Executives Face Stiff Penalties if They Sign off on False Statements, Even Unknowingly

Corporate Responsibility Act Goes Further Than Recent SEC Rules

8/9/2002
The recently signed Sarbanes-Oxley Act of 2002 introduces an unprecedented set of consequences for officers of public companies who sign off on inaccurate financial reports, even if they do so unknowingly. President Bush signed the legislation on July 30, 2002. Verne C. Hampton, an attorney with Dickinson Wright PLLC specializing in SEC-related matters, said that with the advent of the Act chief executive officers and chief financial officers will need to engage in a high level of due diligence to ensure the accuracy of the reports they are signing. "The statute goes even farther than the recently issued rules by the Securities and Exchange Commission, which provided some allowance for mistakes that occurred if the statement was accurate to the best of the officer's knowledge," Hampton said. "The new statute makes it clear that an officer can be held criminally accountable even if the information on the report was true to the best of his or her knowledge." Penalties for violations can be as stiff as 20 years in prison and/or a $5 million fine. Under the Act, CEOs and CFOs will also be liable to their companies for bonuses, other incentive-based compensation and stock sale profits following a financial restatement due to material non-compliance attributable to misconduct. The Act also prohibits providing or arranging for virtually all new corporate loans to executive officers and directors. The statute's primary components deal with four key issues, including: • CEO/CFO Certifications of Financial Reports and Reimbursement; Loans • Improved Disclosure. • Audit Committees • Regulation of Accountants and Attorneys In addition to criminal penalties on officers who certify inaccurate financial statements, the Act requires much faster SEC disclosure of transactions, including a requirement that corporate insiders report transactions involving company securities within two business days. The Act also requires audit committees to establish procedures for handling complaints regarding the company's accounting, including anonymous submissions, and establishes a Public Company Accounting Oversight Board, operating under the SEC's oversight, to regulate auditors and auditing. "Many corporate officers and their advisors may be confused by some of the recent publicity, as the SEC rules and the statute are not exactly the same," according to Thomas D. Hammerschmidt, a Dickinson Wright taxation and corporate law specialist. Complying with the Act in the short run is made more difficult by the fact that there is little in the way of interpretation as the regulations, which Congress directed the SEC to develop and issue, have yet to be delivered. According to the Act, many of the deadlines for these regulations extend into 2003, adding an additional layer of complexity. "The most important thing they must understand is that Sarbanes-Oxley is an extremely comprehensive statute, with severe penalties for noncompliance. There is no longer any margin for error," said Hammerschmidt. Even as regulations are being developed by the SEC, company officials would be wise to consider the following practices in light of the new law: 1. Prepare and document procedures for the review and approval of corporate financial statements and SEC filings. 2. Review the role of the corporation's audit committee and adhere to the requirement that the officer certifications be reviewed with the committee. 3. Strictly adhere to policies and procedures on a consistent basis to insure that financial and other material business information is identified and communicated to company officers, the audit committee, and outside auditors. 4. Consult with legal counsel on a regular basis, as there will be an evolving understanding of the implications and practical applications of Sarbanes-Oxley.
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