Title executive officers of directors, because money
Title IV of Sarbanes-Oxley Act is
associated with enhanced financial disclosures related to internal controls,
operations of the audit committee, as well as additional details in regard to
financial statements. Whether a company
is filing quarterly or annual reports, the disclosures need to ensure that GAAP
is properly applied to the transactions presented, and that they are free from
bias, reliable, fair, accurate and timely.
In one word, the transactions need to be transparent to the reader.
Enhanced financial disclosures need
to include all external correcting entries reflected in the financial
statements which were identified by an auditor and are material. It is an important section because if an
auditor was able to catch material mistakes, it may symbolize that company’s
internal controls might not be working properly or they were incorrectly designed.
This is a disclosure often used by
investors because the weaker internal controls, the greater the risk of
investing in this particular company. In
order to better assess the risk of financial distress, all material off-balance
sheet transactions should be disclosed.
They include the following: operating leases, contingent liabilities
such as lawsuits, and relationships with unconsolidated subsidiaries. In addition, it is also crucial to disclose
the use of special purpose entities.
Conflict of interest provisions are
also another required disclosure.
Generally, issuers are prohibited from making personal loans to their
executive officers of directors, because money should be used to generate revenue
for the entity in order to get a return for investors. An exception is possible if such loan is made
in the ordinary course of business. Furthermore,
related party transactions which are any transactions involving management or
principal stockholders need to be disclosed, because technically they are not
arms-length transactions. Such
disclosures are required if a person owns more than 10 percent of any class of
any equity directly or indirectly.
Commonly referred to as Section 404,
the assessment of internal controls by management as of the end of the most
fiscal year needs to be present in an annual report. It needs state that it is the management who
is responsible for establishing and maintaining satisfactory internal control
structure. In contrast, an auditor will
only express an expert opinion on management’s assertions regarding the effectiveness
of those internal controls. Moreover,
every issuer is required to disclose whether the company adopted a code of
ethics for officers. If no such conduct
exists, a reason as to why must be given.
A code of ethics needs to promote standards such as honest and ethical
conduct, fair, accurate and timely disclosures in financial statements, as well
as compliance with laws and regulations.
A new rule directed by the
Sarbanes-Oxley Act is to have an audit committee which must include at least
one member who qualifies as a financial expert.
The existence of such a financial expert needs to be disclosed. In order to qualify, a person needs to have
adequate education and experience. A
financial expert needs to thoroughly understand and apply GAAP, have experience
with internal controls and with auditing or preparation of financial statements,
as well as understanding of audit committee functions.
The Sarbanes-Oxley Act also puts some
pressure on SEC itself. The Securities and
Exchange Commission is mandated to review all the disclosures submitted by
companies in a systematic manner. It
important to note that the SEC does not give the public an investment advice as
they do not check the disclosures for accuracy, they check them for completeness. Basically, the SEC needs to check if
everything they want issuers to disclose is really there. The frequency of the reviews really depends
on various factors such as company’s volatility in their stock prices, material
restatements of financials statements, or simply companies with the largest
market capitalization that affect a big sector of the economy.