Corporate Governance and Accountability under Sarbanes-Oxley Act of 2002.

On July 30, 2002, President George W. Bush signed the Sarbanes-Oxley Act of 2002. The bill establishes new rules of corporate governance and accountability for accounting for U.S. and foreign publicly owned companies whose shares are registered with the U.S. Securities and Exchange Commission. If you work for such a company, you have some immediate actions for timely compliance, some by August 30, 2002.

This legislation has potential importance to both outsourcers and their customers, as well as their accountants, executives, investment bankers, employees and attorneys.

Scope of the Law.
Enacted in the wake of a series of corporate accounting scandals, this vast and sweeping legislation establishes a public accounting oversight board, adopts certain minimal measures to preserve auditor independence, amends federal security laws to hold insiders and corporate executives and directors to higher standards of care in trading securities (including blackout periods during which such trading is prohibited), increases and extends corporate disclosures of accounting matters, sets standards for “corporate and criminal fraud accountability” and hardens the penalties for “white collar crime.” For particular provisions on corporate responsibility for financial reports and the accuracy of financial reports (including “off balance sheet transactions”), see our copy of the law at Sarbanes-Oxley_Legislative_Text.

Study on Manipulative Accounting.
Investment bankers will now become the subject of a new SEC study. But the study will go further, covering topics that affect virtually every publicly traded outsourcing services provider and its methods of operation. The study will review, among other issues relating to Enron and Global Crossing’s bankruptcies, the role of investment bankers and other advisors:

in creating and marketing transactions which may have been designed solely to enable companies to manipulate revenue streams, obtain loans, or move liabilities off balance sheets without altering the economic and business risks faced by the companies or any other mechanism to obscure a company’s financial picture.

Impact of Sarbanes-Oxley Act of 2002 on Outsourcing Service Providers.

For outsourcing service providers, the new law creates the risk that the SEC might seek to impose penalties for failure to adopt conservative accounting principles. We think that this law could create challenges for outsourcers that adopt the percentage of completion method of accounting, which may be appropriate but nonetheless perhaps not as credible or conservative as the “as collected” basis. Take our Survey on related accounting issues.

Impact of Sarbanes-Oxley Act of 2002 on Employees.

The Sarbanes-Oxley Act of 2002 protects employees from termination or other major adverse effect if they report alleged violations of the accounting rules or corporate governance requirements of that law. For a copy of the act as it applies to employees, please refer to our copy of the law at Sarbanes_Oxley_legislative_text

Please note that this gives new protections to whisteblowers who are employees, but also to non-employees as well. Please refer to our copy of the law at /Sarbanes_Oxley_ACT_2002_legislative_text

Impact of Sarbanes-Oxley Act of 2002 on the Role of Attorneys in Outsourcing.

The Sarbanes-Oxley Act of 2002 on corporate governance and accountability requires attorneys to take their concerns about accounting treatment to in-house lawyers and ultimately to the Board of Directors. Law firms assisting parties to an outsourcing transaction should consult with their clients concerning the accounting treatment implicit in the transactional structures.

Impact of Sarbanes-Oxley Act of 2002 on Venture Capitalists.

The Act will give pause to venture capitalists who fund start-up outsourcing services providers. It raises the legal liability of VC’s who serve on boards of directors, particularly if the portfolio company is targeting an IPO and board membership remains an important component of the VC relationship, compensation, “protection” of VC-organized investor interests and generally investment management.

Impact of Sarbanes-Oxley Act of 2002 on International Outsourcing Services Providers.

Being incorporated outside the United States may have its advantages as well as its disadvantages. Under the Sarbanes-Oxley Act of 2002, foreign companies whose shares are traded on U.S. stock exchanges must comply with new obligations on financial reporting, audit and corporate governance. Foreign services providers such as Accenture Ltd., of Bermuda, that were organized outside the United States prior to relevant “cutoff” dates are likely not to suffer the consequences of U.S. governmental retaliation for foreign “inversion” operations. Unless their securities are listed on a U.S. securities exchange, such foreign services providers may enjoy regulatory freedoms, but such freedoms may elicit suspicion by investors and prospective customers due to the lower level of corporate governance discipline and public disclosure of material information. If you have any question about this process, please contact one of our attorneys.