E6 Legislation Fighting conflicts with a pen: makes business towtheline What has changed? seeits first penalty imposed. The way lawmakers saw it y just about every link in the chain of in. boards and analysts: formationbetween ‘corporations nd in nies must disclose whethera board’s audit committee has at least one dividual investors had been compromised or was vulni said David Hardesty, an accountant and author of Corporate Governance and Accounting quent rule making, the Securities and Exchange Commission said companies must disclose the financial expert's name, define his quali- fications and state whether the ex- purpose, Sarbanes-Oxley attempts to fix pert is independent of management. @ Independence day: It will be it,” Hardestysaid. “These problems were created by people who were willing to generally “unlawful” for an ac: take the risk that they could cook the books andget away withit. In today’s en The law aims to make financial in: formationreleased by public companies as accurateas possible by tweakingthe checks and balances alreadyin place. It boosts the independence of corporate boards and auditors and threatens seri ous sanctions for chief executive and chief financial officers who violate the rules, Among the highlights @CEOs and CFOs must certify reports submitted to the Securities and Exchange Commission. Criminal pen alties of up to 20years can be imposed if records arealtered, destroyed or inac curately stated. © A corporateboard’s audit commit tee mustconsistentirelyof independent directors and must take control of hir ing, overseeing and compensating the company’s auditor. To avoid situations Aswriated Pres file photo The law also called for greater finan: cial disclosures, extended the statute of limitations and expanded the penalties for securities fraud and created new tepid response, port corporate abuses. a job and led to an unlikely ultimately put Pitt outof term elections on the horizon andin vestors threatening to show their out- fortablethat | know what youknow.Tell memoreinsteadofle responding rules. One provisionnot yet rage at the polls, Sen. Paul Sarbanes, Beth Brooke, a partner with Ernst & ineffect is supposed to prevent conflicts of interests for stock research analysts at securities firms. New internal ac countingcontrols won't takeeffect for another year. It may take years for the law to be fully understood ‘It’s very hard for the individual in to the committee head of the Anierican Institute of Indi rather than to management. @ A new quasi-governmental board vidual Investors. ‘There will be dividends, but they may not pay fora while.” Congress nearly doubled the SEC's budget forthe fiscal year beginning Oct 1, to $841.5 million, and the agency, strained by ongoing investigations and prosecutions, nowplans to expandits staff as it steps up routine reviews of D-Md., and Rep. MichaelOxley, R-Ohio, Young, said the firm’s auditors are authored a bill that would accelerate regulatory changes long resisted by Wall Street. ‘Thelegislation doesn’t really present any brand new ideas, said Richard Syl- spending much more time with audit committees. The frequencyof meetings z asking morequestions, too, and may be less concerned abouttaking adversarial started internal certification processes in which line managers attestto thea curacy oftheir own reports. Boards 2 liam Donaldson has vowed to shift the questioning auditors more vigorously and directors are re-examining their own performan “Some CEOs havesaid to me that @ Accounting firms are prohibited balance of power away from “imperial CEOs” and back toward boards and investors. deepened andbroadened. Auditors are ial historian at New York annual reports and otherfilings from public companies. SEC Chairman Wil- from providing most nonaudit services for the public companies they audit. To maintain independence, the jaw requires the rotation of lead audit part ners every five years and limits the ability of auditors to take jobs in senior hasincreased,shesaid,andthelevel of questioning from board members has University’s Stern School of Business. To someextent, he said, it may be simply “areminderto corporate executives about what they should be doing a reminder with some newteeth.” In practical terms,the lawhas forced people to ask more questions. Chiefexecutives are demanding more information before signing off on financial statements and somecompanies have @ Cleaning up Wall Street: New rules separate Wall Street's stock analysis from its deal-making side — and punish companies “retaliate” against analysts fraud increased from to 10 years. Source: The Wall Street Journal positions with CFOs now that they report exclusively to the board. The demand for independent finan- cial experts as board membersha