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The New World of Corporate Responsibility An Overview of the New Drivers of Corporate Responsibility: The Sarbanes-Oxley Act, NYSE Listing Requirements, and NASDAQ Proposal Discussion of Key Considerations and Intersection with Traditional Compliance Program and Internal Control Concepts.

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slide1

The New World of Corporate Responsibility

An Overview of the New Drivers of Corporate Responsibility: The Sarbanes-Oxley Act, NYSE Listing Requirements, and NASDAQ Proposal

Discussion of Key Considerations and Intersection with Traditional Compliance Program and Internal Control Concepts

Nancy Lanis

Senior VP & General Counsel

Curative Health Services

Hauppauge, NY

Michael L. Shaw

Senior Manager

PricewaterhouseCoopers LLP

Washington, DC

Jody Ann Noon RN, JD

Partner

Deloitte & Touche LLP

Portland, OR

slide2

It’s The Law!

  • “Swamped by Scandals
  • Corporate Cases Keep Top Lawyers Hopping”
  • The Washington Post

“SEC may ban auditors’ advice on taxes”

- CNN Money

  • “More Cases of Accounting Problems Lurk”
  • The Associated Press,
  • December, 2002

“In Corporate America

It’s Clean-up time.”

- Fortune, September 2002

  • “Keeping an eye on Corporate America.
  • Ethics officers suddenly feel relevant”
  • Fortune,
  • November 2002

“Only time and more indictments, not acts by the

SEC and Congress, can restore investor confidence”

- CNN Money, August 2002

  • “Sane Walk, Nicer Shoes;
  • Parading of Executives in
  • Custody Fuels New Debate”
  • New York Times,
  • November, 2002

PricewaterhouseCoopers LLP

1

slide3

It’s also expensive!

SEC Reporting and Disclosure ChangesSummary of Estimated Impact (Incremental Costs)

The added expenses as a result of increased regulatory requirements: (Assumes a "typical" Fortune 500 company with $3 billion in sales, global operations, an in-house internal audit function, in-house legal counsel and significant disclosure requirements.)

Source: Financial Executive, January / February 2003– “New Regulations: Preparing for the Unplanned Costs” By Johnsson and Wiechart

PricewaterhouseCoopers LLP

topics overview
Topics Overview
  • Sarbanes Oxley Act, NYSE and NASDQ Listing Requirements Overviews-Corporate Governance and Disclosures
  • Practical Impact on Compliance Standards and Corporate Governance
      • Integrity and Disclosure Requirements
        • Executives, Individual Directors
        • Board of Directors, Board Committees
        • Outside Auditor
      • Recommended Actions to Enhance Compliance Programs
    • Discussion
topics overview cont d
Topics Overview (cont’d)
  • Additional Aspects of Sarbanes-Oxley
      • Document Retention and Destruction
      • Whistleblowers
      • Attorney Reporting Responsibilities
      • Enforcement Penalties
    • Intersection with Compliance Programs
    • Discussion of Internal Controls
    • Question & Answers
sarbanes oxley act nyse and nasdaq listing requirements an overview nancy lanis

Sarbanes Oxley Act,NYSE and NASDAQListing RequirementsAN OVERVIEWNancy Lanis

Curative Health Services

sarbanes oxley act overview corporate governance and disclosures
Sarbanes Oxley Act Overview-Corporate Governance and Disclosures
  • Sarbanes-Oxley Act of 2002 (“SOA”) enacted July 30, 2002
  • Corporate scandals (Enron, WorldCom) provided impetus for Congress to act quickly
  • SOA approved by near unanimous vote in Congress (vote of 99-0 in the Senate and 423-3 in the House)
  • Fast pace of approval likely to result in need for numerous interpretations and explanations
  • Potential for far reaching impact on Corporate Governance and Conduct, Financial Reporting and the Public Accounting Profession
  • Also impacts legal community and investment banking analysts

