VideoTim Reason a senior writer at CFO.
Marching Orders
How the SEC chose to implement the Sarbanes-Oxley Act.
Sources: CFO; Securities and Exchange Commission
| Final rules | Notable Changes or Issues | |
Public Companies | MD&A must detail off-balance-sheet deals. | SEC revised its initial definition of "off-balance-sheet" to target unconsolidated off-balance-sheet entities. |
| Pro forma numbers must be reconciled to GAAP. | To track compliance, earnings releases must be filed as 8K. | |
| Directors and executives may not trade stock during pension-plan blackouts. | ||
| Must disclose if audit committee has financial expert and if not, why not. | SEC expanded definition of "financial expert" to ensure non-CPAs can qualify. | |
| Must disclose whether there is code of ethics for CEO, CFO, controller, and others. If so, code must be publicly available; if not, must explain why. | ||
| Attorneys | Must report material violations "up the ladder." | "Noisy withdrawal" rule vote delayed 60 days. Proposed alternative: companies must report attorney resignation. |
Auditors | Work papers and other records, including differences of professional opinion, must be retained for seven years. | SEC chose longer of two retention periods mentioned in the act, but language about retention of all documents that "cast doubt" was removed from final rule. |
| Nine services banned: bookkeeping, financial-system work, appraisals, actuarial work, internal audit, management or HR work, investment-adviser work, legal services, and other advocacy-related services. | SEC banned services outright, rather than codifying its own existing rules, which included exceptions. | |
| Allowed nonaudit services must be approved by audit committee. | SEC rule allows audit committee to preapprove certain services in written policies. | |
| Fees paid to auditors for services must be disclosed in annual report. | This rule devised by SEC, not Sarbanes-Oxley, but critics say new definitions of audit-related services weaken existing SEC auditor-independence rules. | |
| Lead and concurring audit partners must rotate out after five years and remain out for five years. Others on team may have seven years on, two years off. | SEC's addition of a cooling-off period gives rotation more bite, although initial rule required entire team to rotate. Smaller firms (less than five clients and 10 partners) are exempt, but subject to PCAOB review every three years. | |
| Audit-team members must take a year off before going to work for former clients. | Auditors lose independent status if this ban is violated. Critics say one year is too short to be effective. | |
| Investment Management Firms (mutual funds) and advisers | Fund CEOs and CFOs must certify shareholder reports and disclose whether they have code of ethics and financial expert on audit committee. | The SEC concluded that periodic statements of mutual funds are subject to the same certification and disclosure rules as companies. |
| Funds must file proxy-voting record with SEC and disclose proxy-voting policies and procedures. Both may be made available on the Web or on request. | Required by the SEC, not the act, but passed during the marathon rule-making session. To lessen compliance costs, the SEC did not require regular mailings. |
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