Sarbanes Oxley and Legal risk 1283



  • Thank you all for your responses.
    I am just trying to find out whether SOX/1934 Act specifically requires disclosure of ‘potential legal risks’ or such disclosure is simply considered ‘best practice’ under the requirement to disclose all potential risks.
    Again, if SOX/1934 Act specifically refers to disclosure of legal risks , please refer me to that specific section.
    Thank you again for your assistance.



  • Thank you all for your responses.
    I am just trying to find out whether SOX/1934 Act specifically requires disclosure of ‘potential legal risks’ or such disclosure is simply considered ‘best practice’ under the requirement to disclose all potential risks.
    Again, if SOX/1934 Act specifically refers to disclosure of legal risks , please refer me to that specific section.
    Thank you again for your assistance.
    Are you looking for guidance in disclosing contigent legal liabilities (pending or open legal litigation that may lead to an unfavorable settlement) or general business risks (potential litigation based on the business environment that you operate in)?



  • Are you looking for guidance in disclosing contigent legal liabilities (pending or open legal litigation that may lead to an unfavorable settlement) or general business risks (potential litigation based on the business environment that you operate in)?
    The latter is what I’m interested in. However, the confusion starts from the very beginning, where the thread’s author stated that disclosing legal risks (specifically) is a new requirement under SOX, and then went on to give examples of some companies disclosing ‘potential legal proceedings in the normal course of business’ as a general business risk.
    Therefore, let me put my question this way: If I am a SEC registrant, who has no pending/open litigation at year end, am I required by SOX to say something about ‘potential legal proceedings in the normal course of business’ in my MD-and-A and/or AIF?
    Hope that clarifies my question. Sorry for the confusion and thank you for your patience.



  • Or again, based on the author’s initial example:

    WE FACE CERTAIN LITIGATION RISKS

    We are a party to lawsuits in the normal course of our business.

    Litigation can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, results of operations or financial condition.’

    WHY CISCO and all public companies explain things like that to the public?
    Because they speak about profits… but they don’t really know… they are not sure… because of the legal risks. Perhaps, they will have to pay MUCH money after a court decision… It is also a cash flow issue…

    The question is: Was the public company in this example specifically required by SOX to add such comment even if it had no outstanding litigation at year end or the author means that such comment is desirable under the principles of disclosure of general business risks?
    Sorry, this makes quite a difference… I would appreciate if we can clarify this to see what is REQUIRED and what is RECOMMENDED.



  • NO. SOX does not require this language. It is however, recommended.
    Every public company will have differing disclaimers in it’s safe-Harbor language.
    Here is a link to an overview of safe-harbor language that is generally used in any type of news releases or MD-and-A by public companies -
    The 1934 Securities Act does not specifically identify the language that is to be used in these situations. The SOX Act of 2002 did not add anything to this. George’s mention of increased legal risk more relates to the various legal penalties that a company could be hit with under the SOX Act.
    A disclosure duty exists where a known trend, demand, commitment, event or uncertainty is both presently known to management and is reasonably likely to have a material effect on your financial condition or results of operation. This is from Rule 175© under the securities exchange act of 1933 and rule 3b-6 of the Exchange Act of 1934.



  • Sorry for the delay I was traveling.
    Bogyman, let’s go to your very interesting questions.
    Sarbanes Oxley is not only the Act. It is also every final rule after the act. The interpretations of the act are very important, and we have to monitor the final rules and the web sites (PCAOB, SEC) every month.
    The same is true also with the Securities Exchange Act of 1934.

    1. You must read the following very important document. SEC explains what to include in the form 10-K
      http://www.sec.gov/about/forms/form10-k.pdf
      ‘This Form shall be used for annual reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) (the Act ) for which no other form is prescribed. This Form also shall be used for transition reports filed pursuant to Section 13 or 15(d) of the Act.’
      FORM 10-K
      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 GENERAL INSTRUCTIONS
      Item 3. Legal Proceedings.
      (a) Furnish the information required by Item 103 of Regulation S-K ( 229.103 of this chapter).
      (b) As to any proceeding that was terminated during the fourth quarter of the fiscal year covered by this report, furnish information similar to that required by Item 103 of Regulation S-K ( 229.103 of this chapter), including the date of termination and a description of the disposition thereof with respect to the registrant and its subsidiaries.
      If you read the text, you see that they speak about the Regulation S-K ( 229.103). This is something very important.
    2. Regulation S-K
      http://www.sec.gov/divisions/corpfin/forms/regsk.htm#leg
      Application of Regulation S-K. This part Reg. 229.103. Item 103.
      Describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject. Include the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. Include similar information as to any such proceedings known to be contemplated by governmental authorities.
      Instructions to Item 103.
    3. If the business ordinarily results in actions for negligence or other claims, no such action or claim need be described unless it departs from the normal kind of such actions.
    4. No information need be given with respect to any proceeding that involves primarily a claim for damages if the amount involved, exclusive of interest and costs, does not exceed 10 percent of the current assets of the registrant and its subsidiaries on a consolidated basis. However, if any proceeding presents in large degree the same legal and factual issues as other proceedings pending or known to be contemplated, the amount involved in such other proceedings shall be included in computing such percentage.
    5. Notwithstanding Instructions 1 and 2, any material bankruptcy, receivership, or similar proceeding with respect to the registrant or any of its significant subsidiaries shall be described.
    6. Any material proceedings to which any director, officer or affiliate of the registrant, any owner of record or beneficially of more than five percent of any class of voting securities of the registrant, or any associate of any such director, officer, affiliate of the registrant, or security holder is a party adverse to the registrant or any of its subsidiaries or has a material interest adverse to the registrant or any of its subsidiaries also shall be described.
    7. Notwithstanding the foregoing, an administrative or judicial proceeding (including, for purposes of A and B of this Instruction, proceedings which present in large degree the same issues) arising under any Federal, State or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment shall not be deemed ‘ordinary routine litigation incidental to the business’ and shall be described if:

