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Sarbanes-Oxley
An American Law to be Enforced Universally?

Introduction

This legislation is primarily directed at public companies but it will also have an effect on private firms to ensure that they improve their corporate governance and internal control processes. Private entities need to follow the quoted companies to ensure their procedures and processes are sound so that the Managing Director can have confidence in the integrity of the company's Financial Statements

Many forward looking private companies are taking action to adopt the new standard as good business practice. A key reason to be a private company is to operate with a minimum regulatory intrusion, with no need to be held responsible by public shareholders. Some firms consider the new standards unnecessary and not practical for small enterprises due to the cost and time commitments involved in their implementation.

As time progresses the new business conduct will become clearer.

Provisions of the Act

Sarbanes-Oxley has a wide scope and calls for fundamental changes in financial reporting and information disclosure. It also places new restrictions on public companies and their auditors, which are to remove the problems that caused the need for the Act in the first place.
The fundamental principles of ethical corporate conduct enshrined in the Act are:

Financial Statements must fairly present the condition of the business.
(Sec.401)
Chief Executives must take personal responsibility for the accuracy and completeness of corporate financial statements. (Sec 302)
Non-audit services by external auditors should be restricted to prevent real or perceived conflicts of interest that cast doubt on audit integrity. (Secs. 201,202,206)
Companies need independent, knowledgeable boards and audit committees that will uphold shareholder interests by challenging management and auditors on important issues. (Sec301 and 305)
A strong system of Internal Control is necessary to stem fraud and abuse. (Sec. 404)
Companies must articulate and demonstrate an ethical culture from the top down. (Sec 406)

These principles together with the Securities and Exchange Commission’s new rules requires management to file an internal control report with the annual report. This will have an effect on the operations of not only public but also private companies.

“SOA sets the standard for what disclosure should be like, what internal controls should be in place and what kind of independence should be followed – all those pieces are going to become the standard whether you are public or private.”
Lawrence Lake, Managing Director, Protiviti Inc.

Who could be affected

Companies with heavy reliance on lenders or insurers.
Private Companies who do business with US government entities, even through third parties.
Businesses that report to the Federal Deposit Insurance Corporation.
Small Banks
Unlisted Companies with public debt must comply with Sec 404.
Companies with corporate residency in the United States that enact parallel laws or regulations will be required to comply with the provisions.
Private firms with absentee owners
Businesses considering going public should show they are complaint.
Companies which may be targets for takeovers.
Non-profit entities as SOA may be extended in the future.
Any other organisation that wants to demonstrate that they are following best governance.

The Way Forward

Establish an Audit Committee
Separate Professional Services
Separate your Professional Services provider from your external auditor.
Adopt a formal code of ethics
Provide formal certification of financial information.
Enhance financial competencies.
Strengthen your control environment.
Strengthen relationships and credibility with stakeholders.
Position the organisation for strong business credit and obtaining major financing.

Conclusion

Sarbanes-Oxley may be US legislation but as with US GAAP it is already having an effect in this country. It’s adoption will be required by any company wanting to do business with the United States and will be compulsory for US subsidiaries.

Proactive companies will not see this as a threat but as an opportunity to improve their Corporate Governance and enhance their reputations by improved openness and effectiveness.
This is simply good business for forward thinking successful companies.

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