Curative Health Services

sarbanes oxley act overview corporate governance and disclosures cont
Sarbanes Oxley Act Overview- Corporate Governance and Disclosures (cont.)
  • Several provisions of the SOA require detailed regulations by the SEC and other regulatory bodies
  • SOA aims to restore investor confidence in financial reporting and public capital markets
  • Broadly speaking the Act’s provisions seem to be built around the following principles:
      • Integrity
      • Independence
      • Proper Oversight
      • Accountability
      • Strong Internal Controls
      • Transparency
      • Deterrence

Curative Health Services

nyse and nasdaq listing requirements overview corporate governance and disclosures
NYSE and NASDAQ Listing Requirements Overview- Corporate Governance and Disclosures
  • Board of Directors of NYSE approved new proposals in August, 2002
  • Board of Directors of NASDAQ approved new proposals in May and July, 2002; Summary issued 10/10/02; Bulletin/New rule proposals issued 1/6/03
      • Heightened Corporate Governance standards through additional listing requirements
      • Some additional requirements beyond SOA requirements
      • SEC, after public comment period, will vote to approve proposals
      • SEC voiced intent to combine NYSE and NASDQ requirements

Curative Health Services

the impact of new standards on compliance programs and corporate governance nancy lanis

The Impact of New Standards on Compliance Programs and Corporate GovernanceNancy Lanis

Curative Health Services

practical impact disclosures and the integrity chain
Practical Impact- Disclosures and the Integrity Chain
  • Intended to provide more reliable, timely and useful information to investors
  • Requirements span the reporting supply chain, reinforce accountability
  • Requirements affecting Senior Executives, Individual Directors
  • Requirements affecting the Board of Directors and Board Committees
  • Requirements affecting outside Auditors

Curative Health Services

requirements affecting senior executives individual directors
Requirements Affecting Senior Executives, Individual Directors
  • CEO/CFO Certifications to assure accuracy, completeness and timeliness (separate civil, criminal certifications) (see appendix)
  • Establish and assess disclosure controls and procedures for collecting, processing and disclosing information required to be disclosed in periodic reports (10K, 10Q, 8-K) (current requirement); internal control reports in annual reports (fiscal years post 9/15/03)
  • Accelerated reporting by Executive Officers and Directors (2 days)
  • Code of Ethics, Senior Financial Officers (Disclose in 10K after 1/26/03)
  • Clawbacks for CEO/CFO bonus, stock sales profits if company’s financial statements are restated due to misconduct (12 months from 1st disclosure)

Curative Health Services

requirements affecting senior executives individual directors cont d
Requirements Affecting Senior Executives, Individual Directors (cont’d)
  • Additional disclosure issues
      • Off-balance sheet transactions, contractual commitments, and contingent liabilities ( Q1 ‘03)
      • Pro forma (non-GAAP) information- quantitative reconciliation (Q1 ‘03)
      • Earnings releases; other material, non-public information about annual/quarterly fiscal periods on Form 8-K (Q1 ‘03)
      • Additional (and accelerated) Form 8-K events (SEC proposed 6/02)
      • MD&A critical accounting policies (SEC proposed 5/02)
      • SHS approve equity-based compensation plans (NYSE/NASD 10/02 filings with SEC)
      • Company web-site address
      • New filings deadlines- Forms 10K and 10Q (‘04)
  • No improper influence of Auditors (SEC proposed 10/02; effective Q1 ‘03)
  • Trading restrictions for Executive Officers and Directors- benefit plan blackout periods

Curative Health Services

requirements affecting senior executives individual directors cont d14
Requirements Affecting Senior Executives, Individual Directors (cont’d)

Code of Ethics (NASDAQ-6 months post SEC approval)

  • CEO, CFO, principal accounting officer or Controller, similar functions
  • Exhibit to annual report
  • SOA Disclosure obligation only; (NYSE and NASD propose requirement)
  • Content
    • honest and ethical conduct
    • avoidance of conflicts of interest
    • full, fair, accurate, timely, understandable disclosures
    • compliance with applicable laws, rules and regulations
    • prompt internal reporting of code violations
    • accountability for adherence
  • Form 8-K disclosure of modifications, waivers (NYSE/NASD propose require disclose waivers)

