Valuation analysts who practice in the ad valorem property tax arena often rely on the published financial statements and other financial/operational disclosures of guideline publicly traded companies. This is particularly true with regard to centrally assessed properties and/or properties assessed using the unitary or unit value concept of valuation. This includes properties in the public utility, transportation, communication, energy, and similar cross-jurisdiction industries. Accordingly, property tax valuation analysts depend on the reliability of data and adequacy of disclosure of the annual and periodic reports that public companies file with the Securities and Exchange Commission (SEC). And, that reliability and adequacy depends, in good measure, on (1) the integrity of the public company's CEO and CFO and (2) the independence of the public company's auditors.
The Sarbanes-Oxley Act of 2002 (the Act) was signed by President Bush on July 30, 2002. The Act dramatically reforms the financial/management disclosures and corporate governance/responsibility of public companies. The Act also affects how the public accounting profession will perform its function of auditing public companies. The Act's objectives are:
1. To reform the oversight of the public accounting profession;
2. To improve the quality and reliability of corporate financial reporting; and
3. To strengthen the independence of auditors and public company audit committees.
First, the Act creates an independent accounting oversight board (1) to oversee the conduct of public accountants and (2) to strengthen auditor independence from public company management. One of the most significant ways in which the Act changes the relationship between public accountants and public company management is by limiting the scope of non-audit services that auditors can offer their clients. Second, the Act includes provisions that clearly establish the specific responsibility of public company management (1) for financial reporting and (2) for the quality of financial disclosures made by public companies. The Act requires that public company CEOs and CFOs take direct responsibility for the presentation of the material in their companies' financial reports.
This article will summarize the major provisions of the Act. Valuation analysts who rely on public company financial disclosures related to property tax appraisals should be aware of the provisions of the Act.
Summary of the Act
The Act amends certain provisions of the Securities Act of 1933 (the Securities Act) and the Securities Exchange Act of 1934 (the Exchange Act). The Act also amends certain sections of the Investment Company Act of 1940 (the Investment Act) and the Investment Advisors Act of 1940 (the Advisors Act). This article occasionally refers to that historical legislation in its discussion of the Act.
The provisions of the Act regarding corporate governance, disclosure, auditors, and related matters generally apply to "issuers." The term "issuer" means an issuer of any securities registered under the Exchange Act (1) which is required to file reports under Section 15(d) of the Exchange Act or (2) which has filed a registration statement under the Securities Act that has not yet become effective. Some of the provisions of the Act, such as the requirement for notice of blackout periods and certain of the criminal penalties, have broader application.
1. Accounting Oversight Board. The Act creates a new Public Company Accounting Oversight Board, with broad powers over the public accounting profession and independent audit firms.
2. Auditor Independence. Auditors may no longer provide certain specified non-audit services to their audit clients. Permitted non-audit services must be pre-approved by the issuer's audit committee. Lead audit partners must be rotated every five years. Auditors must report to the company audit committee regarding (1) critical accounting policies, (2) possible alternative treatments of financial information, and (3) other material written communications between the auditor and company management. An accounting firm may not audit an issuer if the company's CEO, CFO, controller, or chief accounting officer (1) was employed by the accounting firm and (2) participated in the audit in any capacity during the last year.
3. Board of Directors Audit Committees. The requirements for an issuer to be listed on a stock exchange or on NASDAQ listing standards must include a provision that the corporation's audit committee be directly responsible for the appointment, compensation, and oversight of the company auditors. Also, the audit committee must be comprised only of independent directors.
4. Certification of Periodic Financial Reports. Each time the issuer files a periodic report that contains financial statements, that report must include a written statement by the CEO and CFO. That statement must certify that the report (1) complies with the Exchange Act and (2) fairly presents, in all material respects, the issuer's financial condition and results of operations. In addition, the Act empowers the SEC to issue rules requiring specified additional certifications.
5. Corporate Governance and Responsibility/Reimbursement of CEO/CFO Compensation. This provision relates to situations when an issuer restates its financial statements due to material noncompliance with financial reporting requirements as a result of misconduct. In such instances, the CEO and CFO must repay any (1) bonus, (2) other incentive-based or equity-based compensation received, or (3) profits on stock trades realized during the 12-month period …