Salient Features Of The Law

Board of Directors

Increasingly, directors on boards of companies are expected to play much more active roles in the interest of shareholders. The New York Stock Exchange, consistent with the provisions of the Sarbanes Oxley Act, expects that non-management directors should hold regular sessions without the participation of the management or any other person with a material relationship with it. The regular meetings of the boards are sought for brainstorming without being biased by the concerns of the management or its influence.

Disclosures

The rampant misrepresentation of the financial situation of companies, especially in the technology industry, by the use of pro-forma financial statements is not possible now without additional disclosures to compare them with GAAP consistent accounting. Under Section 401 (b) of the Sarbanes Oxley Act, it would not be possible to for pro-forma statements to omit any material fact which misrepresents the fair or true position of the company. In addition, companies are now required to provide quantitative measures to reconcile the pro-forma statements with the GAAP consistent financial statements.

The SEC is also rapidly moving towards real time disclosures so that each investor has prompt access to information, under section 409 that will have a material impact on the company. The filing deadlines for quarterly and annual reports have been accelerated by a third. The SEC has also identified items that need to be disclosed in real time.

Fraud

The premise for fraud control is that managements frequently exploit weaknesses in internal controls for their dubious purposes. PCOAB's Auditing Standard 2, therefore, specifically requires that the assessment of internal controls take into account the susceptibility of the company's processes to fraud. The internal controls should be able to prevent, deter and detect fraud.

Governance policies

The Sarbanes Oxley Act seeks to encourage explicit discussion of the corporate governance policies that will set a direction for the board and the management. The New York Exchange has the operative rules which require that the boards of companies set up a Governance committee which will spell out the governance principles which will be used to evaluate the board and the management.

Executive Compensation

In order to check fraud from earnings management by senior executives, Section 304 of of the Sarbanes Oxley Act, requires a company which restates its financial statements due to material noncompliance, misconduct, or with any financial reporting requirement, the CEO and CFO must reimburse the company for bonus or other incentive-based or equity-based compensation received during the 12-month period following issuance of the financial statements and profits realized from the sale of equity during the same period.

Protection of Whistleblowers

Sarbanes Oxley has provided added protection to whistleblowers who can establish a prima facie case of retaliation when they report malfeasance in the company. The instrument for achieving this goal is the change in the burden of proof rules which are now in favor of employees. If they submit evidence that the retaliation was a contributing factor to the adverse employment action, a presumption of retaliation is created. In order to defeat this presumption, the employer must establish, by clear and convincing evidence, that it would have taken the same action with respect to the employee, regardless of the alleged protected activity.

Compensation Committees

Sarbanes Oxley does not explicitly spell out rules governing compensation in order not to restrict the freedom of companies to make their decisions. However, the New York Stock Exchange Governance rules require the Boards to form independent compensation committees which have the authority to decide on compensation policies consistent with the business goals of their companies. They are also required to make decisions on the incentive component of compensation and ensure that they are effective in achieving the performance goals of the company. Compensation committees are also expected to seek advice from compensation consultants about executive pay.

Audit Committees

Sarbanes Oxley has sought to govern auditors at the board level in order to avoid the conflicts that can happen with the management. These audit committees are composed of directors and have the responsibility to ensure that the financial statements of the company and the internal controls are consistent with the regulatory policy. The audit committees are also required to discuss the company's exposure to risk and the means to manage them.

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