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					                      IS THERE A NEW SHERIFF IN
                           CORPORATEVILLE?
                    THE SARBANES-OXLEY ACT OF 2002: NEW
                    OBLIGATIONS FOR DIRECTORS, OFFICERS,
                         ACCOUNTANTS AND LAWYERS

                                    San Francisco
                                     Aug 8, 2003


                                 Thomas O. Gorman
                            Porter, Wright, Morris & Arthur




                                   Background

               Corporate scandals raised a common question: where
              




             were the officers, directors, auditors, lawyers and regulators
             when the events at the likes of Enron and WorldCom
             transpired?
              Sarbanes-Oxley was the reaction; a new code of corporate
              




             ethics, with teeth
                “This law says to every dishonest corporate leader: ‘You
              




             will be exposed and punished. The era of low standards and
             false profits is over. No boardroom in America is above or
             beyond the law.’” Statement of President George W. Bush on
             signing, July 30, 2002.




                                 The Approach

                 “Premised on the notion that nothing concentrates the
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                 mind like the prospect of a hanging, Sarbanes-Oxley
                 added strong penalties for corporate wrongdoing to a
                 variety of regulatory initiatives already under way.

                 Essentially the law tries to restore confidence in
         ¡




                 business through regulation of executives and their
                 advisers, including accountants and lawyers.




Copyright by Thomas O. Gorman, Porter, Wright, Morris & Arthur, L.L.P.        1
                        The Guardians of Shareholder Dollars

                 The Act imposes new obligations on insiders, adds
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                 safeguards to ensure independent oversight and
                 empowers the supposed watchdogs – Perhaps a new
                 sheriff?
                    x   Audit Committees -- Revitalized and Empowered
                    x   Executives -- Code of ethics, Expanded Certification
                        Requirements and Prohibitions on self-dealing
                    x   Auditors -- End to self-regulation, new auditing
                        standards and rules ensuring independence
                    x   Attorneys -- Express Reporting obligations where
                        knowledge of corporate wrongdoing




                            Audit Committee: Old Watch Dog –
                                  Perhaps a New Sheriff?
                New Structure, Mandate and Powers:
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                x   Only Independent Directors can serve on audit committee
                x   At least one member must be a “financial expert”
                x   Charged with appointment, compensation and oversight of any
                    independent audit report or related work
                x   Must establish procedures for receiving complaints relating to
                    accounting, internal controls and auditing matters
                x   Authority to retain advisors necessary to carry out duties




                                   Corporate Responsibility

        “A strong dose of character, honesty, and ethics in corporate
          America wouldn’t hurt” Congressman Mike Oxley, July 25,
          2002
                x   Code of ethics: Issuers must adopt code of ethics for senior
                    financial officers, or disclose the lack thereof and the Issuer’s
                    reason for not adopting a code

                x   Augmented prohibitions on self-dealing:
                            Sec. 402 prohibition on loans to officers/directors
                         




                            Sec. 306 precludes officers/directors from trading in issuer’s
                         




                            stock during pension fund “blackout” period




Copyright by Thomas O. Gorman, Porter, Wright, Morris & Arthur, L.L.P.                       2
                     Corporate Responsibility (cont’d)

        New Requirements for Financial Certification -- an end to the
          era of “I don’t know corporate finance.”
            Principal officers must certify to their knowledge that:
         




             x   the signing officer has reviewed the report;
             x   that the financial information fairly presents in all material respects
                 the financial condition of the issuer;
             x   that the signing officer is responsible for establishing and
                 maintaining the internal controls of the company;
             x   that the signing officers have disclosed to the auditors/audit
                 committee any significant deficiencies in the internal controls, any
                 fraud or any significant changes in the internal controls.




                     Corporate Responsibility (cont’d)

        New Sanctions:
            Personal Accountability: If Issuer is required to restate financial
         




            statements as a result of misconduct, the CEO and CFO must pay back
            any bonus or incentive compensation paid during year following the
            improper reporting


            Officer/Director Bar:
         




             x   Sec.305 lowers the showing required from “substantial unfitness” to
                 “unfitness”
             x   Sec.1105 -- SEC can impose officer/director bar through a cease
                 and desist proceeding where violation of Sec. 17(a)(1) of the 1933
                 Act, Sec. 10(b) of the 1934 Act, or rules under either section




            Auditors: New Oversight and Safeguards for
                          Independence

            The SEC and the Public Company Accounting Oversight Board: End of
         




            the era of self-regulation

             x   Section 101 of the Act establishes the Board

             x   Section 102 requires all public accounting firms which prepare audit
                 reports for publicly traded companies to register.


             x   The Board is given significant authority to set auditing standards
                 and investigate/discipline auditors, subject to SEC oversight.




