The Act impacts many areas of corporate governance, and requires companies to assess their current structure to determine whether or not they are in compliance with the new regulations.  There are three areas that need to be addressed:

• Legal and regulatory requirements – Interpretation of the laws

• Accounting standards and guidance – Interpretation of accounting rules and requirements

• Internal Operations and Management – Assessment of compliance and management of programs related to improve compliance

The process of implementing a Sarbanes-Oxley compliance program can be translated into a list of requirements that may result in a change to your current governance structure, procedures, and/or processes. For simplicity, we have summarized the impacts under the following four headings and have included a list of key components of the Act.  For the full text of the Act, see the SEC web site.

• Corporate accountability and responsibility

• Internal procedures and controls

• Audit and accounting

• Enhanced disclosure and reporting requirements

Corporate Accountability and Responsibility

• Board of Directors must be independent

• Audit committee gains total control over external audits and auditors
• Audit committee must include a financial expert
• Enhanced whistle blower regulations
• CEOs and CFOs must certify financial statements and the evaluation and effectiveness of internal procedures and controls
• Enhanced insider trading regulations for executives and board members
• New limitations on executive loans
• SEC will adopt new rules to address securities analysts conflict of interest
• SEC will receive additional funding and conduct additional studies
• Enhanced document retention rules
• Increased criminal fraud accountability with increased criminal and civil penalties
• SEC recommends that CEO sign tax returns

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Internal Procedures and Controls                

• On an annual basis, CEOs and CFOs must evaluate, document and test internal procedures and controls related to financial reporting
• External auditors must attest to the effectiveness of these controls as part of their annual audit process

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Audit and Accounting 

• Auditors must register with the SEC
• Auditors must be independent, with new limitations imposed on non-audit work
• All non-audit services must be pre-approved by the audit committee
• Audit partners must limit their time with accounts and rotate new partners

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Enhanced Disclosure and Reporting Requirements

• Filing requirements are accelerated
• Enhanced disclosure on internal procedures and controls
• Any non-GAAP financials must be disclosed in an 8K
• All material off-balance-sheet items must be disclosed

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Continue to What Should You Do?

For More Information:

• SEC FAQ on Sarbanes-Oxley

• Other Resources