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Sarbanes-Oxley For Dummies

Enacted in the wake of corporate mismanagement and accounting scandals, Sarbanes-Oxley (SOX) offers guidelines

and spells out regulations that publicly traded companies must adhere to. Sarbanes-Oxley guidelines offer best-

practice principles for any company, especially those providing services to other businesses bound by SOX.

How to Limit Corporate Liability after Sarbanes-Oxley

The Sarbanes-Oxley Act (SOX) provides a legal model for running corporations of all sizes, regardless of whether

theyre publicly traded and technically subject to SOX. The best legal minds agree that good liability-limiting

governance after SOX requires corporations to do the following:

Evaluate your board members. After SOX, shareholders expect the directors who sit on the boards that run

companies to be independent and financially literate.

Create the correct kinds of committees. After SOX, well-governed companies of all sizes break their board

members up into audit committees, nominating committees, compensation committees, and maybe even

disclosure committees.

Get good counsel forcorporate officers. The legal trend is that chief executive officers (CEOs) and chief

financial officers (CFOs) are held responsible for everything that appears on financial statements. CEOs and CFOs

need good legal counsel inside and outside the company to help them ask questions and spot issues necessary to

reasonably protect these officers from liability.

Set defensive communication standards. When a legal battle ensues, communications processes within the

company are scrutinized. Establish clear communication procedures that reflect responsibility and accountability

within the company.

Know the hidden risks to board members. Board members are responsible to shareholders and third parties

that rely on the companys financials. Even in small, private companies, board members can be sued by creditors

and third parties that rely on the financial statements.

Know when to say no to a Section 404 auditor. Attorney opinions can be instrumental in cutting Section 404

costs in a companys first year of Section 404 compliance. Attorneys can help cut costs in the Section 404 process

by identifying areas in which legal liabilities and exposures are minimal.

Dont treat whistle-blowers like whiners. Whistle-blowers are people who alert the company to breaches of

internal policy and government regulations, and they must be treated with special care after SOX.

Know when to file an 8-K report. SOX Section 404 contains a list of seemingly routine events in the life of a

corporation that call for the filing of an 8-K report. These events include (among many others) changes in

management and loss of a major client. Know these triggering events.

Figure out whether your company needs an SAS 70 Form.Even small companies that technically dont have to

comply with SOX Section 404 may be asked to provide certifications about their internal control to their clients who

do have to comply using this form.

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Sarbanes-Oxley Practices for Good Corporate Governance

Sarbanes-Oxley (SOX) was passed to combat corruption at big public companies like Enron, WorldCom, Tyco,

Adelphia, Global TelLink, HealthSouth, and Arthur Andersen. But small and not-for-profit companies are finding they

have no choice but to adopt many of the same standards if they want to get insurance, attract investors and donors,

and repel lawsuits. SOX compliance is becoming a portfolio building block that no company can ignore. Heres what

to do:

Form an audit committee. Yourcompanys audit committee should consist of independent directors who sit on

the board and ensure the integrity of your companys audit process. After SOX, its tough to explain to investors

and regulatory authorities why your company never got around to convening an audit committee.

Combat Section 404 audit-chondria and policy paranoia. Auditors and governance officers want to shine by

conscientiously complying with SOX Section 404. However, they have to do their jobs within the bounds of budget

and reason. Not every audit issue deserves full-throttle testing, and not every trivial process needs accompanying

polices and controls.

Prevent whistle-blower complaints from becoming lawsuits. Every company has its share of complainers and

malcontents. However, when employee or vendor complaints regard matters than can affect the companys

financial statements, the issues need to be fully documented and vetted.

Keep a lid on insurance premiums. Increasingly, insurance companies are looking at SOX compliance as an

unofficial underwriting criterion in quoting officers and directors liability policies and other coverage relative to

companies exposure. Put simply, SOX compliance can save premium dollars.

Be credible in raising capital. No investor or donor wants to assume unnecessary risk. Documenting your

companys compliance with the relevant aspects of SOX shows creditors and donors that your company operates

in an ethical, controlled environment and that its future growth is a good bet.

Deal with real data in making decisions. No company can make good decisions if its financial data is

speculative and its procedures are hazy. The good news about SOX is that it has created spinoff software tools

and checklists to help your CEOs, CFOs, and other management team members get a handle on whats

happening with your company.

Figure out if SAS 70 applies to you (even if the rest of SOX doesnt). If your company provides services to

publicly traded companies, your clients may be asking you for an SAS 70 report. Even if you dont have to comply

with SOX, your customers may have to document that they only outsource to service providers with good internal

controls in place and may be looking for you to provide the appropriate SAS 70 documentation.

Communicate about control. When a company experiences a breach of ethics or internal control, its important

to be able to trace the company communications to see where the breakdown occurred. Clear communications

about controls, procedures, and ethics can protect conscientious management and employees at all levels while

laying the blame on those attempting to circumvent SOX standards. The SOX spinoff market has produced tools

and checklists to test communication as well as other types of control.

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Prepare management for new levels of liability. SOX places more responsibility (and potential liability) on

management than ever before. Management needs to understand what it can no longer delegate under SOX and

develop a strategy for maintaining control over what can be handed off to others.

Adopt a code of ethics, and mean it. Every company should adopt a simple code of ethics and communicate it

to everyone in the organization. In any company, new situations that arent covered by specific policies will arise.

However, in the post-Enron era of SOX, the companys code of ethics should cover everything.