rule required a lawyer to make a Proposed rule required a lawyer to make a “noisy withdrawal”“noisy withdrawal” from from representing the company if the attorney sees evidence of fraud and representing the company if the attorney sees evidence of fraud and the company fails to react (As reporting to SEC his/her withdrawal the company fails to react (As reporting to SEC his/her withdrawal "for professional reasons.") SEC delayed the application"for professional reasons.") SEC delayed the application

Professional Responsibility of Professional Responsibility of AttorneysAttorneysDiscussions on Professional Responsibility of AttorneysDiscussions on Professional Responsibility of Attorneys

•Sec. 307’s reporting up requirement is attempted to force attorneys as an Sec. 307’s reporting up requirement is attempted to force attorneys as an information intermediaryinformation intermediary

•This can affect attorney’s behavior in two ways; This can affect attorney’s behavior in two ways; -firstly -firstly causing lawyers to investigate potential corporate misconduct causing lawyers to investigate potential corporate misconduct

more vigorously.more vigorously.--secondly secondly bringing evidence of misconduct to the officers and the Board, bringing evidence of misconduct to the officers and the Board,

so corporate decision maker will be informed.so corporate decision maker will be informed.

•Sec. 307 can provide a type of early warning system for independent directors, Sec. 307 can provide a type of early warning system for independent directors, who are not involved in day to day corporate operations much. who are not involved in day to day corporate operations much.

•The cost of the regulation can be threatening for the quality of information flow The cost of the regulation can be threatening for the quality of information flow between corporate attorneys and their clients. between corporate attorneys and their clients.

•On the other hand to reduce the risk lawyers may choice over disclosure or On the other hand to reduce the risk lawyers may choice over disclosure or decrease incentive to become fully informed.decrease incentive to become fully informed.

•Willingness of the employee to provide information to attorney can be affected.Willingness of the employee to provide information to attorney can be affected.

•Regulations like noisy withdrawal may compromise a lawyers’ professional Regulations like noisy withdrawal may compromise a lawyers’ professional reputation. Other managers will be unwilling to hire a lawyer who is known as a reputation. Other managers will be unwilling to hire a lawyer who is known as a whistle blower.whistle blower.

•These Rules are likely to have a profound impact on attorney-client These Rules are likely to have a profound impact on attorney-client confidentiality rules.confidentiality rules.

•The debated noisy withdrawal requirements which SEC is proposed and delayed The debated noisy withdrawal requirements which SEC is proposed and delayed to apply seem beyond the Sec. 307’s intention. This regulation can inhibit to apply seem beyond the Sec. 307’s intention. This regulation can inhibit information flow between customers and attorney.information flow between customers and attorney.

Regulations of Sarbanes-OxleyRegulations of Sarbanes-Oxley Affecting Corporate Responsibility and Its DisclosureAffecting Corporate Responsibility and Its DisclosureCorporate Responsibilities of Financial ReportsCorporate Responsibilities of Financial Reports

Sec. 302 – Sec Final Rule “Certification of Disclosure in Sec. 302 – Sec Final Rule “Certification of Disclosure in Companies’ Quarterly and Annual Reports” Companies’ Quarterly and Annual Reports”

•Certification application Certification application starts with the order of SEC to 947 starts with the order of SEC to 947 biggest public companies.biggest public companies. Then transferred to SOA. Then transferred to SOA.

•Sec. 302 regulatesSec. 302 regulates that SEC must adopt regulations, public that SEC must adopt regulations, public company’s company’s principal executive officer and principal financial officerprincipal executive officer and principal financial officer or person performing similar functions certify each annual and or person performing similar functions certify each annual and quarterly report filed under Section 13(a) or 15(d) of the Securities quarterly report filed under Section 13(a) or 15(d) of the Securities Exchange Act.Exchange Act.

•The certifications The certifications pertain to the content of each reportpertain to the content of each report and to a and to a company’s company’s system of controls designed tosystem of controls designed to enable it to meet its enable it to meet its periodic disclosure obligations.periodic disclosure obligations.

•Certifications must use the Certifications must use the exact wording prescribed in the rulesexact wording prescribed in the rules..

Corporate Responsibilities of Financial Corporate Responsibilities of Financial ReportsReports

•The rules require these principal executive and financial The rules require these principal executive and financial officers to officers to certify that the report is accurate, complete, and fairly certify that the report is accurate, complete, and fairly presentedpresented and to take responsibility for maintaining and and to take responsibility for maintaining and evaluating the issuer’s “disclosure controls and procedures.” evaluating the issuer’s “disclosure controls and procedures.”