Curative Health Services

requirements affecting board of directors board committees
Requirements Affecting Board of Directors, Board Committees
  • Corporate Governance requirements affecting full Board of Directors
  • Audit Committee oversight, composition/integrity, reporting mechanism, pre-approvals
      • Audit Committee and independent Auditors seen as key to restoring faith in the process of financial reporting and oversight
      • Audit Committee will have enhanced role in Corporate Governance
  • Bans on loans to Executive Officers/Directors (Compensation Committee)

Curative Health Services

requirements affecting board of directors board committees cont d
Requirements Affecting Board of Directors, Board Committees (cont’d)
  • Corporate Governance Requirements Affecting Full Board:
  • Current NYSE/NASDAQ proposals (SEC may combine):
      • Majority of independent directors (NYSE- within 24 months SEC approval) (NASDQ-1st annual meeting after 1/1/04)
      • Regularly convened executive sessions (independent Directors only) (NYSE/NASDAQ-6 months from SEC approval)

Curative Health Services

requirements affecting board of directors board committees cont d17
Requirements Affecting Board of Directors, Board Committees (cont’d)
  • Corporate Governance (Proposed) Requirements Affecting Full Board:
  • Independent Director standards will be increased (for example):
    • NASDAQ
      • No family member employed as executive officer in past 3 years
      • No former outside auditor partner/employee during last 3 years
      • No interlocking compensation committee issue during past 3 years
      • Not-for-profits covered if size tests met
      • Director or family member may not receive any payments >$60,000 other than for board service
    • NYSE
      • Similar requirements; but 5 year cooling off periods
      • Board must affirmatively determine no material relationship with company and disclose determination

Curative Health Services

requirements affecting board of directors board committees cont d18
Requirements Affecting Board of Directors, Board Committees (cont’d)
  • Additional Corporate Governance (Proposed) Requirements:
      • Independent Director approval of Director nominations
      • Adopt/disclose code of business conduct and ethics
      • SH approval for adoption/material modification of stock option plans
      • Independent Director approval of CEO and Executive Management compensation (NASDAQ)
      • Director Continuing Education to be mandated (NASDAQ)
      • Material misrepresentation/omission to NASDAQ may be basis for delisting (NASDAQ)
      • Nominating/Governance Committee Charter (NYSE)
      • Compensation Committee Charter (NYSE)
      • Adopt/disclose Corporate Governance guidelines (NYSE)
      • Annual CEO disclosure not aware of listing violation (NYSE)

Curative Health Services

audit committee oversight
Audit Committee Oversight

Increased Audit Committee Oversight Responsibilities:

  • Directly responsible for “appointment, compensation and oversight” of independent Auditors (SOA);) Have sole authority to appoint, compensate and oversee outside Auditor (NASDAQ)
  • Approve, in advance, the provision by the Auditor of all permissible non-audit services
  • Authority to engage and determine funding for independent counsel and other advisors; company must provide funding
  • Have a written charter (NYSE)(NASDAQ- 6 months post SEC approval)

Curative Health Services

audit committee oversight cont d
Audit Committee Oversight (cont’d)
  • At least annually, obtain and review a report by the independent Auditor describing the firm’s internal quality control procedures; any material issues raised by the most recent internal quality control review, peer review or any inquiry or investigation within the preceding five years and assess the Auditor’s independence with respect to all relationships between the independent Auditor and the company (NYSE)
  • Discuss annual and quarterly financial statements with management and independent Auditor, including MD&A (NYSE)
  • Establish complaint reporting procedures/mechanism
  • Audit Committee must review and approve all related-party transactions (NASDAQ)
  • Additional NYSE requirements (e.g., discussing risk assessment and risk management)

Curative Health Services

audit committee composition
Audit Committee Composition
  • Independence
    • Audit Committee member not to receive any compensation other than for board or committee service
    • Audit Committee member may not be affiliate of the company or its subsidiary (NASDAQ= own/control >20% voting stock )
    • NASDAQ
    • Limit time non-independent Audit Committee members can serve to 2 years; prohibited from serving as chair. Cannot be company employee/family member; affirmative board determination required that in best company interests; disclosure requirements

