In the seven months since the Sarbanes-Oxley Act (H.R. 3763) became law, publicly traded catalogers have been busily adding independent accountants and auditors to their boards of directors.
For instance, when Hanover Direct appointed Robert H. Masson to its board of directors in January, chairman/president/CEO Tom Shull said in a statement that “Bob brings to our board a depth of financial expertise that will greatly assist Hanover Direct as we continue to meet the increasing reporting demands under the Sarbanes-Oxley Act of 2002.” Masson, who has served in executive financial and treasury roles with Ford and PepsiCo, will also chair Edgewater, NJ-based Hanover’s audit committee.
Public companies have until April 26 to comply with Sarbanes-Oxley. Passed in January 2002 and signed into law on July 30 by President Bush, it was designed to protect shareholders of public companies from corporate accounting misdeeds in the wake of the Enron, Worldcom, and Tyco scandals.
Sarbanes-Oxley requires public companies to create an accounting oversight board, a subcommittee of the board of directors, to oversee all accounting from financial statements to tax returns. The audit committee must be made up of and run by independent financial experts. Though board members are typically compensated, members of the audit committee cannot receive fees through the company. Potential audit committee members can’t be employed by the company nor can they have a relative at the company.
The law also requires the audit committee members serve no more than two terms of five years. And two members of the committee must be certified public accountants.
In addition, Sarbanes-Oxley contains Draconian penalties for corporate rulebreakers. For example, corporate officers who knowingly sign false financial statements can face a hefty $5 million fine and up to 20 years in prison. If the company restates its earnings due to noncompliance of Sarbanes-Oxley, both the CEO and the chief financial officer must return any bonuses they earned that year.
“Sarbanes-Oxley puts the onus on directors of companies to be much more diligent in supervising the activities of their companies,” says Malcolm Appelbaum, president of New York direct marketing financial advisory firm AppleTree Advisors.
Diligent indeed. Former Wall Street analyst Ken Gassman has followed the direct marketing industry for 20 years and now sits on the board of directors at two publicly traded companies. Since the law was passed, audit committee meetings that used to last 15-30 minutes have been running in excess of three hours, Gassman says. “It’s a huge time commitment,” he notes, “but I believe Sarbanes-Oxley will tighten up auditing substantially.”
Because of Sarbanes-Oxley, Gassman says, the boards now request that the company auditors be present at board meetings. “We want the auditors to hear the questions we may ask senior management. We even invite the auditors to ask questions of senior management.” Also, the boards might now call in middle managers for answers.