•The officers have made required disclosures to the The officers have made required disclosures to the auditors auditors and to the audit committee about fraud and about significant and to the audit committee about fraud and about significant deficienciesdeficiencies and material weaknesses in internal controls. and material weaknesses in internal controls.

•The officers must also affirm that The officers must also affirm that they have disclosed their they have disclosed their evaluations for the effectiveness of theevaluations for the effectiveness of the “disclosure controls and “disclosure controls and procedures” and must indicate whether there have been procedures” and must indicate whether there have been significant changes in the internal controls or in factors that significant changes in the internal controls or in factors that might significantly change them.might significantly change them.


Disclosure Controls and ProceduresDisclosure Controls and Procedures

•A new term A new term established by SEC to ensure that established by SEC to ensure that information required to be disclosed in reports is information required to be disclosed in reports is gathered, reported, processed, summarized and gathered, reported, processed, summarized and disclose in a timely manner. disclose in a timely manner. •Intended to enable the Intended to enable the financial and non-financial financial and non-financial information requiredinformation required to meet its reporting obligations. to meet its reporting obligations.•Failure to maintain adequate disclosure controls and Failure to maintain adequate disclosure controls and procedures and review them, could be subject to procedures and review them, could be subject to SEC’s action. SEC’s action. •In that way SEC is regulating the company’s In that way SEC is regulating the company’s disclosure preparation procedures. disclosure preparation procedures. •SEC interpreted that this term is different from the SEC interpreted that this term is different from the internal control. internal control.


Sec. 906 CertificationSec. 906 Certification

•In addition to Sec. 302 certification requirements, Sec. 906 of In addition to Sec. 302 certification requirements, Sec. 906 of the Act also requires a certification by the companies chief the Act also requires a certification by the companies chief executive officer and the financial officer accompany each period executive officer and the financial officer accompany each period filed under Section 13(a) or 15(d) of the Securities Exchange Act filed under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 containing financial statements. of 1934 containing financial statements.

•Providing that:Providing that:-The report fully complies with the requirements of -The report fully complies with the requirements of

reporting;reporting;-The information in the report fairly presents in all -The information in the report fairly presents in all

material respects, the financial condition and results of material respects, the financial condition and results of operations of the company,operations of the company,•This certification requirement is effective immediately.This certification requirement is effective immediately.

•Imposes criminal penalties of up to $1 million and/or ten years Imposes criminal penalties of up to $1 million and/or ten years in prison for knowingly filing a false certification, and up to $5 in prison for knowingly filing a false certification, and up to $5 million and/or 20 years in prison for willfully filing a false million and/or 20 years in prison for willfully filing a false certification.certification.


Discussions on Corporate ResponsibilityDiscussions on Corporate Responsibility

•Certification requirements Sec. 302 and Sec. 906 seems Certification requirements Sec. 302 and Sec. 906 seems to overlap. to overlap. •Both of them covers the certification of fair presentation Both of them covers the certification of fair presentation of financial conditions and results of operations of the of financial conditions and results of operations of the company.company. •Bringing two separate certification burden for officers, Bringing two separate certification burden for officers, may be interpreted as an evidence of the disorganized may be interpreted as an evidence of the disorganized manner of the Act. Using different officer terms is another manner of the Act. Using different officer terms is another evidence.evidence.•CEO and CFO’s have been signing the annual reports. So CEO and CFO’s have been signing the annual reports. So before the certification CEOs or CFOs that make knowingly before the certification CEOs or CFOs that make knowingly false certification would have been subject to prosecution false certification would have been subject to prosecution for making false statements.for making false statements. •Primary certification is the one codified in Sec. 302 which Primary certification is the one codified in Sec. 302 which is also including the procedures to ensure the financial is also including the procedures to ensure the financial statements accuracy. However only Sec. 906 certifications statements accuracy. However only Sec. 906 certifications has criminal provisions.has criminal provisions.


