For the Anchorage Journal of Commerce

At the end of a year many of us unabashedly proclaim New Year's resolutions - what we intend to do differently or anew with the start of a new year. However, the tradition is not limited to individuals. Excellent opportunity Corporations and other business entities in Alaska have an excellent opportunity to learn from corporate scandals, mistakes and misdealings that have dominated American business news during 2002. Whether the news reports were of yet another failure of an officer or member of a board of directors to exercise a duty of care for his or her company or to exercise a duty of loyalty to that company, many of these events could have been prevented. That preventive action consists of two simple steps -

Establish and operate an audit committee composed of independent persons

• Establish and follow a code of business conduct and ethics for officers, directors and employees

To get your company moving in a positive direction for 2003, consider these steps as your first two items of business, i.e., resolution nos. 1 and 2, for the new year.

What is an audit committee?

But you say, what is an audit committee?

Sarbanes-Oxley Act of 2002. The U.S. Congress has provided guidance on both steps (as well as several other corporate governance issues) through enactment of the Sarbanes-Oxley Act of 2002 (SOA) applying to "public companies." The act was signed by President Bush and became law in July of this year. The Securities and Exchange Commission (SEC) has since been busy proposing and adopting rules to implement and interpret SOA.

Committee of the board . Under SOA, an audit committee is a committee of, and composed of members of, a company's board of directors. It is established for the purpose of overseeing the accounting and financial reporting process and audits of financial statements for the company.

The SOA also provides that an audit committee is directly responsible for the appointment and compensation of the external auditor employed by the company for the purpose of preparing or issuing audit reports or related work.

Finally, under SOA the audit committee is responsible for establishing procedures for handling complaints received by the company regarding accounting, internal auditing controls, and audit matters and confidential, anonymous submission by company employees of their concerns about questionable accounting or auditing matters.

An audit committee is typically composed of three or more members of the board. When the board does not have a separate, identifiable audit committee, SOA provides the functions and responsibilities of the committee are handled by the full board.

Independence . Under SOA, the members of an audit committee must be independent. The SOA provides, to be "independent," a member of the committee may not (other than in his or her capacity as a member of that committee, the board or another committee of the board) -

• Accept any consulting, advisory, or other compensatory fee from the company
• Be an affiliated person of the company or any of its subsidiaries

An "affiliated person" is one that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.

What is a code of ethics?

You may further ask, what is a code of ethics?

The SOA defines a code of ethics as a codification of standards reasonably designed to promote -

• Honest and ethical conduct
• Full, fair, accurate, timely and understandable disclosure in periodic reports by management
• Compliance with applicable governmental rules and regulations

Neither SOA nor the proposed rules of the SEC thus far include a "model" code of ethics. The SEC has stated that it believes such a code may vary from company to company and that decisions as to specific provisions of a code should best be left to the company adopting it.

Application to my company?

Public company. The provisions of SOA, to a large extent, including the provisions on audit committees and codes of ethics, apply to public companies. That is, they apply primarily to a company having securities registered under the Securities Exchange Act of 1934 or, having registered an offering of its securities under the Securities Act of 1933, as amended, is subject to the periodic reporting requirements of the Exchange Act. If your company is such a public company, it is subject to SOA's audit committee and code of ethics provisions. It is also subject to the final rules of the SEC regarding SOA.

Not a public company. You may say, my company is not a public company, so why should I even consider SOA's terms? That's a good question. However, the point here is that, even if your company is not presently subject to SOA, the provisions of the act are useful guidelines in addressing these issues.

Preventive medicine. Issues surrounding the need for objective, independent review by a company of its audit and accounting functions are critical to the company's not becoming another sordid news story - at best, one of accounting or audit irregularities, and, at worst, one of embezzlement and fraud. Think of establishing and operating an audit committee as preventive medicine to avoid the malaise of these accounting and auditing issues.

Tailor-made for you. While under SOA a code of ethics is mandated for the chief executive officer and chief financial officer of a public company, you might consider its application to all officers, directors and employees of your company.

You might further consider expanding the code to become a code of business conduct and ethics. As such, the code could address conflicts of interest and compliance with applicable laws and regulations and provide for enforcement in the context of your company. Setting forth in such a code a resolve by the company to deal fairly with its customers, suppliers, competitors and employees, projects a positive image for conduct of the company's business. In this way, the code becomes tailor-made for your company.

It makes good sense

Establishing and operating an audit committee and establishing and following a code of business conduct and ethics are not only good for the company, they are good for its investors and the community and marketplace in which it operates. Try them for 2003 and resolve to keep them in place for the full new year. It makes good sense. Happy New Year!

*Mr. Brecht is managing shareholder and an attorney in private practice with the law firm of Wohlforth, Vassar, Johnson & Brecht, A Professional Corporation, with offices in Anchorage, Alaska. Mr. Brecht's concentration of practice is in state and federal securities law, corporate, and financial law. The content of this article was not prepared as, and must not be construed as, legal or investment advice to anyone. He may be reached via email at jbrecht@wvjb.com.

Printer Friendly View
Add To Favorites