Curative Health Services

audit committee composition cont d
Audit Committee Composition (cont’d)
  • Financial Expertise
    • Audit Committee must include at least one “financial expert.”(SOA-disclosure requirement in 10K after 1/26/03)(NYSE/NASD require)
    • All Audit Committee members must be able to read and understand financial statements (NYSE/NASDAQ- at time of appointment)
    • At least one member of the Audit Committee must have accounting or related financial management expertise (NYSE); consider education and experience as public accountant or Auditor or public company CFO, Controller, and sufficient financial expertise in the accounting and auditing areas specified in SOA (NASDAQ)

Curative Health Services

audit committee reporting mechanism
Audit Committee Reporting Mechanism
  • Complaint Procedures:
      • Must establish procedures for receipt, retention and treatment of complaints regarding accounting, internal accounting controls and auditing issues.
        • Implies reporting mechanism, record-keeping and responsive actions
      • Provide mechanism for employees to submit concerns on a confidential, anonymous basis regarding questionable auditing or accounting matters.

Curative Health Services

audit committee pre approvals
Audit Committee Pre-approvals
  • Must pre-approve any non-auditing service to be performed by outside auditors (but certain services prohibited- see next slide)
  • Disclose such non-auditing approvals in periodic reports (10K, 10Q)

Curative Health Services

requirements affecting outside auditors
Requirements Affecting Outside Auditors
  • New Auditor Independence Requirements
  • Registered public accounting firms will be prohibited from providing eight types of non-audit services to audit clients:
      • Bookkeeping or other services related to company’s accounting records or financial statements
      • Financial information systems design and implementation
      • Appraisal or valuation services, fairness opinions
      • Actuarial services
      • Internal audit outsourcing services
      • Management functions or human resources
      • Broker or dealer, investment adviser or investment banking services
      • Legal services and expert services unrelated to the audit
      • Any other service determined to be impermissible by the future Public Company Accounting Oversight Board

Curative Health Services

requirements affecting outside auditors cont d
Requirements affecting Outside Auditors (cont’d)
  • Public Company Accounting Oversight Board established
      • Oversight of audit of public companies, protect investor interests
      • Responsibilities include:
        • Register and inspect public accounting firms
        • Set standards for outside Auditors
        • Enforce compliance with SOA
      • Not a government agency; First meeting held January, 2003
      • 5 members (only 2 CPAs)

Curative Health Services

requirements affecting outside auditors cont d27
Requirements Affecting Outside Auditors (cont’d)
  • Mandatory Auditor rotation: Partner cannot be lead or review partner for more than 5 consecutive years
  • Outside Auditor must timely report to Audit Committee:
      • All critical accounting policies and practices to be used in financial reports
      • All alternative treatments of financial information within GAAP that have been discussed with management, ramifications of their use, and treatment preferred by the Auditor
      • Other material written communications with management

Curative Health Services

provisions affecting board compensation committees
Provisions Affecting Board Compensation Committees
  • Prohibitions on loans to top management and Directors:
      • Public companies now prohibited from directly or indirectly making personal loans to Executive Officers
      • Elimination of other types of loan-related “sweetheart deals” for Executive Officers
    • Covers company and subsidiaries
    • Grandfathers loans outstanding prior to 7/30/02 (but no material modifications or extensions)

Curative Health Services

recommended actions to enhance compliance specific steps
Recommended Actions to Enhance Compliance- Specific Steps
  • Assess/document P&P, processes already in place; determine gaps requiring new standards
  • Develop and implement new standards
  • Communicate to and train appropriate individuals
      • Board of Directors
      • Senior Management
      • Compliance Officer
      • Other Employees
    • Enhance reporting mechanism (ensure Audit Committee link)

Curative Health Services

recommended actions to enhance compliance specific steps cont d
Recommended Actions to Enhance Compliance- Specific Steps (cont’d)
  • Consider/clarify relationship of Internal Audit/Public Reporting Compliance Coordinator, Compliance Officer, Compliance Committee, Board and Board Committee Oversight
  • Consider/incorporate auditing, monitoring approaches in compliance program
  • Opportunity to consider/incorporate overall risk assessment and risk management
  • Incorporate responsive actions in compliance program

