What You Don’t Know about Sarbanes-Oxley

Snares, pitfalls, and trapdoors: Sarbanes-Oxley is full of surprises. These five top the list.

The act also has surprises in unexpected areas, things like compensation, executive relocation, and overseas operations. And contrary to popular belief, private companies aren’t entirely immune to the provisions of Sarbox, as some finance managers have come to refer to the law.

Indeed, if you thought the provisions of Sarbanes-Oxley only concerned corporate finance, independent auditing, and equity research, you’ve missed the fine print. Sarbox also covers such disparate corporate functions as information technology, human resources, compensation, and environmental compliance.

Why? Because these areas — and a host of others — affect company financials.

In fact, after the SEC gets finished implementing the provisions of the bill, Sarbanes-Oxley might be a whole lot more far-ranging than its proper title suggests. That moniker? “Public Company Accounting Reform and Investor Protection Act.”

Here, then are five of the more nettlesome — and less publicized — edicts of the Sarbanes-Oxley Act of 2002.

1. Material changes must be reported at lightspeed.

Most CFOs are aware that they now must provide the SEC with an 8-K form within five business days if their company issues an earnings release.

They also know that if they follow up an earnings release by dishing up important new details in a conference call, they might need to issue another 8-K.

Such requirements could make it “difficult to have open discussions,” says Brian Jarzynski, CFO of Comshare Inc. It could also make it harder for finance chiefs “to get people listening” by holding out some of the good stuff for the conference call.

Still, that five-day 8-k isn’t expected to produce all that many ripples.

What might spawn bigger waves is the realization that companies will have to issue 8-Ks in real time when something big and unexpected happens. Under Section 409 of Sarbox, companies must report material changes in the financial or operating condition of the company “on a rapid and current basis.”

How rapid is rapid? In a footnote to a rule on non-GAAP financial reporting issued in January, the SEC said it plans to tackle that issue in the near future. Last June, the commission made it clear that it meant those 8-Ks to be filed in two business days. That’s a big change from the five business days the commission now requires to report material changes — and the 15 calendar days it asks for others.

What’s more, the topics deemed worthy of an 8-K filing would vastly expand. Currently, companies must file when they undergo nine specific events, including a change in control, a significant acquisition, or a bankruptcy.

To that, the SEC is proposing to add a whopping 11 triggering events. Among them: ending (or merely reducing) a significant business relationship with a customer; large write-offs and restructuring charges; material impairments; and a change in a rating agency’s decision.

Because the SEC’s policy was proposed before the passage of Sarbanes-Oxley and the ensuing brouhaha surrounding it, however, finance chiefs are only just now waking up to the implications of “a whole new disclosure regime,” says Deborah Meshulam, a partner with Piper Rudnick in Washington.

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