Discussions on Corporate ResponsibilityDiscussions on Corporate Responsibility

•Certification requirements use fairly present clause not the GAAP Certification requirements use fairly present clause not the GAAP compliance requirement. So the certification statement is not compliance requirement. So the certification statement is not limited to a representation that the financial statements and other limited to a representation that the financial statements and other financial information have been presented in accordance with financial information have been presented in accordance with GAAP. GAAP. •SEC’s view about disclosure in periodic reports would not be only SEC’s view about disclosure in periodic reports would not be only restricted with the GAAP compliance for financial statements restricted with the GAAP compliance for financial statements resembles a new perspective beyond the GAAP. It reflects intention resembles a new perspective beyond the GAAP. It reflects intention of evolving the principal based standards to rule based standards. of evolving the principal based standards to rule based standards. •The effect of fair presentation clause is concluded as codification The effect of fair presentation clause is concluded as codification of Judge Friendly’s decision in United States v. Simon, which held of Judge Friendly’s decision in United States v. Simon, which held that an accountant could be convicted of securities fraud even if that an accountant could be convicted of securities fraud even if the accounting practice at issue complied with GAAP. This can the accounting practice at issue complied with GAAP. This can affect further cases concept. affect further cases concept. •CEOs and CFOs of the company’s would require downside CEOs and CFOs of the company’s would require downside certifications, besides bringing new paperwork burden, can harm certifications, besides bringing new paperwork burden, can harm the trust in companythe trust in company•Certification requirement may bring more conscience to the Certification requirement may bring more conscience to the process of report preparation.process of report preparation.


Management Assessment of Internal ControlManagement Assessment of Internal Control

SEC. 404-SEC Proposed Rule ‘Disclosure Required by Section SEC. 404-SEC Proposed Rule ‘Disclosure Required by Section 404, 406 and 407 of Sarbanes-Oxley Act of 2002”404, 406 and 407 of Sarbanes-Oxley Act of 2002”

•DefinitionDefinition

Controls that pertain to the preparation of financial statements Controls that pertain to the preparation of financial statements for external purposes that are fairly presented in conformity with for external purposes that are fairly presented in conformity with GAAP GAAP

•Managements Internal Control ReportManagements Internal Control Report

•Annual reports must include a report of management on Annual reports must include a report of management on internal controls and procedures for financial reporting. Stating;internal controls and procedures for financial reporting. Stating;

– The responsibility of management for establishing and The responsibility of management for establishing and maintaining an adequate internal control structure and maintaining an adequate internal control structure and procedures for financial reporting ,procedures for financial reporting ,

– Contain an assessment, as of the end of the most recent Contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for internal control structure and procedures of the issuer for financial reporting.financial reporting.

•In addition external auditor attestation. In addition external auditor attestation.

Management Assessment of Internal Management Assessment of Internal ControlControl•Rule proposes changes to certification requirements Rule proposes changes to certification requirements –every periodic report include both evaluation of –every periodic report include both evaluation of disclosure and internal control.disclosure and internal control.

Discussions on Assessment of Internal ControlDiscussions on Assessment of Internal Control

•There is overlap between Act’s Sec. 302 and Sec. There is overlap between Act’s Sec. 302 and Sec. 404 requirements. 404 requirements.

( SEC tried to differentiate them bringing a new ( SEC tried to differentiate them bringing a new concept as disclosure control and procedures) concept as disclosure control and procedures)

•Disclosure controls and procedures should entail Disclosure controls and procedures should entail some level of internal controls review.some level of internal controls review.

•Act’s two separate sections possess the same aim Act’s two separate sections possess the same aim ‘effective internal control procedures.’‘effective internal control procedures.’


Compensation of CEOs and CFOsCompensation of CEOs and CFOs

Sec. 304-Forfeiture of Bonuses and ProfitsSec. 304-Forfeiture of Bonuses and ProfitsIn case an accounting restatement due to the material In case an accounting restatement due to the material noncompliance, as a result of misconduct, the CEO and CFO of noncompliance, as a result of misconduct, the CEO and CFO of the issuer shall reimburse the issuer for:the issuer shall reimburse the issuer for:

•Any bonus or other incentive-based or equity based Any bonus or other incentive-based or equity based compensation compensation

•Any profits realized from the sale of securities of the issuerAny profits realized from the sale of securities of the issuer

Sec. 402-Loans to Officers and DirectorsSec. 402-Loans to Officers and Directors• Makes unlawful for any issuer to arrange or to renew an Makes unlawful for any issuer to arrange or to renew an extension of credit, in the form of a personal loan to or for any extension of credit, in the form of a personal loan to or for any director or executive officer (Prohibits indirect compensation) director or executive officer (Prohibits indirect compensation)

FASB’s and exchange’s proposalsFASB’s and exchange’s proposals

Compensation of CEOs and CFOsCompensation of CEOs and CFOs

Discussions on CompensationDiscussions on Compensation

•Forfeiture required regardless of effect of restatement or Forfeiture required regardless of effect of restatement or whether directly attributable to the misstatement of financial whether directly attributable to the misstatement of financial results.results.

