Public companies adopt tight financial controls

On July 30, 2002, President Bush, backed by overwhelming support from Congress, signed into law the Sarbanes-Oxley Act of 2002. According to a Sept.11, 2003 article in the Nashville Business Journal by Dwight Klingenberg, Sarbanes-Oxley is the "most sweeping legislation affecting businesses since

The Sarbanes-Oxley Act governs corporate auditing practices, financial reporting and standards for board membership for publicly- traded companies.

In his article, Klingenberg said, "This act will have a significant, long-term impact on corporate governance, periodic disclosure, regulation of auditors, non-audit services, SEC enforcement, securities litigation, research analysts, and benefits for directors and executive officers."

The legislation mandates the board of a publicly-traded company must have five financially-literate members appointed for five-year terms, and two must be certified public accountants.

The board must also adopt auditing, quality control, ethics, etc. relating to the preparation of audit reports, and they must report on its standard setting activity on an annual basis.

These are just a few of the highlights of the 66-page Sarbanes- Oxley Act of 2002.

John "Neel" Foster, who just completed a 10-year term on the U.S. Financial Accounting Standards Board, spoke at Colorado College last Friday, Sept. 12, on the types of changes needed in the accounting profession due to recent disclosures concerning the unethical practices of a few corporations.

During a Sept. 11 phone interview, Foster said the Sarbanes- Oxley Act deals, in a nutshell, with financial reporting, the certification of financial statements and accounting practices for public companies.

What are the ramifications for privately-held companies and nonprofit organizations? Foster doesn't think the legislation will extend to private firms and nonprofit organizations, but he added that "larger nonprofits may adopt similar requirements to ensure a high level of accounting standards."

Jill Goodwin is an accountant with Waugh & Associates PC, and she said private companies and nonprofit organizations are going to be "more aware of the fact that people are watching and, although the legislation doesn't apply to them, they will take note of what's going on and self-police."

The American Management Association (AMA) surveyed 220 members and corporate customers regarding their companies' plans to beef up ethical standards and accounting practices. Executives from 52 publicly-traded companies, 52 nonprofit organizations and 116 privately-held companies responded to the survey. How are the companies - excluded from the Sarbanes-Oxley Act - reacting?

Fifty-four percent of the nonprofit organizations and 37 percent of the privately-held companies have updated and published a code of ethics. Nonprofit organizations and privately-held companies, 31 percent and 12 percent, respectively, have hired a chief governance officer. Forty-five percent of the executives from nonprofit organizations said they had adopted an anti-fraud program and an action plan that ensured its compliance, and 36 percent of the executives from private companies reported they had an anti-fraud program and compliance plan in place.

Fifty-two percent of the nonprofit organizations and 37 percent of the private companies had procedures in place to handle complaints from employees regarding accounting, internal accounting controls or auditing issues.

Implementing stricter financial controls is costly, but privately- held companies and nonprofit organizations may have to ante up because of public perception that companies not adhering to the Sarbanes-Oxley Act will be of a lesser standard.

"Many of these requirements are going to be imposed on them (nonprofit organizations and private firms) by government customers, insurance companies, lenders and others. They will get the additional costs with none of the benefits," continued Klingenberg in his article. The same article referenced a statement by Larry Bridgesmith from the Tennessee law firm of Waller Lansden Dortch & Davis: "Sarbanes-Oxley has established a new standard of accounting and disclosure 'best practices.' Private and not-for-profit companies are incorporating the requirements of the act into their internal procedures to avoid being targeted by litigation alleging negligence in the boardroom."

For more information on the Sarbanes-Oxley Act, visit www.google.com, where one can choose from 149,000 sites referencing the legislation.