Curative Health Services

recommended actions to enhance compliance specific steps cont d31
Recommended Actions to Enhance Compliance- Specific Steps (cont’d)
  • Financial and Disclosure controls:
      • Develop timeline/calendar for preparing annual/quarterly reports, distribute to Management, Directors, Legal Counsel and Auditors
      • Prepare Disclosure Guidelines
        • Assess/document P&P, processes already in place
        • Review/research disclosure rules to assure all covered in process; review industry information- competitor reports, analyst research reports (identify issues that be material to investing public); determine gaps requiring new P&P

Curative Health Services

recommended actions to enhance compliance specific steps cont d32
Recommended Actions to Enhance Compliance- Specific Steps (cont’d)
  • Financial and Disclosure controls:
      • Prepare Disclosure Guidelines (continued)
        • Identify appropriate individuals to involve in process- principal accounting officer/controller, risk management, investor relations, compliance officer, in-house counsel, business unit heads, subsidiary parallel positions, CEO/CFO review
        • Assign responsibility to appropriate specific individuals
        • Consider appropriate oversight and disclosure mechanisms- e.g., checklists, form Disclosure Committee

Curative Health Services

recommended actions to enhance compliance specific steps cont d33
Recommended Actions to Enhance Compliance- Specific Steps (cont’d)
  • Financial and Disclosure controls:
      • Prepare Disclosure Guidelines (continued)
        • Back-up certifications by key individuals
        • Consider parallel clawbacks in event of material restatement
        • Legal Counsel review of reports
        • Outside Auditor/Audit Committee roles, including review
        • Document meetings, reviews, approvals/pre-approvals
      • Review/revise Audit Committee charter

Curative Health Services

discussion
Discussion
  • Compliance Officers’ Brave New World? Familiarity with Financial and Disclosure Controls?
  • Respective roles of Compliance Officer, Internal Audit, Disclosure Committee, Compliance Committee, Board Committees (Audit, Governance, Compliance), CFO, Legal Counsel
      • How many have Board Compliance Committees?
  • Hotlines/reporting mechanisms- how many already include accounting, internal accounting controls, auditing issues?
  • Can Auditor also provide CIA IRO services?
  • Risk Assessment/risk management relationship with Compliance officer/compliance policies

Curative Health Services

appendix reporting internal controls
APPENDIX

Reporting

&

Internal Controls

act imposes important reporting requirements on management
Act Imposes Important Reporting Requirements on Management

Section 302 (and related SEC rule) (Civil)– CEO/CFO Must Certify Quarterly and Annually that:

  • SEC report being filed has been reviewed
  • Report does not contain any untrue statements or omit any material facts necessary to make the statements made not misleading
  • Financial statements fairly present, in all material respects, the financial position, results of operations and cash flows
  • He/she is responsible for and has designed, established, and maintained Disclosure Controls & Procedures (“DC&P”), as well as evaluated and reported on the effectiveness of those controls and procedures within 90 days of the report filing date
  • Deficiencies and material weaknesses in internal control have been disclosed to Audit Committee and auditors, as well as any fraud (material or not) involving anyone with a significant role in internal control
  • Significant changes in internal control affecting controls for periods beyond review have been reported in the certification, including any corrective actions with regard to significant deficiencies and material weaknesses

Note: Individual certifications above and any corresponding disclosure requirements have various effective dates beginning with filings made after August 29, 2002.

PricewaterhouseCoopers LLP

act imposes important reporting requirements on management continued
Act Imposes Important Reporting Requirements on Management (continued)

Section 404 – Management Must Assess Internal Controls Annually

(Effective date pending)

  • Internal control report states management’s responsibility for establishing and maintaining adequate internal control structure and procedures for financial reporting
  • Management must assess effectiveness of internal control structure and procedures for financial reporting as of the end of the most recent fiscal year
  • Attestation by external auditor (Section 404 and 103)

Section 906 (Criminal) – CEO/CFO Must Certify that Periodic Financial Reports

(Effective July 30, 2002)

  • Fully comply with 34 Act and information fairly presents financial condition and results of operations

PricewaterhouseCoopers LLP

cautionary note
Cautionary Note

Recent CEO/CFO certifications filed with the SEC (either in respect of its “one time” Order or pursuant to Section 906) do not contain any explicit assertions about internal controls. As Section 302 and 404 provisions require certification or assessment of specified controls, companies will need to assess the implications of these expanded reporting responsibilities, and determine the nature of any additional steps that should be taken in response thereto.

