What changes can be expected from this new legislation?
In response to the almost daily reports of greed, corruption, fraud and opulence plaguing the top echelons of corporate America, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Act"). The intended consequence of the Act is to increase the reliability and accuracy of corporate reporting, accounting and audit practices. Public perception places the blame on rich executive compensation packages and weak governance standards. L&A sees the impact of the Act in three main areas: increased executive compensation, elimination of executive loans, and continued conflicting interests among the Big 4 auditors and consultants.
The full impact of the Act on executive compensation is not yet known; however, following the economic principle of risk-reward, L&A believes there are significant implications of this Act related to executive and board of director compensation. This legislation requires the CEO and CFO to take personal responsibility for the accuracy of the financial reports, with heightened penalties for misstatements. Through legislation, the risks associated with these executive and director positions have grown considerably, as evidenced by the rise in premiums for Director and Officer liability insurance, as well as auditor fees. As a logical result, the rewards will follow; and the compensation packages for the CEO, CFO, and directors will increase further. Additionally, the CEO and CFO positions have now been placed on equal playing ground due to their equal risks; the compensation for these positions may become more closely aligned with each other than in the past.
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