10 pages

English

NEW Role of Audit Comm

Shaej - Rfreret

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10 pages

English

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August 12, 2002CORPORATE GOVERNANCE ALERTROLE OF THE AUDIT COMMITTEE IS SIGNIFICANTLYENHANCED; AUDITORS MUST ADHERE TO NEW INDE-PENDENCE STANDARDSOn July 30, 2002, President Bush signed into law theSarbanes-Oxley Act of 2002, sweeping new legislation thatoverhauls corporate governance requirements, federal disclo-sure laws and oversight of public accounting firms. The Actseeks, among other things, to improve the quality and trans-parency in financial reporting and independent audits for pub-lic companies. The provisions of the Act apply only to public companies and publicaccounting firms that prepare or issue audit reports for public companies. Most ofthe provisions of the Act are effective upon future rulemaking by the Securitiesand Exchange Commission (the SEC) and a newly established private regulatoryentity entitled the Public Company Accounting Firm Oversight Board (the Board),which is subject to the oversight of the SEC and is responsible for the regulationof public accounting firms. Of great significance are the provisions of the Actrelating to auditor independence and the enhanced role and obligations of theaudit committee.The public and political desire for increased financial accountability also hasprompted The Nasdaq Stock Market, Inc. (Nasdaq) and the New York StockExchange (the NYSE) to adopt new listing standards for public companies andaccounting firms that are intended to enhance the integrity of corporate disclosureand restore ...

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Publié par	Shaej
Nombre de lectures	21
Langue	English

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CORPORATE GOVERNANCE ALERT

ROLE OF THE AUDIT COMMITTEE IS SIGNIFICANTLY ENHANCED; AUDITORS MUST ADHERE TO NEW INDE PENDENCE STANDARDS

On July 30, 2002, President Bush signed into law the SarbanesOxley Act of 2002, sweeping new legislation that overhauls corporate governance requirements, federal disclo sure laws and oversight of public accounting firms. The Act seeks, among other things, to improve the quality and trans parency in financial reporting and independent audits for pub lic companies. The provisions of the Act apply only to public companies and public accounting firms that prepare or issue audit reports for public companies. Most of the provisions of the Act are effective upon future rulemaking by the Securities and Exchange Commission (the SEC) and a newly established private regulatory entity entitled the Public Company Accounting Firm Oversight Board (the Board), which is subject to the oversight of the SEC and is responsible for the regulation of public accounting firms. Of great significance are the provisions of the Act relating to auditor independence and the enhanced role and obligations of the audit committee.

The public and political desire for increased financial accountability also has prompted The Nasdaq Stock Market, Inc. (Nasdaq) and the New York Stock Exchange (the NYSE) to adopt new listing standards for public companies and accounting firms that are intended to enhance the integrity of corporate disclosure and restore confidence in the capital markets. As noted below, many of the new listing standards adopted by Nasdaq and the NYSE overlap provisions of the SarbanesOxley Act. These listing standards become effective upon approval by the SEC.

August 12, 2002

This alert outlines the provisions of the Act and the new listing standards relating to auditor inde pendence and the enhanced role of the audit committee and provides suggested guidelines for consid 1 eration by issuers and audit committees.

AUDITOR INDEPENDENCE

SARBANES-OXLEYACTOF2002

Prohibition and PreApproval of NonAudit Services.The Act prohibits a registered public accounting firm that performs an audit required by the Securities Exchange Act of 1934, the SEC or the Board from providing, contemporaneously with the audit, any of the following nonaudit services:

 bookkeeping or other services related to the accounting records or financial statements of the issuer • financial information systems design and implementation • appraisal or valuation services, fairness opinions, or contributioninkind reports • actuarial services • internal audit outsourcing services • management functions or human resources • broker or dealer, investment adviser, or investment banking services • legal services and expert services unrelated to the audit, or • any other service that the Board determines, by regulation, is impermissible.

A registered public accounting firm may engage in a nonaudit service, including tax services (so long as the service is not one of the services enumerated in the preceding bullet points), only with the prior approval of the audit committee of the issuer. In addition, on a casebycase basis and subject to review by the SEC, the Board may exempt any person, issuer, public accounting firm, or transaction from the prohibition on the provision of the enumerated services if it is in the public interest and is consistent with the protection of investors.

