Client Advisories and Bulletins
Next Stage Of Sarbanes-Oxley Act Will Impose New Burdens On Audit Committees And Executives
August 23, 2002
Even as companies cope with the effective or soon-to-be-effective provisions of the Sarbanes-Oxley Act of 2002 (the S-O Act), they must also begin planning for the impact of the S-O Act provisions that become effective six to nine months following its date of enactment. In large part, this "next stage" of the S-O Act deals with the roles and responsibilities of the auditors and audit committees of public companies. The underlying policy of many of these provisions is to reduce or eliminate the perceived conflicts of interest arising, for example, when accounting firms provide non-audit services to their audit clients, or when auditors are selected by the management whose work they are responsible for reviewing. In general, these provisions invest the audit committee with the responsibility for choosing, and managing the relationship with, a company’s auditors, and seek to insure that the audit committee will have the information, independence, competence, authority and resources to fulfill these responsibilities.
These "next stage" provisions also address the perceived need for improved transparency of public company operations by requiring new disclosures regarding material correcting adjustments in financial statements, off-balance sheet transactions, reconciliation of pro forma figures to GAAP figures, the status of internal financial controls, and the existence of, and deviations from, codes of ethics applicable to senior financial executives. The Securities and Exchange Commission’s initiative to require quicker disclosure of a wider range of information is also given the S-O Act’s imprimatur.
The "next stage" of the S-O Act addresses two other issues brought into relief by the Enron debacle. In one of its most complex and detailed provisions, the S-O Act forbids trading in a company’s equity securities by directors and executive officers during pension fund blackout periods. Finally, the S-O Act mandates new ethics rules for attorneys practicing before the SEC that may fundamentally alter the attorney-client relationship for public companies and their counsel.