PricewaterhouseCoopers LLP

general rather than specific requirements have been established
General Rather Than Specific Requirements Have Been Established
  • Management must determine for themselves the structure, approach and level of documentation and formalization that gives the CEO/CFO the requisite basis (and confidence) to provide Section 302 quarterly certifications.
  • The SEC provides a definition of Disclosure Controls and Procedures and related objectives but does not outline specific requirements, other than recommending the establishment of a disclosure committee.
  • In general, the new certification requirements may require some companies to formalize control structures, enhance controls and establish monitoring programs to enable CEOs and CFOs to make their evaluations and report their conclusions.

The SEC expects that each company will develop a process that is consistent with its business and internal management and supervisory practices.

PricewaterhouseCoopers LLP

understanding requirements for disclosure controls and procedures
Understanding Requirements for Disclosure Controls and Procedures

The SEC defines DC&P as follows:

Controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. "Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in its Exchange Act reports is accumulated and communicated to the issuer's management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

  • In this regard, the SEC intends that companies maintain controls and procedures (commensurate with those already required with respect to financial reporting) for gathering, analyzing and disclosing all information – BOTH financial and non-financial – that is required to be disclosed in specified and periodic filings.

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special issues for lawyers and compliance officials
Special Issues for Lawyers and Compliance Officials
  • Document retention and destruction
  • Whistleblowers protection
  • Attorney reporting responsibilities
  • Increased enforcement penalties

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documents cont d
Documents (cont’d)
  • 18 U.S.C. § 1519: “Whoever knowingly alters, destroys . . . with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any [U.S.] department or agency . . . or in relation to or contemplation of any such matter or case . . .”
  • Highlighted language raises questions:
      • Could common document retention/destruction policies result in violations where they call for destruction of documents relevant to a matter that could arise in the future?
      • Potential problem if a document retention program is set up with the intent to avoid future Government liability.

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documents cont d44
Documents (cont’d)
  • Need to develop a business justification for every element of the document destruction plan
  • Document destruction program should exempt from destruction all documents that could be used in future investigations
  • Company’s e-mail policy and document retention policies should be reviewed and revised to accord with new statutory requirements.

PricewaterhouseCoopers LLP

sec lawyers
SEC Lawyers
  • New Lawyer Disclosure Obligation: SEC to issue rules within 180 days setting minimum standards for lawyers appearing/practicing before the SEC (Sec. 307)
  • Two-tiered disclosure obligation:

(1) Rules will require in-house and outside counsel to report securities law violations to company’s CEO or chief legal officer;

(2) If they don’t respond appropriately, lawyer must report directly to Board of Directors or designated Board committee

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sec lawyers cont d
SEC Lawyers (cont’d)
  • Materiality standard: SEC is to adopt rule “requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof ”
  • Good news
      • “Materiality” limitation
      • No reporting outside the company is required
  • Troublesome issues:
      • “Practicing before the Commission” is a broad standard; will probably include work on registration statements
      • What kind of “evidence” should an attorney have?

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sec lawyers cont d47
SEC Lawyers (cont’d)
      • What is a “similar violation?”
      • What is an “inappropriate” response on the part of the CEO or Chief Legal Officer, that would require the attorney to go to the Audit Committee or full Board?
      • What if the Audit Committee or Board are complicit in the wrongdoing, or refuse to take remedial action?
  • Legal department may want to articulate and disseminate standards to staff as to when they must come forward to the General Counsel

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whistleblowers cont d
Whistleblowers (cont’d)
  • Sweeping new protections for whistleblowers--
    • Modeled after protections for airline employees reporting safety violations
  • Two new criminal provisions to protect whistleblowers
    • 18 U.S.C. § 1513
    • 18 U.S.C. § 1514A

