The Sarbanes-Oxley Act: New Securities Disclosure Requirements in the United States
Lansing, Paul, Grgurich, Christopher, International Journal of Management
In response to the recent onslaught of corporate scandals such as Enron, Arthur Andersen, and WorldCom, the United States Congress passed the Corporate Accounting Practices Act, also known as the Sarbanes-Oxley Act. The primary purpose of this Act was to formalize and strengthen the rules governing those individuals and firms within the Securities industry who play a role within U.S. capital markets. Through the following analysis of the Sarbanes-Oxley Act and related SEC releases, foreign private issuers will better be able to comply with new U.S. securities law measures.
Admist the recent onslaught of corporate scandals rocking such giants as Enron, Arthur Andersen, and WorldCom, a debate was sparked concerning much needed reform in United States securities laws. On July 30, 2002, the United States Congress passed the Corporate Accounting Practices Act, also known as the Sarbanes-Oxley Act (the '"Act"). The primary purpose of this Act is to formalize and strengthen the rules governing corporate officers, accountants, lawyers, and those individuals and firms within the securities industry who play a function within U.S. capital markets. As drafted, the Act poses broad-reaching implications for each of these groups. Importantly, the Act itself does not distinguish between foreign (non-U.S.) and domestic securities issuers.
During the months following the passage of the Act and continuing through today, the Securities and Exchange Commission (SEC) has released and adopted several important provisions interpreting controversial sections of the Act as the provisions relate to foreign issuers. This article contains an analysis of the Sarbanes-Oxley Act ("the Act") and SEC releases interpreting various portions of the Act as the provisions relate to listed foreign private issuers. It should be noted, however, that this article does not address all potential concerns created by the Act as applied to listed foreign private issuers. For a complete breakdown and analysis of the new rules, foreign private issuers should consult counsel for proper advice in meeting the new securities law requirements.
Rapidly constructed, the Sarbanes-Oxley Act was created to stifle shaken investor confidence in American stock markets. Realizing that a stock market is a system comprised in part of public issuers, individual and private institutional investors, attorneys, accountants, and analysts, the U.S. legislature broadly drafted the Act to reregulate each of these groups in ways designed to holistically bring investor confidence back to the marketplace. Of the numerous groups regulated by the Act, listed private issuer officers and directors face the most dramatic changes in their corporate responsibilities under the new U.S. securities laws.
The Act is composed of eleven chapters. Though the SEC and various stock market exchanges have since drafted and adopted several thousands of pages of rules interpreting various provisions of the Act. the key to a manager's basic understanding of new disclosure requirements stems from a thorough analysis of the basic provisions set forth in the Act and subsequent SEC interpretations of these provisions.
II. Framework of the Act
The Act attempts to rebuild investor confidence in public issuer management with a two pronged approach consisting of internal and external monitoring procedures coupled with significantly heightened penalties placed upon senior corporate officers failing to comply with the Act's requirements.
A. Internal Control: Creation of an Audit Committee
Beginning with the internal approach, the Act requires a corporation to establish a corporate auditing committee whose function is to act as the sole link between management and outside public auditors. In the past, when public auditors raised questions, they were chiefly required to seek out key management personnel for needed answers. As a result, management, perhaps directly responsible causing the accounting irregularities, was in the unique position to shape and bias information available to the auditor resulting in "Enron - like" tragedies. …