Module 10 A Glimpse into the Legal World

Module Ten: A Glimpse into the Legal World

When dealing with corporate finances, strict regulations shape how financial information is gathered, stored, and reported. As a manager, you must understand why the laws exist, what they require, and how you factor into the situation. There are severe consequences when these laws are not followed. Of course, there may be controls already in place at your company. Still, if you intend to be involved with your company's financial activities, it is best to be familiar with some of the legal requirements businesses must follow. In this module, you will learn the following topics:

  • A brief history
  • The Sarbanes-Oxley Act
  • CEO/CFO certification
  • 8th Company Law Directive

Let us look at a brief history of the government's involvement in the financial dealings of corporations in the United States.  

A Brief History

Abuses in the stock market in the 1900s forced the government to intervene and regulate how companies sold securities. The origins of financial regulations began back in 1933 with the enactment of the Securities Act of 1933. Here is a brief list of subsequent acts throughout history:

  • The Securities Act of 1933 regulated the offer and sale of securities.
  • Securities Exchange Act of 1934 governed the secondary trading of securities like stocks and bonds.
  • Trust Indenture Act of 1939 requires the appointment of an independent trustee to serve for the benefit of the holders of securities.
  • The Investment Company Act of 1940 helped reduce or eliminate conditions affecting the public interest and the interest of the investors. 
  • Investment Advisers Act of 1940 regulates the actions of investment advisers. 
  • Sarbanes-Oxley Act of 2002 sets standards for all public company boards, management, and accounting firms in the United States. 
  • Credit Rating Agency Reform Act of 2006 improved the rating quality of companies, protecting investors. 

The U.S. Securities and Exchange Commission is the agency that enforces federal securities laws.

The Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 became law on July 30, 2002. This law is also known as the following:

·       Public Company Accounting Reform And Investor Protection Act

·       Corporate And Auditing Accountability and Responsibility Act

·       Sarbanes-Oxley

·       Sarbox

·       SOX

The law was named after its sponsors, U.S. Senator Paul Sarbanes and U.S. Representative Michael G. Oxley. The bill was created after companies like Enron, Tyco International, Adelphia, Peregrine Systems, and WorldCom committed significant financial scandals.

The law regulates the standards for all U.S. public company boards of directors, management, and public accounting firms. The Securities and Exchange Commission (SEC) oversees the enforcement of this law.  

The law establishes the following:

  • Public Company Accounting Oversight Board, which performs the following
  • Oversee audits of public companies
  • Set audit reporting standards
  • Ensures compliance of public accounting firms
  • Requires accounting firms to register with them
  • Instructs company board of directors to establish auditing, quality, and ethics standards
  • Provide rules for auditing standards
  • Auditor Independence
  • Corporate Responsibility
  • Enhanced Financial Disclosures
  • Analysis of Conflicts of interest

Security and Exchange Authority

CEO/CFO Certification

Section 302 of the Sarbanes-Oxley Act of 2002 requires the CEO and CFO to certify the annual or quarterly report. The Corporate Responsibility for Financial Reports area of the law outlines the following requirements for the CEO and CFO:

  • The signing officer has reviewed the report
  • Based on the officer's knowledge, the report does not contain any untrue statement
  • Based on such an officer's knowledge, the report fairly presents in all material respects the financial condition
  • The signing officers are responsible for establishing and maintaining internal controls
  • The signing officers have disclosed to the issuer's auditors and the audit committee of the board of directors all significant deficiencies in the design or operation of internal controls
  • The signing officers have indicated in the report whether or not there were significant changes in internal controls

8th Company Law Directive

The 8th Company Law Directive is the European version of the Sarbanes-Oxley Act of 2002. This law was enacted in 2006. Most of you may not have to worry too much about this law unless your organization is based in Europe.

Knowing about this law helps will allow you to become more globally aware of how corporate finances are regulated.

Lesson Summary

As a manager of corporate finances, you must understand the laws that shape their operations. This module covers the legal requirements in the United States and Europe, including: - A brief history of laws in the US - The Sarbanes-Oxley Act - CEO/CFO certification - 8th Company Law Directive In the US, the Securities Act of 1933 introduced regulations to prevent and limit abuses in stock trading. Subsequent acts, including the Investment Company Act of 1940, Investment Advisers Act of 1940, and the Sarbanes-Oxley Act of 2002 strengthened financial regulations around the offer and sale of securities, corporate responsibility, and financial disclosures. The Sarbanes-Oxley Act of 2002 established a Public Company Accounting Oversight Board to oversee performance reviews and compliance of accounting firms. It also requires the CEO and CFO to certify their company’s financial reports. In Europe, the 8th Company Law Directive of 2006 is the equivalent of the Sarbanes-Oxley Act of 2002, and addresses similar corporate responsibility topics.

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