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whistleblowers cont d49
Whistleblowers (cont’d)
  • 18 U.S.C. § 1513: “Whoever knowingly, with the intent to retaliate, takes any action harmful to any person . . . for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense . . .”
  • Elements added to 18 U.S.C. § 1513(e):
      • Knowing and intentional action to retaliate
      • Against any person (not just an employee)
      • Providing truthful information relating to commission or possible commission
      • A law enforcement official (not just a Federal agent)
      • Regarding any Federal offense

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whistleblowers cont d50
Whistleblowers (cont’d)
  • Elements of 18 U.S.C. § 1514A:
      • Prohibits a company from sanctioning an employee because of any lawful act to provide information about “fraud against shareholders” to (1) a Federal agency, (2) Congress, or (3) employee’s supervisor.
      • Authorizes civil action for damages and equitable relief, including reinstatement, back pay, attorneys’ fees, etc.
      • 90-day statute of limitations: employee must file claim within 90 days of retaliation.
      • Provision construed narrowly: applies only to information provided in connection with an ongoing proceeding.

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new felonies and increased criminal penalties
New Felonies and Increased Criminal Penalties
  • Substantive new offenses added by the Act:
      • 18 U.S.C. § 1348: Scheme or artifice to defraud
      • 18 U.S.C. § 1350: Knowing violations involving new CEO/CFO certifications
  • Enhanced Penalties:
      • Multiple directives to U.S. Sentencing Commission to boost penalties for obstruction of justice, criminal fraud, accounting and securities fraud, and the new “white collar” provisions in the Act related to document destruction or tampering

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new felonies and increased criminal penalties cont d
New Felonies and Increased Criminal Penalties (cont’d)
  • Enhanced penalties for conspiracies (from 5 years to same level as underlying offense)
  • Stiffer penalties for criminal ERISA violations
  • Doubles the penalties for criminal violations of Securities Act of 1934

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intersection with compliance programs and internal control concepts michael l shaw

Intersection with Compliance Programs and Internal Control ConceptsMichael L. Shaw

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intersection with elements of a compliance program
Intersection with Elements of a Compliance Program

Standards and Procedures

  • Federal Sentencing Guidelines
  • Experience from other industry sectors
  • OIG Compliance Program Guidance

Oversight Responsibility

Education and Training

Lines of Communication

Monitoring and Auditing

Enforcement and Discipline

Response and Prevention

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intersection with elements of a compliance program55
Intersection with Elements of a Compliance Program

Standards and Procedures

  • Code of Conduct
  • Commitment by senior management
  • Distribution to applicable employees and contractors
  • Updating to address new risks
  • Values approach
  • Records retention

Oversight Responsibility

Education and Training

Lines of Communication

Monitoring and Auditing

Enforcement and Discipline

Response and Prevention

PricewaterhouseCoopers LLP

intersection with elements of a compliance program56
Intersection with Elements of a Compliance Program

Standards and Procedures

  • High-level involvement
  • Responsibility for developing, operating, and monitoring the compliance program
  • Direct access to Board and/or CEO
  • Updates to Board and/or CEO
  • Operational Committee

Oversight Responsibility

Education and Training

Lines of Communication

Monitoring and Auditing

Enforcement and Discipline

Response and Prevention

PricewaterhouseCoopers LLP

intersection with elements of a compliance program57
Intersection with Elements of a Compliance Program

Standards and Procedures

  • General and specific training sessions on a periodic basis
  • Cover commitment, reinforce policies and procedures, and address risks
  • Conducted for applicable employees and contractors
  • Documentation of training efforts

Oversight Responsibility

Education and Training

Lines of Communication

Monitoring and Auditing

Enforcement and Discipline

Response and Prevention

PricewaterhouseCoopers LLP

intersection with elements of a compliance program58
Intersection with Elements of a Compliance Program

Standards and Procedures

  • Hotlines
  • Exit interviews
  • Periodic surveys
  • Supervisor accountability
  • Documentation of issues identified and resolved
  • Periodic reports on issues handled
  • Non-retaliation policy

Oversight Responsibility

Education and Training

Lines of Communication

Monitoring and Auditing

Enforcement and Discipline

Response and Prevention

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intersection with elements of a compliance program59
Intersection with Elements of a Compliance Program