•Cost inhibiting the CEO and CFO’s eager to make prompt Cost inhibiting the CEO and CFO’s eager to make prompt disclosure of non-compliances.disclosure of non-compliances.

•‘‘Loans to officers and directors’ concept is ambiguousLoans to officers and directors’ concept is ambiguous

•Types of indirect compensations can be created if there is an Types of indirect compensations can be created if there is an intention for it.intention for it.

•After these penalizing attempts compensation techniques can After these penalizing attempts compensation techniques can evolveevolve


Officer Bar and Penalties Officer Bar and Penalties

Sec. 305Sec. 305•Replaces “substantial unfitness” standard for banning officer Replaces “substantial unfitness” standard for banning officer and directors with an “unfitness” standard. and directors with an “unfitness” standard.

•Contains an equitable relief section Contains an equitable relief section

Sec. 1105Sec. 1105In any cease-and-desist proceeding, the SEC may order to In any cease-and-desist proceeding, the SEC may order to prohibit officer or director of any issuer with registered securities prohibit officer or director of any issuer with registered securities demonstrates unfitnessdemonstrates unfitness

Discussions Discussions --SEC has a lower standard and new administrative technique for SEC has a lower standard and new administrative technique for banning the officersbanning the officers

-Responsibility of the fraud for officers is also increased-Responsibility of the fraud for officers is also increased


Fair Fund For Investors Fair Fund For Investors

Sec. 308Sec. 308Disgorgement of profits ordered against those who have violated Disgorgement of profits ordered against those who have violated securities laws, or any other funds collected as a result of the securities laws, or any other funds collected as a result of the imposition of penalties following securities laws violations, be imposition of penalties following securities laws violations, be added to a fund for the benefit of the victims of the violations if added to a fund for the benefit of the victims of the violations if the SEC so directs.the SEC so directs.

DiscussionsDiscussions--Civil money penalties can be distributed harmed investors-prior Civil money penalties can be distributed harmed investors-prior forwarded to Treasuryforwarded to Treasury

-Utilization requires amendments to Act and enhanced collection -Utilization requires amendments to Act and enhanced collection techniques (another spontaneous manner of the Act)techniques (another spontaneous manner of the Act)

Regulations of Sarbanes-Oxley Regulations of Sarbanes-Oxley Affecting Corporate Responsibility and Its DisclosureAffecting Corporate Responsibility and Its Disclosure

Code of Ethics Code of Ethics Sec. 406-SEC Final Rule “Disclosures Required by Section Sec. 406-SEC Final Rule “Disclosures Required by Section 406 and 407 of Sarbanes-Oxley”406 and 407 of Sarbanes-Oxley”

-Requires disclosure of whether they have adopted a code of -Requires disclosure of whether they have adopted a code of ethics and “of any change in, or waiver of” an issuer’s code of ethics and “of any change in, or waiver of” an issuer’s code of ethics in annual reports. ethics in annual reports.

DefinitionDefinition

-honest and ethical conduct-honest and ethical conduct

-Full fair, accurate timely disclosure in reports and documents,-Full fair, accurate timely disclosure in reports and documents,

-Compliance with laws, rules and regulations,-Compliance with laws, rules and regulations,

-Prompt reporting to violations,-Prompt reporting to violations,

DisclosureDisclosure

-Made publicly available by exhibit to annual report, post -Made publicly available by exhibit to annual report, post internet web site, by giving information in annual report give internet web site, by giving information in annual report give copy to any person without charge copy to any person without charge

Code of EthicsCode of Ethics

Waiver of Code of Ethics Waiver of Code of Ethics

•Required to promptly disclose any changes to, or Required to promptly disclose any changes to, or waivers of, the code of ethics on Form 8-K or on its waivers of, the code of ethics on Form 8-K or on its Internet Web siteInternet Web site

Discussion on Code of EthicsDiscussion on Code of Ethics

•Has been used by companies for several years Has been used by companies for several years (Enron also had a code of ethics). (Enron also had a code of ethics).

•Only raise the level of ethical behavior if taken Only raise the level of ethical behavior if taken seriously and enforcedseriously and enforced

•Provide information to investors on code of ethic but Provide information to investors on code of ethic but can not guarantee or impose ethical behavior to can not guarantee or impose ethical behavior to officers. officers.

THANK YOU FOR YOUR THANK YOU FOR YOUR PATIENCE PATIENCE

sarbanes-oxley act of 2002 -regulations affecting corporate responsibility and its disclosure-

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