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Sarbanes-Oxley Act of 2002
The Act was signed into law by President Bush on July 30, 2002. It was a legislative response to a combination of legal, ethical, accounting and auditing and regulatory issues arising out of the spate of scandals rocking the business and investment community in the United States. It amounted to a clear vote of no-confidence in the accounting and auditing profession and the structures and practices of corporate governance there. It came down on the side of prescriptive measures rather than principles, giving rise to the charge of introducing a tick box approach to corporate governance. Whatever the criticisms and its deficiencies, the Act is very much in place and because of the shame which Enron and Andersen had brought onto corporations and the audit profession, there is little option available to corporate America but to comply.
The Act is so strongly Enron-flavoured that it could have been more aptly termed the Prevention of Another Enron Act. Observers note quite a dilemma however, since in terms of structure Enron was a model company and its directors boasted impressive academic and business expertise. It had a wonderfully crafted published statement of corporate values and required new employees to sign a written code of ethics. You do not come much better than that - at least not on paper.
For public companies only
The Act adds a new layer of matters to be addressed by listed companies, their directors and auditors. A Public Company Accounting Oversight Board (PCAOB) has been established to oversee the audits of public companies and related matters. In recent developments, the PCAOB has announced that it will not exercise the authority afforded under the Act to designate or recognise any professional group of accountants to propose standards. Instead, the PCAOB will now establish audit and other professional standards for registered public accounting firms.
All auditors of public companies (including overseas auditors) must, among other things, register with the PCAOB, list fees earned for audit and non-audit services, (under Guyana law expenses must also be disclosed) explain their audit quality control procedures, and identify all criminal, civil, administrative, and disciplinary proceedings against the firm or any of its associated persons in connection with an audit. Instead of barring an auditor from working as an officer of a company, the Act states that an audit firm may not audit a public company whose officers worked for the audit firm within the previous year.
The Act restricts the consulting work auditors can do for their audit clients. Restricted services include (with certain exceptions) bookkeeping, financial systems design, appraisal and valuation, actuarial, internal audit, management functions, human resources, broker-dealer, investment banking, and legal. In Guyana where accounting practices are patterned after the UK profession, accounting firms including Ram & McRae undertake certain of the activities restricted under SOX.
SOX also sets out very clear rules for the audit committee which is a mandatory requirement for public companies. The Act states that all audit committee members must be independent (non-executive) directors while audit firms will be appointed by, and will report directly to, the audit committee. Unlike the other territories of the Caribbean, audit committees are not mandatory in Guyana. Here they seem to be treated more for PR purposes than a serious control function and some audit committee members appear not to know the difference between a debit and a credit on a bank statement or to know how to prepare a half-decent tax return. If corporate governance is to mean anything here then companies must ensure that audit committees start taking their responsibilities seriously.
The chief executive officer and chief financial officer must now certify the company's financial statements and the Act specifically prohibits improper influence on audits. To ensure that sins do not go rewarded, the Act requires forfeiture of executive bonuses and equity gains if financial statements must be restated. Perhaps in response to the abuse of the shredding machine in the Enron/Andersen saga, the Act introduces a new criminal offence in the US in respect of anyone who knowingly alters, destroys or falsifies a document or shreds, hides or alters a document or other object in order to impede or attempt to impede an official investigation.
Very recently the Securities and Exchange Commission (SEC) issued draft rules requiring audit committees to establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls and auditing matters. It will also require that procedures be put in place for the confidential anonymous submission by company employees of concerns regarding questionable accounting or auditing matters.
And under the Act itself, the employee is protected from attempts to dismiss, demote, suspend, threaten, harass or otherwise discriminate against her/him because of that employee's involvement in a securities- or fraud-related investigation against the company. The employee in such a case can sue the company.
In Guyana whistleblowing is regarded as a cardinal sin and I am aware of one internal auditor who was fired on suspicion of passing information to the external auditors. Yet in that particular and hopefully isolated case, the external auditors facilitated the dismissal by agreeing to employ the internal auditor. Company bosses not unlike politicians regard and handsomely reward the employee's willingness to lie, conceal information or carry out tasks that are clearly improper. Ironically it is often because of such relationships that there are so many frauds perpetrated by so-called trusted employees.
Code of ethics
SEC companies must now state in their annual reports whether they have adopted codes of ethics applicable to the CEO, the CFO and other senior managers with accounting and financial functions or explain their reasons for not doing so. This provision which is limited to certain categories only has been criticised for sending the wrong signal to those who are not included. The preferred option is that any code of ethics should apply to everyone - from the top director to the most junior employee.
The SEC defines codes of ethics as written standards reasonably designed to deter wrongdoing and to promote:
* honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
* full, fair, accurate, timely and understandable disclosure in company reports, documents and other public communications;
* compliance with applicable governmental laws, rules and regulations;
* prompt internal reporting of code violations; and
* accountability for adherence to the code.
The code and any amendments must be publicly available and be filed with their annual reports, be posted on the company's website and be furnished on request.
Interestingly enough, Enron had excellent internal rules on conflicts of interest but it very conveniently waived them in the now discredited scheme to establish off-shore, off-balance sheet vehicles which merely served to hide billions of dollars of liabilities, artificially inflate profits and facilitate substantial payments to its Chief Financial Officer. The company never bothered to inform shareholders about the risks associated with these arrangements and continued to declare publicly its financial soundness - so gullibly bought into by the army of investment analysts and institutional investors until it was too late.
If Sarbanes-Oxley is designed to prevent future Enrons, it may only partially succeed. Enron's failure was not one of the absence of rules or codes of ethics or even whistleblower procedures. While these help to shape corporate conduct they are only useful if they apply to everyone and if the leadership shows complete commitment to them. It is the personal and ethical values of those who drive the organisations that make the real difference. Ethical values are not negotiable neither are they affected by the changing circumstances which businesses face. They should not be compromised because the competition is not playing fair or because tax rates are high or because the government wastes money. They are the foundations on which companies are built to last.
And that was Enron's failure - the absence of a corporate culture in which rules applied to and were respected by everyone. Like so many of our own companies, the emphasis was doing just enough to comply with what the law clearly required, arguing about the rest while in fact behaving as though none of these mattered in a positive sense. That disrespect for the law and rules was accompanied by questionable business practices, aggressive accounting and an emphasis on short-term profitability.
Whether our top corporate managers want to admit it or not, there is great distrust among the public about personal values, quality corporate governance, companies' accounts and reports and the credibility of information generally. Shareholders do not consider that they are treated with any respect while the rest of society looks on in a state of helplessness as if to say 'this is Guyana, what do you expect?'
The tragedy for us is that in the USA there was public opinion as well as politicians who understood the implications of good corporate behaviour for the society and the dangers of going outside of the law.