Closing the door on greedy ceos

In an article on Greed and the Shareholder Model, Dr Rolph Balgobin made mention of the Sarbanes-Oxley Act (the Act) of 2002 as a piece of legislation meant to effect corporate governance, financial disclosure and the practice of public accounting. The Act was passed by the United States Congress on July 30, 2002 in order to increase fiduciary accountability at publicly-held firms.

This summary highlights some of the main conditions of the Act. Clearly, there is much in the spirit and letter of the Act, which might prove useful to us here in Trinidad and Tobago. It would be interesting to see whether our regulators, legislators and the audit profession take the cue. The Act is intended to hold corporate executives and auditors more accountable to the shareholders of public companies. Most observers would agree that it is the single most important piece of US legislation meant to pull the reins on the operations of many audit firms.  The Act is indeed a very far-reaching and comprehensive policy and this article attempts to summarise four of its main provisions:
Directors & Senior Executives of Public Companies
The Act imposes obligations and restrictions on directors and senior executives of public companies. It requires CEO’s & CFO’s to make extensive certifications with respect to each annual and quarterly report filed with the Securities and Exchange Commission (SEC). A CEO or CFO who knows that a certification is wrong may be fined up to $5 million (USD) and imprisonment of up to 20 years. Other significant provisions are:
*Forfeitures by CEO’s and CFO’s of incentive pay and securities trading profits when there are accounting restatements based on misconduct
* Ban on trading by directors and executives in a public company stock pension during pension fund blackout periods
* Prohibition of “improper influence” by directors and executives in the conduct of audits
* Authority for barring persons from serving as directors and executives of public companies
*Acceleration of reporting deadlines for trades of company stock by directors and executives and 10% equity holders to as short as two days.
Audit Process & Oversight

The Act establishes the Public Company Accounting Oversight Board to oversee independent auditing firms of public companies both in the United States and abroad. Specific independence provisions prevent firms from engaging in non-audit services. The Act requires audit committee members to be independent and to engage independent counsel and advisors. Audit committees are also required to establish procedures to protect “whistle blowers”. The SEC must direct national securities exchanges to prohibit listing of any security of a public company that fails to comply with these provisions. Under the Act the SEC must require annual “internal control reports” subject to management assessment and outside auditor attestation. CEO’s and CFO’s will have to certify as to the effectiveness of internal controls on a quarterly basis.
Public Company Disclosures
The Act authorises the SEC to require public companies to disclose on a rapid and current basis, material changes in financial condition or operations. The SEC must review disclosures made by public companies at least once every three years. Other disclosures will consider:
* Off-balance sheet transactions
* Audit committees financial expertise
*Code of ethics for senior financial officers
*Pro forma financial disclosures
 Enforcement & Penalties

On the criminal side, the Act creates new penalties aimed at corporate disclosures and individual wrongdoers. CEO’s & CFO’s who must now certify financial reports of their companies may suffer severe fines and prison sentences of up to 20 years for failing to comply. The Act mandates that auditors of public companies retain their records for five years after an audit or face possible imprisonment. It subject individuals who alter or destroy records in order to impede an official investigation, fines and up to 20 years of imprisonment. The Act also imposes or increases penalties for other white-collar crimes such as securities, mail and wire fraud. On the civil side the Act contains provisions designed to assist securities plaintiffs. Civil plaintiffs now have an expanded statute of limitations for securities fraud claims - they may bring a securities fraud lawsuit within two years of the discovery of the violation, or five years after the violation has occurred, whichever is earlier. Under the Act “Fair Funds” requirement, any ill-gotten gains and fines paid by corporate wrongdoers will be put into a disgorgement fund to benefit injured investors. Finally, a company will no longer be permitted to discharge in bankruptcy any order or settlement arising from a securities-related action.