Sarbanes-Oxley Act: Government tightens accounting regulations on public companies

The financial scandals of Enron, WorldCom and other publicly held companies led Congress to pass the Sarbanes-Oxley Act of 2002.

The act, signed into law July 30, established a new standard for corporate governance, and appropriate policies and procedures for financial accuracy and disclosure, said Virginia Fry, managing partner of Blackwell Sanders Peper Martin law firm.

Private companies should be aware of the act, but it mostly applies to public companies, Fry said.

"There are some situations were it will impact private companies. If they have an (Employee Stock Ownership Plan), there are some other regulations that probably make it more applicable," Fry said.

Fry said her firm recommends both public and private companies complete a compliance "gap analysis" to evaluate their current compliance status.

"The compliance component is really a mechanism that clients can use to analyze where they're at," she said.

The compliance analysis targets governance issues such as audit compensation issues, accounting practices, general business practices, whether or not the business is truly independent, and ethics and values.

"Any compliance program is going to target the areas that Sarbanes is looking at," Fry said.

She added that businesses should be aware of the increasing price tag on audits.

"I think one of the first effects will be the audit costs. I've heard an estimate that the cost of audits will go up anywhere from 20 to 40 percent, so that's a pretty big jump," Fry said.

Public companies also are now required to have an independent member on their audit boards.

The act also addresses code of ethics for senior financial officers. Code of ethics standards promote honest and ethical conduct; address conflicts of interest; promote full, fair, accurate, timely and understandable disclosure; and promote compliance with the law.

It is noted in the act that waivers or changes must be disclosed in the company's 8-K report.

The company must disclose whether or not it has adopted a code. In addition, proposed NASDAQ rules require a code of conduct, according to information supplied by Blackwell Sanders.

The Sarbanes-Oxley Act also addresses changes in executive compensation, including prohibition on loans to executives.

Forfeiture on bonuses or profits on the sale of stock may be required following restatements.

Blackwell Sanders held a seminar in October that outlined the major points in the Sarbanes-Oxley Act.

Fry said about 30 people attended the seminar, representing both public and private companies in Springfield and surrounding communities.

Bruce Winston, chief financial officer with Guaranty Federal who attended the seminar, described the legislation as "very detailed and complex," because it was designed with large companies in mind.

Companies will have to be fully prepared to back up information in a variety of reports, should questions arise, Winston said.

In compliance with the act, CEOs and CFOs will be required to certify to the best of their knowledge that the information on quarterly and annual reports are accurate, he said.

The act forces company executives to "know what you're presenting, and have the documentation to support it," Winston said.

He said the act will not mean huge changes for the financial industry, which is already used to preparing thorough documentation.

"Our industry is probably the most regulated industry there is. We're used to the scrutiny more so than some other industries," Winston said.

The act also addresses insider trading situations such as the Martha Stewart debacle.

It was discussed at the Blackwell Sanders seminar that rules are to be adopted requiring "plain English" disclosure of material changes in financial condition or operations "on a rapid or current basis."

Fry said the "fraud-a-week environment" prompted Congress to take action quickly, leading to the creation of the Sarbanes-Oxley Act. It will take a while for the act to sort itself out and be most effective, she said.

"I think there are going to be a lot of changes by the time the regulations under this law get implemented. It's going to be far-reaching," Fry said.