rocketed, with retired CFOs and audit partners among the most attractive candidates. Prospective board members face a host of new concerns, with liability insuranceoften topping thelist. Before agreeing to join a board, many want to talk to the company’s auditors, lawyers and other board members, said Andrea Redmond, co-managerof board services at recruiting firm Russell Reynolds. ment Forum. Somedecidethecost is too past year. Many companiesare seeinglegal, accounting and consulting fees rise as they try to comply. The more bureaucratic aspects of the law ean be especially frus- trating for some executives; they might object to the ideaof forming big committees, establishing extensive procedures and creating tedious papertrails. The law’s detractors grumble that the requirements are too onerous, but the long-term benefit of providing more comprehensive information to investors and improving corporate defenses against internalfraud far outweigh any additional costs, said Patrick McGurn, chief counsel for Institutional Shareholder Services. A survey by the Business Roundtable, an industry group made up of chief executives, found that many companiesalready have taken steps to comply. Despite some complaints, the changes have only been a burden for companies that did not already have good practices in place, said Franklin Only 40 percent of companies expect Raines, CEOofFannie Mae and chair- they've taken some timeto be more fi- to be in immediate compliance when the nancially current,” said Steve Mader, lawtakesfull effect, according toa study man of the group's governance task force. 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Maximumpenalty for mail and wire The Bush administration's first SEC they serve. 1 who who criticize them. @ Jail threat: Makes tampering chairman, Harvey Pitt, arrived in 2001 with a gentler approachto big business financial positions at the companies | nicknamed Peekaboo. The board of five “financially literate” members answers to the SEC. by the Business Performance Manage- sides of thepolitical fence. With mid ready in place, but parts won't takeef fect until regulators and stock ex: tween two congressmen fromopposite | high; the number of companies going private, and thus no longer subject to the law, has jumped 22 percent in the changes write and formally adopt cor- Much ofthe law's provisions areal alliance be- of not more that $1 million and a sentence ofnot more than 10yearsin jail or both. @ Watchdog:Theact established the Public Company Accounting Oversight Board (PCAOB) — quickly president of the executive search firm Christian & Timbers. “Whatthat really means is they've grabbed theirchieffinancial officers and spent much more time with them, saying, ‘Make me com- must report dire powerto issue subpoenas and impose sanctions forrules violations. 9 billion failure eclipsed it as the gest bankruptcy inhistory. The stunning sequenceof fiascoes that followed, and criticismof the SEC’s rulesto protect whistle-blowers who re vestor to say, ‘OK, what have I madeoff of Sarbanes-Oxley?”” said John ese, board sets quality controlstandardsfor audits, inspects andinvestigates regis tered accounting firms and has the countingfirm to provide any major nonaudit service (bookkeeping, for example) to a client while completing that company’s audit. @Taking responsibility: The CEO and CFO must swear to the President Bush shakes hands with Sen. Paul Sarbanes, D-Md., right, as Rep. Mike Oxley, R-Ohio, applauds prior to signing into law the Sarbanes-Oxley Act in July. that could leadto conflict, the auditor has beenestablished to oversee audits, a provision expected to have a greater impact on theaccounting industry than any since the 1930s. The five-member stock reason for the absence. In a subse- guide for securities professionals. “Each place where information could be altered, either inadver y or on vironment, the feeling is that if we cook Street “financial expert” and if not, the Underthe Sarbanes-Oxley Act of 2002, a the books, we might get caught Wall @Better governance: Compa- accuracyof the company’s quarterly and annual financial reports. An officer whocertifies a report that does not conform to the act’s requirements of Sarbanes-Oxleyfaces a fine * Interest compounded daily can be paid monthly, quarterly, semiannually, annually or at maturity The Annual Percentage Yields aboveareavailable through August 2, 2003. This announcement is neither an offer to sell nor a solicitation of an offer to buy Notes. The offer is made only by Prospectus to residents of select states, including UT and CA, The Notes are being sold by Advanta Corp. andthe proceedswill be used for general corporate purposes. 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