The Sarbanes-Oxley Act (the Act) which became law in the USA in July 2002 was a response to recent corporate scandals and stock market uncertainty. It has made extensive changes to the law applicable to public companies, including those incorporated outside the USA. The Act sets out to increase the reliability and accuracy of corporate reporting, accounting and audit practices and to ensure the independence of securities analysts' advice. The Act has important consequences for UK companies with a US listing and for accounting firms that play a significant role in the audit of a company that reports to the Securities and Exchange Commission (SEC).
Revised Audit Committee Standards
A company's audit committee will have responsibility for the appointment, compensation and oversight of the work of the company's auditors and the auditors will report directly to the committee. The committee will be composed entirely of independent board members who should maintain their independence by not accepting any consulting, advisory or other compensatory fee (except directors' fees) and not being an affiliated person of the company or any of its subsidiaries. The audit committee is also charged with setting up procedures to deal with any complaints received concerning audit or accounts issues. The company must disclose in filings with the SEC whether the committee contains at least one "financial expert", i.e. someone with an understanding of GAAP and financial statements and experience in their preparation, as well as internal control experience and a good understanding of the role and purpose of the audit committee.
Ban on loans to Directors and Officers and other executive rules
Personal loans may not be made to directors or other officers of the company on terms more favourable than those available to the general public.
If material non-compliance with the requirements of the Act leads to the need to restate the financial reports of the company, the CEO and CFO must return any bonus, incentive-based or equity-based compensation received during the previous year and any profits earned on the sale of company securities in that period.
The Act also requires all SEC reporting companies, including non-US companies, to disclose to the SEC a code of ethics for the senior "financial" officers of the company. In the absence of such a code, the company must explain its reasons for not having one.
The Act gives the SEC the power to...