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What a Buyer Must Know About Sarbanes-Oxley: The new law fighting financial reporting and accounting abuse leaves little in these areas to pure discretion. Acquirers should bone up on the new requirements to make sure that their targets are measuring up.

Article Excerpt
The new Sarbanes-Oxley Act has certainly been in the news recently. And no matter what your take on the Act may be, or your views on the politics surrounding it, there can be no denying that it is one of the most significant pieces of business legislation to come down the pike since the Securities Act of 1933 and the Securities Exchange Act of 1934. The new law affects almost every aspect of corporate governance.

If you are a corporate executive or a member of an audit committee of a board of directors, you should thoroughly understand the implications of the act, as it very well may affect you personally as well as professionally.

The penalties for non-compliance are severe. Willful violations of the "certification" requirements by the CEO or CFO carry monetary penalties of up to $500,000. Criminal violations of the Act subject the executive to imprisonment of five, 10, or 20 years depending on the nature of the violation. Any restatements caused by material non-compliance with the financial reporting requirements of the Act require the CEO and CFO to reimburse the company for any bonuses or other incentive-based or equity-based compensation they received during the 12 months following the issuance or filing or any non-compliant document. They also must surrender any profits realized from the sale of securities of the company during that period.

In the context of mergers and acquisitions of companies, Sarbanes-Oxley creates unique challenges. The acquirer must increase its normal due diligence procedures to assess the internal control and disclosure control environment of the acquired company and the manner in which it will be integrated with its own control structure. In decentralized organizations, subsidiaries are often managed with a great degree of autonomy. In these situations, there are the equivalents of CEOs and CFOs at the subsidiary level. These individuals should be providing certifications to the CEO and CFO of the parent. Internal audit control reviews should be required to test the veracity of the subsidiary CEO and CFO certifications that are being delivered to corporate management.

Our primary focus is to discuss the:

* New law and related final rules issued by the SEC;

* Duties and responsibilities placed on the audit committee;

* Overall corporate responsibility for internal controls and newly required "disclosure" controls; and CEO and CFO certifications.

Responsibilities of audit committees

Each member of the audit committee must be an independent member of the board. The independent director receives compensation only for service on the board, cannot receive any consulting, advisory, or other compensatory fee from the company, and is not otherwise affiliated with the company or any subsidiary.

The audit committee is directly responsible for the appointment, compensation, and oversight of an independent accounting firm, which must be "registered" with the newly established Public Accounting Oversight Board. The committee is required to establish procedures for the "receipt, retention, and treatment of complaints" received from employees or other "whistleblowers" regarding accounting, auditing, and internal controls.

Audit committee members should be aware that the Act makes it unlawful for auditors to provide a number of non-audit services, including bookkeeping, financial information systems design and implementation, appraisal or valuation, actuarial, internal audit outsourcing, broker or dealer, investment advisory, investment banking, and legal, as well as expert services unrelated to the...

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