Ensuring Ethical Effectiveness: New Rules Mean Virtually Every Company Will Need a Code of Ethics

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EXECUTIVE SUMMARY

* THE SARBANES-OXLEY ACT NOW REQUIRES PUBLICLY traded companies to disclose whether they have adopted a code of ethics for senior financial officers. In addition, the New York Stock Exchange is considering new rules that would require listed companies to have a code of business conduct that applies to all employees.

* UNDER THE ACT THE SEC REQUIRES COMPANIES to file an internal control report with their annual report outlining management's responsibilities for establishing and maintaining adequate internal controls as well as its conclusions about the effectiveness of those controls. The company's auditor must attest to management's evaluation.

* MANY COMPANIES ALREADY HAVE ETHICS CODES. With the emphasis in Sarbanes-Oxley on financial reporting, CPAs may want to help employers and clients review these codes to make sure they comply with the new regulations. Companies will need to establish a process for rank-and-file employees to report code violations confidentially to someone outside the ordinary corporate chain of command.

* THE BEST WAY TO DRAFT A CODE OF ETHICS all employees will follow is to bring together a multidisciplinary team from all parts of the organization. Employees must then be trained in what the code means using real-life dilemmas they might encounter on the job. Regular refresher courses are important because ethics training is perishable--people forget.

* COMPANIES WITH AN EXISTING ETHICS CODE UNLIKELY will need a new one. Still, businesses may want to revisit the code to make sure they have a full-blown compliance program in place. Even though the act focuses on the CFO, the SEC expects the entire organization to comply with the law.

Stung by the high-profile accounting scandals that drove some the nation's leading companies into bankruptcy court, Congress and other regulatory authorities have taken up their pens in an attempt to legislate business behavior. The Sarbanes-Oxley Act, which President Bush signed into law in July of 2002, requires publicly traded companies to disclose whether they have adopted a code of ethics for their senior financial officers, and if not, why. They also must report promptly any amendments to or waivers from the code.

The New York Stock Exchange, meanwhile, proposed new corporate governance standards which--if the SEC approves them--would require companies traded on that exchange to adopt corporate governance guidelines and a code of business conduct and ethics for all employees. CPAs can help employers or clients navigate these new rules and create a code of ethics that complies with all of the requirements.

NUTS AND BOLTS

For companies that choose to adopt a set of ethics guidelines in response to Sarbanes-Oxley--and few will run the risk of not doing so given the negative message it would send to investors, regulators and potential litigants--section 406 of the act says the code should seek to ensure that senior financial executives

* Conduct themselves honestly and ethically, particularly in handling actual or apparent conflicts of interest.

* Provide full, fair, accurate, timely and understandable disclosure in the periodic reports their employers file with the SEC.

* Comply with all applicable government laws, rules and regulations.

Even for CPAs who don't toil as principal financial officers, comptrollers or principal accounting officers--job titles Sarbanes-Oxley specifically targets--the new law introduces a raft of issues. As interpreted by the SEC in the proposed rule-making notice it issued on October 16, 2002, Sarbanes-Oxley does more than suggest companies have a code of ethics for senior financial executives.

Once SEC rules are finalized, section 404 of the act will require publicly traded companies to file in their annual reports an "internal control report" that outlines what steps management has taken to establish and maintain adequate internal controls and financial reporting procedures, as well as management's conclusions about the effectiveness of those controls and procedures--a report CPAs and corporate finance departments likely will have a hand in drafting. …