1 On its face, the SarbanesOxley Act does not exempt foreign private issuers from its requirements. However, under the rulemaking authority that Congress has given the SEC, the SEC may exempt foreign private issuers from specific provisions of the Act. Nasdaq requires that foreign private issuers disclose exemptions to Nasdaq’s corporate governance requirements, at the time the exemption is received and on an annual basis thereafter, as well as any alternative measures taken in lieu of the waived requirements. These exemptions are available to foreign private issuers if Nasdaq’s rules would require the issuer to do anything contrary to the laws, rules and regulations or generally accepted business practices of the home juris diction. The NYSE permits foreign private issuers to follow the practices of the foreign private issuer’s home jurisdiction so long as the issuer discloses any significant ways in which its corporate governance practices differ from those followed by domestic issuers under NYSE listing standards.

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The audit committee must preapprove all auditing services and nonaudit services to be provided by the issuer’s auditor, except for nonaudit services if:

• the aggregate amount of the nonaudit services constitutes not more that 5 percent of the total revenues the issuer paid to its auditor during the fiscal year in which the auditor provided the nonaudit services • the issuer did not recognize the services to be nonaudit services at the time of engagement • the services are promptly brought to the attention of the audit committee and, prior to the comple tion of the audit, are approved by the audit committee or an authorized member of the audit com mittee.

An issuer must disclose to investors in its periodic reports the approval by its audit committee of any nonaudit service to be performed by its auditor. The issuer’s audit committee may delegate to one or more of its members the authority to preapprove nonaudit services. Decisions to preapprove non audit services must be disclosed to the full audit committee at each of its scheduled meetings.

Audit Partner Rotation and Conflicts of Interest.A registered public accounting firm may not provide audit services to any issuer if the lead (or coordinating) audit partner (the partner having primary responsibility for the audit) or the audit partner responsible for reviewing the audit has performed audit services for that issuer in each of the five previous fiscal years. Additionally, a registered public accounting firm may not perform any audit if a chief executive officer, controller, chief financial officer, chief accounting officer, or any person serving in an equivalent position for the issuer, was employed by that accounting firm and participated in the audit of the issuer during the oneyear period preced ing the date of the initiation of the audit.

Reports to the Audit Committee.Each registered public accounting firm that performs an audit must timely report to the audit committee of the issuer:

• all critical accounting policies and practices to be used • all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management officials of the issuer, ramifications of the use of these alternative disclosures and treatments, and the treatment preferred by the accounting firm • other material written communications between the accounting firm and the management of the issuer, such as the management letter or schedule of unadjusted differences.

NASDAQLISTINGSTANDARDS

The audit committee shall approve, in advance, the provision by the auditor of all services not related to the audit.

THE ENHANCED ROLE OF THE AUDIT COMMITTEE

SARBANES-OXLEYACTOF2002

Public Company Audit Committees.By April 26, 2003, the SEC must direct the national securities exchanges and the national securities associations to require that the audit committee of each issuer:

• be directly responsible for the appointment, compensation, and oversight of the issuer’s account ing firm and that each accounting firm must report directly to the audit committee • be composed solely of “independent” directors (to be “independent,” a director may not, other than in his or her capacity as a member of the audit committee, board of directors or other board com mittee, accept any consulting, advisory or other compensatory fee from the issuer and may not be an affiliated person of the issuer or any of its subsidiaries) • shall have in place procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees regarding questionable accounting matters • shall have the authority and appropriate funding to engage independent counsel and other out side advisors necessary to carry out its duties.

Improper Influence on Conduct of Audits.By October 28, 2002, the SEC must propose rules that will make it unlawful for any officer or director of an issuer, or any person acting under their direction, to take any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant performing an audit of the financial statements of that issuer for the purpose of rendering the financial statements materially misleading. In any civil proceeding, the SEC will have exclusive authority to enforce this provision and any associated rule or regulation. The SEC must issue final rules no later than April 26, 2003.

NASDAQLISTINGSTANDARDS

Audit committees shall have the sole authority to hire and fire the outside auditors.

