Sarbanes-Oxley and the Practice of Financial Relations

By T.L. HEADLEY
MBA, MA, BA, AAMS
Principal, The Genesis Group
In the wake of the seemingly endless corporate financial scandals of the late-1990s, Congress adopted a broad reform package known as the Sarbanes-Oxley Act in 2002.
What is Sarbanes-Oxley and why should those of us engaged in public relations practice – either as corporate counsels or consultants – know and understand its requirements and our responsibilities?
The short answer to both questions is “full disclosure.”
The scandals of the 1990s resulted from companies utilizing “creative accounting” to artificially inflate earnings, driving up stock prices. In many cases, corporate executives reaped multi-million dollar bonuses and made additional millions exercising their stock options.
Ultimately, when the bill finally came due, the losers were the shareholders, retirees whose pensions were largely based on company stock and employees who lost their jobs as a result of layoffs and company bankruptcies.
The scandals widened to include investment firms, which were found to be utilizing illegal trading schemes to boost their own bottom lines at the expense of investors, and “independent” auditing firms found to be complicit with corporate officers in misrepresenting corporate financial information.
Sarbanes-Oxley was intended to tighten corporate disclosure requirements and to hold corporate executives responsible for accurate and full disclosure of the financial status of publicly traded companies.
The requirements of Sarbanes-Oxley may be divided into three categories: certification, auditability and disclosure.
Sarbanes-Oxley requires CEOs and CFOs of publicly traded companies to certify financial statements. Those who knowingly certify falsely are personally liable for criminal and civil penalties. This so-called C-level certification is essentially the corporate executive’s personal guarantee that processes are in place to assure the proper flow of information.
The second primary mandate of the act is auditability, which requires companies develop and publish internal processes in standard ways so outsiders can know that appropriate controls are in place.
Finally, under the act’s disclosure mandates, companies must report financial results and material changes in corporate financial condition or operations “on a rapid and current basis.”
Public relations counsels – either staff or consulting – play a key role in all three areas, but particularly in the last.
It is increasingly important for those engaged in public relations to speak the language of business – to know what a 10-K or 10-Q report is, to be able to dissect and understand the contents of a financial statement and know what “off-balance sheet transaction” means. Unfortunately, few public relations professionals have a background in business or finance, and few financial professionals have experience or knowledge of public relations. There are few programs available that provide this combination of skills.
Digging through the often arcane requirements of Sarbanes-Oxley, public relations officers and consultants must thoroughly familiarize themselves especially with the requirements of Section 302 of the act.
Section 302 is entitled “Corporate Responsibility for Financial Reports” and details new reporting requirements and who in the corporate structure bears responsibility for the accuracy and truthfulness of the reports.
Section 302 requires the principal executive officer or officers and the principal financial officer or officers, or persons performing similar functions, certify in each annual (10-K) or quarterly (10-Q) report filed or submitted that:
the signing officer has reviewed the report
based on the officer’s knowledge, the report doesn’t contain any untrue statement of material fact or omit any material fact to make the report misleading;
based on the officer’s knowledge, the financial statements and other financial information included in the report, fairly represent in all material respects the financial condition and results of operations of the company for the periods represented in the report.
Section 302 also explicitly states that the signing officers are “responsible for establishing and maintaining internal controls” and that they design internal controls to ensure that material information relating to the company is reported on a timely basis to the officers by support staff. The officers are also required to certify that they have evaluated the effectiveness of the internal controls within 90 days of the report and that they have presented in the report their conclusions about the effectiveness of the controls.
Officers are also required to disclose to independent auditors and the company’s audit committee their conclusions of the effectiveness of the controls, any and all “significant deficiencies” and “any fraud that involves management or other employees who have a significant role in the issuer’s internal controls.”
Last, the signing officers are required to indicate in the report whether there have been “significant changes” in internal controls or other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions taken.
Three other sections are vital for public relations and financial relations practitioners to review and understand.
Section 401 details the content requirements of the financial reports
Section 406 of the act establishes a code of ethics for senior financial officers.
Section 409 of the act mandates “real time disclosures.” Companies and their responsible officers are required to “disclose to the public on a rapid and current basis such additional information concerning material changes in the financial condition or operations of the issuer, in plain English, which may include trend and qualitative information and graphic presentations necessary or useful for the protection of investors and in the public interest.”
Finally, it is imperative for public relations and financial relations professionals to understand that they are at the front lines of compliance with the mandates of Sarbanes-Oxley. It has never been more important to observe closely the mandates of our own code of ethics. We are required to provide good counsel to clients and/or our employers. Also, we can’t sit back and say, “finance is not our responsibility.” It is our primary responsibility. Every other responsibility is peripheral to our responsibility to the shareholder and the general public. If we are ever confronted with the choice between this responsibility and the desires of company management, there is no room for hesitation.
Note: For those public relations professionals without advanced training in finance, a very good and easily understood primer is available at http://www.investopedia.com/. If you have any questions, or would like a copy of the PowerPoint presentation that accompanies this article, please contact me at tlheadley@thegenesisgroupbc.com.
About the Author: T.L. Headley is an independent public and financial relations consultant. He is principal of The Genesis Group, a full-service public relations consultancy based in Ona, WV. Headley is formerly senior writer for The State Journal and also served as communications director for the West Virginia Department of Agriculture. He currently serves as a contributing editor for WV Inc. magazine. He holds an MBA in finance and management.