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Last Month, in an aim to crack down on corporate fraud after the recent Enron and Worldcom scandals, the Sarbanes-Oxley Act of 2002 (SOA) was signed into law in the United States. The passing of this bill, however, is set to affect not only the 1,000 largest reporting firms but also British companies with secondary listings on the New York Stock Exchange (NYSE). The Act does not exempt "foreign private issuers," which are often accorded different treatment under SEC and national securities exchange rules. The Act applies to all companies listed in New York including British firms who have American Depository Receipts (ADRs) listed there. The ADRs have the effect of allowing US investors to buy and trade shares in UK companies on the NYSE. British companies active in the US are obliged to comply with US laws which apply to them. The extra-territorial effects of the SOA may also incorporate European companies. The Act introduces a system of federal oversight of public auditors through the Public Company Accounting Oversight Board (PCAOB). The Board will be given powers to investigate foreign companies that filed accounts with the US Securities and Exchange Commission (SEC) including accounting firms. There are two new certification requirements and the consequences of breaching these rules will lie with the CEO and CFOs personally and an officer who 'knowingly' or 'wilfully' makes a false certification may be subject to a fine of up to $5 million and imprisonment of up to 20 years. The first certification requirement, applicable immediately, applies to any periodic report containing financial information. It states that the report must be accompanied by a written statement signed by the CEO and the CFO certifying that the report "…fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934." It must also be stated that the information contained in the report "…fairly presents, in all material respects, the financial condition and results of the operation of the issuer." On 29 August 2002, section 302 of the Act will give the SEC wide powers to make its own regulations regarding interim accounts. The second new certification requirement will apply to quarterly and annual reports of all companies that are required to file periodic reports with the SEC and that includes foreign issuers. The CEO and CFO of every public company must certify that they have reviewed the report and, based on the officer's knowledge, the report contains no untrue statements or omissions of material fact. The financial statements and information included in the report fairly present, in all material respects, the financial condition and results of operations of the company as of and for the periods presented in the report. In addition, all significant deficiencies in the design or operation of the internal controls and any fraud whether material or not, must be disclosed to the company's independent auditor and audit committee of the board of directors. Finally, the CEO and CFO must indicate in the report whether or not there were any significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. This should include any corrective actions taken with regard to significant deficiencies or material weaknesses in the internal controls. At present it is unclear whether British companies will have to comply with the regulations for audited quarterly figures. The DTI is continuing to press for an exemption for UK companies with US listings from the requirements of certification in the Act. The grounds being that the UK companies are already subject to strong regulations. The following changes in the law will either take effect immediately or on 29 August 2002:
Published on 20 August 2002 - AccountingWeb: Business Management Zone |
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