2 Audit committees must be composed solely of “independent” directors. To qualify as an independent director, a director must meet the following requirements:

2 In addition to satisfying the independence standards, Nasdaq currently requires that each member of the audit committee must be able to read and understand fundamental financial statements, including an issuer’s balance sheet, income statement and cash flow statement and at least one member of the audit committee must have past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background that results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.

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• an independent director, or family member, may not receive any payments (including political con tributions) in excess of $60,000 other than for board service (we believe that this standard will need to be modified to conform to the SarbanesOxley Act, which prohibits any payments to inde pendent directors other than for service as a member of the Board or a committee of the Board) • an independent director may not own or control 20 percent or more of the issuer’s voting securities • any relative of an executive officer of an issuer or its affiliates will not be considered independent • a director will not be considered independent if the issuer makes payments to a charity where the director is an executive officer and those payments exceed the greater of $200,000 or 5 percent of either the issuer’s or the charity’s gross revenues for the year in which the contribution is made. Former partners or employees of the outside auditor who worked on an issuer’s audit engagement shall not be deemed “independent” for a period of three years after that partner or employee stops work on the issuer’s audit engagement.

Audit committees shall have the authority to consult with and retain legal, accounting, and other experts in appropriate circumstances.

Audit committees, or a comparable body of the board of directors, must review and approve all related party transactions.

Each audit committee member must be able to read and understand financial statements at the time of their appointment rather than “within a reasonable period of time” thereafter.

A nonindependent director may serve on the audit committee pursuant to “exceptional and limited circumstances” for up to two years, but may not serve as the chair of the audit committee (we believe this standard will need to be modified to conform to the SarbanesOxley Act to ensure that each mem ber of the audit committee, at a minimum, meets the independence standards of the Act).

The audit committee requirements for small business issuers shall conform to those of other issuers.

NYSELISTINGSTANDARDS

Director’s fees shall be the sole compensation that an audit committee member may receive from the issuer.

3 All members of the audit committee must be independent :

• a director who meets the “independence” standard but who also holds 20 percent or more of the issuer’s stock (or who is a general partner, controlling shareholder or officer of such a holder) may not be the chair, or a voting member, of the audit committee • a director who is a former employee of the issuer cannot be considered independent until five years after the employment has ended • a director cannot be considered independent if he or she, in the past five years, has been part of an interlocking directorate in which an executive officer of the issuer serves on the compensation committee of another issuer that employs the director • directors with immediate family members in the above categories also are subject to the fiveyear “cooling off” standards for purposes of determining independence. A director who is, or in the past five years has been, affiliated with or employed by an auditor of the issuer (or of an affiliate) is not “independent” until five years after the end of either the affiliation or the auditing relation ship.

Each issuer shall have an internal audit function.

Each issuer shall adopt a written audit committee charter that addresses the committee’s purpose, its duties and responsibilities, and an annual performance evaluation of the audit committee.

The purpose of the audit committee is to assist the board of director’s oversight of:

• the integrity of the issuer’s financial statements • the issuer’s compliance with the legal and regulatory requirements • the independent auditors’ qualification and independence • the performance of the issuer’s internal audit function and independent auditors.

The duties and responsibilities of the audit committee to be set forth in the charter must be to:

• retain and terminate the issuer’s independent auditors • at least annually, obtain and review a report by the independent auditors describing (i) the firm’s internal qualitycontrol procedures; (ii) any material issues raised by the most recent internal qualitycontrol review, or peer review, of the firm, or by any inquiry or investigation by govern mental or professional authorities, within the last five years, respecting one or more independent

3 In addition to satisfying the independence standards, the NYSE currently requires that each member of the audit com mittee must be financially literate, as such qualification is interpreted by the issuer’s board of directors in its business judg ment, or must become financially literate within a reasonable period of time after his or her appointment to the audit com mittee, and at least one member of the audit committee must have accounting or related financial management expertise, as the board of directors interprets such qualification in its business judgment.

