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Module 11 – A Glimpse into the Legal World Copy


(This video chapter begins at 14:06 and ends at 15:32. Click on the blue dot at the 14:06 timestamp to play the video for this module.)

 

 

A Glimpse into the Legal World

When dealing with corporate finances, there are strict regulations that shape the way financial information is gathered, stored, and reported. As a manager, you must understand why the laws exist, what they require, and how you factor into the situation. There are severe consequences when these laws are not followed. There may be controls already in place at your company, but if you intend on being involved with the financial activities in your company it is best to be familiar with some of the legal requirements business must follow.

Our focus quote for this module:

“Government in the U.S. today is a senior partner in every business in the country.” – Norman Cousins

In this module, you will learn the following topics:

  • A brief history
  • The Sarbanes-Oxley Act
  • CEO/CFO certification
  • 8th Company Law Directive

Let us look at a brief history of the government’s involvement in the financial dealings of corporations in the United States.

 

 

A Brief History

Abuses in the stock market in the 1900s forced the government to intervene and regulate how companies sold securities. The origins of financial regulations began back in 1933 with the enactment of the Securities Act of 1933. Here is as brief list of subsequent acts throughout history:

  • Securities Act of 1933 regulated the offer and sales of securities.
  • Securities Exchange Act of 1934 governed the secondary trading of securities like stocks, and bonds.
  • Trust Indentured Act of 1939 requires the appointment of an independent trustee to serve for the benefit of the holders of securities.
  • Investment Company Act of 1940 helped reduce or eliminate conditions, which affected the public interest and the interest of the investors.
  • Investment Advisers Act of 1940 regulates the actions of the investment advisers.
  • Sarbanes-Oxley Act of 2002 sets standards for all public company board, management and accounting firms in the United States.
  • Credit Rating Agency Reform Act of 2006 improved ratings quality of companies, protecting investors.

The U.S. Securities and Exchange Commission is the agency that enforces federal securities laws.

 

The Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 became law on July 30, 2002. This law is also known as the following:

  • Public Company Accounting Reform And Investor Protection Act
  • Corporate And Auditing Accountability and Responsibility Act
  • Sarbanes-Oxley
  • Sarbox
  • SOX

The law was named after its sponsors U.S. Senator Paul Sarbanes and U.S. Representative Michael G. Oxley. The bill was created after companies like Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom committed major financial scandals.

The law regulates the standards for all U.S. public company board of directors, management, and public accounting firms. The Securities and Exchange Commission (SEC) oversees the enforcement of this law.

The law establishes the following:

  • Public Company Accounting Oversight Board, which performs the following
    • Oversee audits of public companies
    • Set audit reporting standards
    • Ensures compliance of public accounting firms
    • Requires accounting firms to register with them
    • Instructs company board of directors to establish auditing, quality and ethical standards
    • Provide rules for auditing standards
  • Auditor Independence
  • Corporate Responsibility
  • Enhanced Financial Disclosures
  • Analysis of Conflicts of interest
  • Security and Exchange authority

 

CEO/CFO Certification

Section 302 of the Sarbanes-Oxley Act of 2002 requires that the CEO and CFO certify the annual or quarterly report. The Corporate Responsibility for Financial Reports area of the law outlines the following requirements for the CEO and CFO:

  • The signing officer has reviewed the report.
  • Based on the officer’s knowledge, the report does not contain any untrue statement.
  • Based on such officer’s knowledge the report fairly presented in all material respects the financial condition.
  • The signing officers are responsible for establishing and maintaining internal controls.
  • The signing officers have disclosed to the issuer’s auditors and the audit committee of the board of directors all significant deficiencies in the design or operation of internal controls.
  • The signing officers have indicated in the report whether or not there were significant changes in internal controls.

 

8th Company Law Directive

The 8th Company Law Directive is the European version of the Sarbanes-Oxley Act of 2002. This law was enacted in 2006. Most of you may not have to worry too much about this law unless your organization is based in Europe.

Knowing about this law helps, and will allow you to become more globally aware of how corporate finances are regulated.

 

 

Practical Illustration

Anna was the CEO of a small accounting firm. She was approached by an employee of the Public Company Accounting Oversight Board. He explained that they required all accounting firms to register with them. Anna explained that her company was registered, and it was expecting an audit soon. After being audited by an independent auditor, Anna’s company was found to be on track. Anna knew this would be the case, because as CEO, she had to sign off on the annual report. The report included the results of the audit.