    A. Such proceeding is material to the business or financial condition of the registrant;
    B. Such proceeding involves primarily a claim for damages, or involves potential monetary sanctions, capital expenditures, deferred charges or charges to income and the amount involved, exclusive of interest and costs, exceeds 10 percent of the current assets of the registrant and its subsidiaries on a consolidated basis; or
    C. A governmental authority is a party to such proceeding and such proceeding involves potential monetary sanctions, unless the registrant reasonably believes that such proceeding will result in no monetary sanctions, or in monetary sanctions, exclusive of interest and costs, of less than USD100,000; provided, however, that such proceedings which are similar in nature may be grouped and described generically.
    3. Yes, there are new requirements under Sarbanes Oxley. SARBANES OXLEY IS NOT ONLY THE ACT, BUT THE INTERPRETATIONS, IN THE NEW LEGAL AND POLITICAL CONTEXT.
    Well, the interpretations are different now. The disclosure requirements are now more important. There is no room to ‘forget’ to include legal proceedings after Sarbanes Oxley and all the certifications.
    After Sarbanes Oxley, Regulation S-K, Item 103Legal Proceedings is more important. And the interpretations from the court are VERY bad for companies… here is the NEW legal risk
    Example:
    In April 2003, in Small v. Fritz Companies, Inc., the California Supreme Court ruled that a shareholder who neither bought nor sold stock, but who merely held on to shares he already owned, could sue a company if its public statements turned out to be false or misleading.
    That is why companies must be very careful
    There are several new rules. Another example: Companies must evaluate and, if material, disclose liabilities from actual or threatened legal proceedings, and financial impacts that may result from emerging trends in environmental regulations.



  • Hi George,
    Can I run a hypothetical situation by you with this one please ?
    OK, under SOX 409, is it hypothetically necessary for a corporation under SOX to do a full formal risk analysis of the business, because if any of those risks materialise, couldn’t shareholders subsequently sue the company board for negligence over risk assessment ?
    In other words, to prevent a legal risk of board negligence materialising, would SOX companies have to perform a comprehensive business risk assessment ?



  • kymike, lekatis:
    Thanks a lot for your detailed responses. I really appreciate your time.



  • Bogyman,
    Thank you for the opportunity to discuss more about this serious issue.
    MBAStudent,
    Thank you for the hypothetical situation.
    Yes. Companies have to perform a comprehensive business risk assessment. and, disclose the results to the public. Please read carefully:
    FORM 10-K: http://www.sec.gov/about/forms/form10-k.pdf
    PART I
    Item 1. Business.
    Furnish the information required by Item 101 of Regulation S-K ( 229.101 of this chapter) except that the discussion of the
    development of the registrant’s business need only include developments since the beginning of the fiscal year for which this report is filed.
    Item 1A. Risk Factors.
    Set forth, under the caption Risk Factors, where appropriate, the risk factors described in Item 503© of Regulation S-K (229.503© of this chapter) applicable to the registrant.
    Provide any discussion of risk factors in plain English in accordance with
    Rule 421(d) of the Securities Act of 1933 (230.421(d) of this chapter).
    Item 1B. Unresolved Staff Comments.
    If the registrant is an accelerated filer or a large accelerated filer, as defined in Rule 12b-2 of the Exchange Act (240.12b-2 of this chapter), or is a well-known seasoned issuer as defined in Rule 405 of the Securities Act (230.405 of this chapter) and has received written comments from the Commission staff regarding its periodic or current reports under the Act not less than 180 days before the end of its fiscal year to which the annual report relates, and such comments remain unresolved, disclose the substance of any such unresolved comments that the registrant believes are material. Such disclosure may provide other information including the position of the registrant with respect to any such comment.
    Item 2. Properties.
    Furnish the information required by Item 102 of Regulation S-K ( 229.102 of this chapter).
    Item 3. Legal Proceedings.
    (a) Furnish the information required by Item 103 of Regulation S-K ( 229.103 of this chapter).
    (b) As to any proceeding that was terminated during the fourth quarter of the fiscal year covered by this report, furnish information similar to that required by Item 103 of Regulation S-K ( 229.103 of this chapter), including the date of termination and a description of the disposition thereof with respect to the registrant and its subsidiaries.



  • Hi George,
    Thanks for your reply on this.
    Just following on from your point that you mentioned above, if a business has to do a comprehensive risk assessment based on Form 10-K and Regulation S-K, why does this not include enterprise risk management (or in other words cultural risk management) ? In fact, if you look at Ruglation S-K’s description of risk in Reg. 229.503, it could be interpreted as needing ERM…
    It strikes me as bizarre, because surely ERM is very often the biggest risk that companies face - indeed arguably that was the biggest risk Enron ignored ?



  • ERM is more than Sarbanes Oxley. It is not necessary for compliance. All the discussions and the interpretations of SOX by SEC and PCAOB agree that COSO is enough.


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