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audits carried out by the firm, and any steps taken to address any such issues; and (iii) all rela tionships between the independent auditors and the issuer • discuss the annual and quarterly financial statements (including the MD&A) with management and the independent auditors • discuss earnings press releases and earnings guidance provided to analysts and rating agencies • as appropriate, obtain advice from outside legal, accounting or other advisors • discuss policies with respect to risk assessment and risk management • each quarter, meet separately with management, the internal auditors and the independent audi tors • review with the independent auditors any audit problems and management’s response • set hiring policies for employees of the independent auditors • regularly report to the full board of directors.

ENHANCED PUBLIC DISCLOSURES

SARBANES-OXLEYACTOF2002

Code of Ethics for Senior Financial Officers.By January 26, 2003, the SEC must issue rules to require each issuer to disclose in its periodic reports whether or not (and if not, the reason why not) it has adopted a code of ethics applicable to senior financial officials. The SEC also is obligated to revise its current regulations concerning matters requiring prompt disclosure on Form 8K to require immediate disclosure, by means of the filing of an 8K, dissemination by the Internet or by other electronic means, by any issuer of any change in or waiver of the code of ethics for financial officers. A code of ethics means those standards as are reasonably necessary to promote:

• honest and ethical conduct, including the ethical handling of actual or apparent conflicts of inter est between personal and professional relationships • full, fair, accurate, timely, and understandable disclosure in the periodic reports required to be filed by the issuer • compliance with applicable governmental rules and regulations.

Disclosure of Audit Committee Financial Expert.By October 28, 2002, the SEC must issue rules to require each issuer to disclose in its periodic reports whether or not (and if not, the reason why not) the issuer’s audit committee is comprised of at least one member who is a “financial expert.” The SEC must issue final rules by January 26, 2003. In defining the term “financial expert,” the SEC will con sider whether a person has, through education and experience as a public accountant or auditor or a principal financial officer, comptroller or principal accounting officer of an issuer, or from a position involving the performance of similar functions:

• an understanding of generally accepted accounting principles and financial statements

• experience in: • the preparation or auditing of financial statements of generally comparable issuers • the application of these principles in connection with the accounting for estimates, accruals and reserves • experience with internal accounting controls • an understanding of audit committee functions.

NASDAQLISTINGSTANDARDS

All issuers must have a code of conduct that is publicly available and addresses, at a minimum, con flicts of interest and compliance with applicable laws, rules and regulations, with an appropriate com pliance mechanism.

The issuer must publicly disclose waivers of the code of conduct to executive officers and directors.

NYSESTANDARDS

Issuers must adopt a code of business conduct and ethics, which must include compliance standards and procedures to facilitate the effective operation of the code, must address conflicts of interest, corpo rate opportunities, confidentiality, fair dealing, protection, proper use of company assets and compli ance with laws, and must encourage the reporting of illegal or unethical behavior.

Any waiver of the code for directors or executive officers may be made only by the board of directors or a board committee and must be promptly disclosed to shareholders.

SUGGESTED GUIDELINES

Many of the provisions of the SarbanesOxley Act are directives to the SEC and other regulatory bod ies to conduct studies or adopt rules to carry out the policies set forth in the Act. Accordingly, we expect that additional regulatory requirements will be forthcoming. Our firm will continue to be avail able to provide advice and guidance with respect to the SarbanesOxley Act and any future require ments that arise from this regulatory activity.

However, the Act sets forth specific guidance with respect to the SEC rulemaking it requires, and, in addition, each of Nasdaq and the NYSE has adopted new listing standards addressing the topics dis cussed in this alert. We suggest that issuers comply with the provisions of the Act that remain subject to rulemaking, as well as these new listing standards. In that vein, we suggest that issuers consider taking the following actions:

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Audit Committee Composition.The board of directors should review the composition of its audit committee and make any necessary changes in composition to ensure that each member meets the “independence” requirements and sophistication standards of the Act and Nasdaq or the NYSE.

Audit Committee Authority.The board of directors should grant to the audit committee:

• the direct responsibility for the appointment, compensation and oversight of the outside auditor • the authority and funding to engage independent counsel and other outside advisors if the audit committee deems it necessary to carry out its duties • the sole duty and responsibility to review and approve all related party transactions.

