South Carolina Lawyer
Vol. 14, No. 3, Pg. 20.
Enron, WorldCom, Martha Stewart...What's a public company to do?
20Enron, WorldCom, Martha Stewart...What's a public company to do?By A. Marvin Quattlebaum jr. and Thomas F. MoranA wave of corporate scandals has dominated recent political and economic news headlines. This wave of misconduct has increased scrutiny of the conduct of corporate executives, board members, accountants and attorneys with respect to financial reporting and the other financial activities of public companies. Sensing the rise in public sentiment against such groups, Republicans and Democrats have found common ground in expressing outrage over corporate scandals and in vowing to investigate and prosecute accounting irregularities and those responsible for them. This political trend is most visibly reflected in the July 30 passage of the Sarbanes-Oxley Act of 2002 (also known as the Accounting Industry Reform Act or the "Act"). Pub.L.No.107-204, § 1(a) (2002). In the current political climate, one need not be Martha Stewart or a top executive of Enron in order to take notice. The Act creates new issues that all public companies must consider and address. This article summarizes new issues raised by the Act and suggests certain ways that public companies might respond to them.
22 Audit committee requirements
One of the targets of the Act is boards of public companies and specifically the audit committees of such boards. The Act prohibits the listing of a company on the public stock exchange if a public company's audit committee fails to comply with the following requirements:
(a) All audit committee members must be independent. This means that members of the audit committee cannot accept consulting, advisory or other compensation fees from the company other than compensation for serving on the board. Id.§ 301(3)
(b) The audit committee must have authority to appoint, oversee and compensate outside auditors. No longer can audit committee members take the position that they did not hire the outside auditors and that they relied on their advice. They are not allowed to defer this duty to CEOs or CFOs. They must have authority to be actively involved. Id.§ 301 (6)
(c) Audit committees must have authority to engage independent legal counsel and company funds must be provided for this activity. This requirement directly links the audit committee of the board to counsel hired to investigate company activities. No longer can boards allow a CEO to dominate the selection and direction of counsel. Boards must be involved in this activity. Id.§ 301 (5)
(d) Audit committees must have atleast one member who is a financial expert. Id. § 407 In the early 1990s, Infinity Broadcasting's audit committee provided a ready example of non-compliance with this provision. During that time, O.J. Simpson was a member of the committee, who clearly did not have the proper skills for that role.
Suggested responses by boards
The Act will likely lead to scrutiny of boards regarding the...