Sarbanes-Oxley Helps Guide Public Authority Reform Proposal

Sarbanes-Oxley Helps Guide Public Authority Reform Proposal

Continued from the Home Page

Issued in late February, the Hevesi draft bill is one of many reform attempts—from Eliot Spitzer’s legislative bid to raise the governance standards of nonprofits to the European Commission’s latest plan to improve corporate oversight through audit proposals—to take their cue from Sarbanes-Oxley.

The comptroller’s draft, also referred to as the Public Authority Reform Act of 2004, stems from the findings of a Hevesi-sponsored study that, among other things, concluded that public authorities are responsible for approximately 90 percent, $35.4 billion, of total outstanding state-supported debt, yet operate with very little oversight or review procedures. The draft, therefore, seeks to strengthen board governance, cut down on waste and misconduct and bring the state’s 600-plus public authorities under tighter control.

In its effort to realize these objectives, the public authority proposal has adopted a diction and spirit that is strikingly similar to Sarbanes-Oxley. Both acts embody many of the same principles of independence, fairness, accuracy, transparency and accountability and are peppered with expressions—“enhanced oversight,” “public interest,” “public confidence,” “quality control,” “conflict of interest”—that are very similar in their corrective tone and intentions.

The Hevesi draft, however, draws even more explicit parallels to Sarbanes-Oxley, in some instances incorporating provisions that are nearly identical to the federal law.

One clear example is the auditor rotation requirement. Though Sarbanes-Oxley does not require firm rotation, it requires audit partner rotation every five years. Hevesi’s proposal stipulates that for certain public authorities, external auditing firms would have to rotate every five years, unless the authority’s governing board determined that it is not feasible to procure a different audit firm. In such cases, a different lead partner and reviewing partner within the same audit firm would be required every five years.

This section of the draft includes a list of prohibited nonaudit services for auditors of public authorities, just as Sarbanes-Oxley bans most “consulting” services outside the scope of practice of auditors.

Hevesi’s proposal also calls for the formation of a commission to undertake comprehensive reviews and oversee the activities of public authorities. The comptroller’s proposal would establish a “Temporary Commission on Public Authority Reform” to authoritatively inspect and regulate public authorities. Though different in scope and practice, this proposed oversight body bears a certain likeness to the Public Company Accounting Oversight Board that Sarbanes-Oxley created to regulate and discipline the auditing profession.

Corporate responsibility and independence are also chief objectives of Hevesi’s proposal. The draft bill stipulates that the boards of certain public authorities would be composed of a majority of independent members and would be responsible for forming an independent audit committee, a procurement policy committee and an employment and compensation committee. Sarbanes-Oxley requires audit committee members to sit on the board of directors and otherwise be independent.

The financial statement certification provision in Hevesi’s draft bill could have come directly from the same provision in Sarbanes-Oxley. Under the proposal, the CEO and CFO of certain public authorities would have to certify that they have reviewed the financial statements and that they do not contain any untrue statements or omissions of material facts. Under Sarbanes-Oxley, CEOs and CFOs also are required to affirm their company’s financials and must establish and maintain internal controls.

Sarbanes-Oxley, of course, also includes a number of other provisions, from penalties for fraud to restrictions on company loans, that are designed to protect investors and combat corporate malfeasance. Likewise, the Hevesi draft bill contains additional measures that are designed to produce good governance and protect New Yorkers who finance public authorities. These range from compensation disclosure requirements to limiting the influence of lobbyists to establishing a better process for awarding contracts.

Hevesi’s proposal has not yet been introduced in the state Senate or Assembly, nor has it been assigned a bill number.