Audit Committee Responsibilities.The audit committee should take the following actions:

• meet with the independent auditors to discuss the independence requirements set forth in the Act and the rules of Nasdaq and the NYSE, as applicable, and the scope of services being provided to the issuer by the independent auditors. The audit committee must determine whether the rela tionship between the existing independent auditors and the issuer complies with the requirements of the Act and the newly adopted listing standards. • meet with the independent auditors and discuss the role of the audit committee, the fact that the independent auditors report to the audit committee, and the form and content of the report to be delivered to the audit committee • establish preapproval procedures for all audit and nonaudit services • establish appropriate procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous sub mission by employees regarding questionable accounting matters • consider whether to establish an (or review and make any necessary modifications to an existing) internal audit function • review its annual calendar to determine whether it should hold additional meetings throughout the year in light of the enhanced responsibilities and heightened scrutiny created by the Act and the listing standards. During the meetings, discuss all topics identified in the Act and the new list ing standards. Prior to each meeting, prepare a detailed agenda and distribute the agenda to all members and other attendees in advance of the meeting. Legal counsel should attend each meet ing and detailed minutes should be prepared. • conduct separate meetings with management, the internal auditors and the independent auditors • review the management representation letter issued to the independent auditor • discuss with the party responsible for investor relations what is being said or asked about the issuer, as it may further assist the audit committee in asking probing questions to management • ask probing questions of management and the independent auditors and receive satisfactory answers.

Code of Ethics.The board of directors should review any existing code of ethics applicable to its sen ior financial advisors to determine whether it contains adequate provisions to carry out the policies expressed in the Act, and the provisions of the listing standards of Nasdaq and the NYSE. Any neces sary changes should be adopted by the board of directors. If no code exists, the board should prepare, or cause to be prepared, a code of ethics that incorporates the provisions of the Act, and the listing standards of Nasdaq and the NYSE. Issuers should promptly publicly disclose any changes in or waiv er of the code of ethics for senior financial officers.

Continuing Education.Issuers should consider making available to members of the board and audit committee appropriate educational and training sessions to promote highquality corporate gov ernance.

Our lawyers are monitoring the current standards and will keep you apprised of any developments. To access previous Corporate Governance Alerts, please visit our Web site, www.akingump.com.

CONTACT INFORMATION

If you have any questions or would like to learn more about this topic, please contact the partner who normally represents you, or any of the lawyers listed below:

Corporate and Securities Team Rick L. Burdick ..........................................202.887.4110 ................................rburdick@akingump.com ....................................Washington Bruce S. Mendelsohn ..............................202.887.4446 ................................bmendelsohn@akingump.com ..........................Washington C.N. Franklin Reddick III ........................310.728.3204 ................................freddick@akingump.com ....................................Los Angeles Alan Siegel ................................................212.872.1029 ................................asiegel@ akingump.com ......................................New York Michael E. Dillard ....................................214.969.2786 ................................mdillard@ akingump.com ..................................Dallas Patrick J. Dooley........................................212.872.1080 ................................pdooley@ akingump.com ..................................New York Daniel G. Walsh ........................................011 44 20 7726.9617 ..................dwalsh@ akingump.com ......................................London J. Patrick Ryan............................................210.281.7232 ................................pryan@akingump.com..........................................San Antonio

Civil and Criminal Litigation Team John M. Dowd ..........................................202.887.4386 ................................jdowd@ akingump.com........................................Washington David A. Donohoe ....................................202.887.4050 ................................ddonohoe@ akingump.com ..............................Washington Stephen A. Mansfield ............................310.229.1019 ................................smansfield@ akingump.com ..............................Los Angeles James J. Benjamin Jr. ..............................212.872.8091 ................................jbenjamin@ akingump.com................................New York Richard B. Zabel ........................................212.872.8060 ................................rzabel@ akingump.com ........................................New York Gregg C. Laswell ......................................713.220.5813 ................................glaswell@ akingump.com ....................................Houston Edward S. Koppman ................................214.969.2846 ................................ekoppman@ akingump.com ..............................Dallas

Public Law and Policy Team Joel Jankowsky..........................................202.887.4082 ................................jjankowsky@ akingump.com ............................Washington Smith W. Davis..........................................202.887.4098 ................................sdavis@ akingump.com........................................Washington Henry A. Terhune ....................................202.887.4369 ................................hterhune@ akingump.com..................................Washington

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