The Sarbanes-Oxley Law: Key Requirements

Following are major elements of the 2002 federal law designed to heighten corporate accountability.

While the law was written for publicly traded companies, some nonprofit groups have adopted many of the provisions included here. Many state and federal legislators are debating whether nonprofit groups should be required to follow some of these provisions.

Audit committees

• Each member of the audit committee must serve on the board of directors. Committee members must also be independent, which means they can’t also serve as top managers of the company or receive compensation from the company for professional services they provide as consultants.
• The company must disclose if its audit committee has at least one financial expert or, if not, explain why.
• The audit committee must be directly responsible for hiring and overseeing the external auditor.
• The audit committee must have the authority to hire lawyers and other advisers if it needs outside help.
• The partner of an auditing firm who has primary responsibility for an auditor who is responsible for reviewing the auditmust be rotated every five years.
• The auditing firm generally cannot provide other services to the company, including bookkeeping and actuarial services.
• The auditing firm must report to the audit committee all critical accounting policies and practices that the company uses, as well as alternatives that have been discussed with senior managers.

Certifying financial statements

• Principal executive and financial officers must certify in writing that financial statements are accurate and fairly present the financial condition and operations of the company.
• Senior managers must maintain and assess the company’s internal financial controls.

Conflicts of interest and codes of ethics

• The company generally cannot make loans to any directors or executives.
• The company must disclose if it has adopted a code of ethics for senior financial officers or, if not, explain why.

Protecting whistle-blowers

• The company cannot punish employees who report suspected illegal activities within the organization. In addition, the audit committee must establish procedures for handling complaints, including anonymous ones, about accounting and financial matters.

Destroying documents

• The company cannot destroy, alter, or falsify documents and records to prevent their use in federal investigations and bankruptcy cases.