Copyright by Thomas O. Gorman, Porter, Wright, Morris & Arthur, L.L.P.                     3
                                   Auditors: New Standards
                                    Perhaps a New Sheriff?

                   Auditing standards:
           ¡




                    x    Although the Board is directed to consult with the public and
                         industry, it is the Board that is empowered to promulgate new
                         auditing standards, subject to SEC approval

                    x    The Board is directed to establish new ethical and quality control
                         standards for auditors
                              New restrictions to eliminate potential conflicts of interest
                           




                              Audit partner rotation every five years
                           




                              Expanded audit opinions
                           




                         Auditors: Registration and Oversight

               Registration: Public Company Auditors required to
                 register with the Board; Foreign firms required to submit
                 to the Board’s jurisdiction
                    Board Oversight Powers:
               ¡




                     x   Authority to conduct periodic inspections of firms
                     x   Investigate possible violations of the Act and its rules
                     x   Hold Administrative hearings to determine whether a violation
                         has occurred
                     x   Can request that the SEC issue subpoenas




                                   Auditor Oversight (cont’d)

           Disciplinary proceedings. Sanctions available to the Board
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           include:
           x       Suspension;
           x       Monetary fines up to $100,000 for an individual and $2 million for a firm.
                   For intentional, knowing, reckless or repeated instances of negligence
                   the fines can be increased up to $750,000 for an individual and $15
                   million for a firm.
           Other Sanctions:
           x       Debarment
           x       Criminal Fines and Imprisonment for “knowingly and willfully” destroys
                   audit work papers within five years of an audit, Section 802




Copyright by Thomas O. Gorman, Porter, Wright, Morris & Arthur, L.L.P.                          4
                                    Auditor Independence

            New Safeguards for Auditor independence:
                Generally, the Act prohibits registered public accounting
            ¡




                firms from providing “non-audit” services to the public
                companies they audit
                Issuers must disclose fees paid for audit and non-audit
            ¡




                services
                Firms must rotate audit partner every five years
            ¡




                Firm cannot audit public company if current member of Sr.
            ¡




                Mgt. was employed by the firm and participated in the
                company’s audit the prior year




                                 Expanded Audit Opinions

        Additional Reporting Obligations for Auditors, opinions must
          now specify:
                 x   Scope of auditor’s testing of internal controls
                 x   Auditor’s findings based on testing
                 x   Evaluation of whether internal controls are sufficient to accurately
                     reflect transactions/dispositions of assets
                 x   Evaluation of whether internal controls provide reasonable assurance
                     of adherence to GAAP and management authorization of
                     receipts/expenditures
                 x   Description of any “material weakness” in internal controls and
                     “material noncompliance”




            Lawyers: New Obligations & Reporting Duties

        The Act gives the SEC explicit authority to set forth “minimum
          standards” for attorneys practicing before the Commission:
                Counsel required to “report evidence” of a material violation of the
         




                securities laws, breach of fiduciary duty or similar violation by chief
                legal counsel or chief executive officer – Perhaps another new
                sheriff?
                 x   If response insufficient, must report to audit committee, other independent
                     Board Committee or Board of Directors
                Ethics rules for attorneys practicing before the SEC
         




        Sanctions:
                Like auditors, attorneys can be barred from practicing before the
         




                Commission




Copyright by Thomas O. Gorman, Porter, Wright, Morris & Arthur, L.L.P.                             5
                       Lawyers: Rulemaking Ongoing


            SEC Rulemaking -- Controversial provisions dropped or on
              hold:
                Extended comment period for “noisy withdrawal” provision
             




                Dropped requirement for attorneys to document report of material
             




                Violation, response and retain documentation;

                Withdrew limited waiver provision; although policy of entering into
             




                confidentiality agreements when in public interest affirmed




                 Ethics Reinforced by Expanded Liability

                New securities fraud crime: New offense of securities fraud
        ¡




                which prohibits knowingly executing or attempting to
                execute a scheme or artifact to defraud investors in publicly
                traded companies.
                New obstruction of justice crimes
        ¡




                Section 804 increases the statute of limitations for
        ¡




                securities fraud
                Increased penalties. Other provisions of the Act increase
        ¡




                existing criminal penalties




Copyright by Thomas O. Gorman, Porter, Wright, Morris & Arthur, L.L.P.                6