Standards and Procedures

  • Internal or external evaluators to perform regular reviews
  • Focus on high-risk areas
  • Validation of policies and procedures
  • Qualifications of reviewers
  • Corrective action in response to audit results
  • Monitoring and reporting of audit efforts

Oversight Responsibility

Education and Training

Lines of Communication

Monitoring and Auditing

Enforcement and Discipline

Response and Prevention

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Intersection with Elements of a Compliance Program

Standards and Procedures

  • Consequences of violating the law, the Code of Conduct, or policies and procedures
  • Violations reviewed and resolved on a case-by-case basis
  • Consistent disciplinary action
  • Confidentiality
  • Periodic reports of action taken

Oversight Responsibility

Education and Training

Lines of Communication

Monitoring and Auditing

Enforcement and Discipline

Response and Prevention

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intersection with elements of a compliance program61
Intersection with Elements of a Compliance Program

Standards and Procedures

  • Prompt investigations of reasonable allegations of suspected noncompliance
  • Decisive steps to correct problems identified
  • Reporting to Government when appropriate under the advice of legal counsel

Oversight Responsibility

Education and Training

Lines of Communication

Monitoring and Auditing

Enforcement and Discipline

Response and Prevention

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addressing dc p requirements
Addressing DC&P Requirements

LEGEND

Disclosure Requirements

Disclosure Controls and Procedures

Internal

Accounting

Controls

Financial Reporting

Other aspects of Compliance and Operations pertaining to DC&P

Operations

Compliance

Internal Controls Over Financial Reporting

what are internal controls
What are ‘Internal Controls’?

What are Internal Controls?

  • COSO defines internal controls as a process effected by an entity’s Board of Directors, Management and other personnel, designed to provide reasonable assurance regarding achievement of the objectives in each of the following categories:
      • Effectiveness & Efficiency of Operations
      • Reliability of Financial Reporting
      • Compliance with Applicable Laws and Regulations

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5

the five components under the coso framework
The Five Components under the COSO Framework

The Five Components under the COSO Framework

  • Monitoring
  • Assessment of a control system’s performance over time.
  • Combination of ongoing and separate evaluation.
  • Management and supervisory activities.
  • Internal audit activities.
  • Control Activities
  • Policies/procedures that ensure management directives are carried out.
  • Range of activities including approvals, authorizations, verifications, recommendations, performance reviews, asset security and segregation of duties.
  • Control Environment
  • Sets tone of organization-influencing control consciousness of its people.
  • Factors include integrity, ethical values, competence, authority, responsibility.
  • Foundation for all other components of control.
  • Information and Communication
  • Pertinent information identified, captured and communicated in a timely manner.
  • Access to internally and externally generated information.
  • Flow of information that allows for successful control actions from instructions on responsibilities to summary of findings for management action.
  • Risk Assessment
  • Risk assessment is the identification and analysis of relevant risks to achieving the entity’s objectives-forming the basis for determining control activities.

All five components must be in place

for a control to be effective.

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6

benefits of the new law
Benefits of the New Law
  • Increased confidence of CEO/CFO in meeting reporting requirements
  • Improved coordination of Company Management Team
  • Improved and clarified Corporate Governance process
  • Systematized process for early identification of business risks/ whistle blowing issues/incident management
  • Systematized approach to dealing with change (i.e., transactions, personnel, accounting principles, internal controls and operating procedures)
  • Increased operational effectiveness

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final observation
Final Observation

The Sarbanes-Oxley legislation has established a new paradigm for corporate responsibility, accountability, transparency, and behavior. Responsibilities of some parties have increased; while those of others have been made more explicit. And the Act has established a new standard for companies regarding the reporting of internal control effectiveness.

Good internal controls are not just a best practice……the Act reinforces them in the Law!

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complex processes and organizational models
Complex Processes and Organizational Models
  • The Health Care & Life Sciences Industry faces an ever-changing spectrum of risks:
  • Who is responsible for managing risks related to each activity? What should be done to plug any gaps?
  • What are the mechanisms for escalating emerging risks?
  • Who monitors risk management activities to ensure they are effective?
scope of compliance
Scope of Compliance

Corporate Governance

  • Complex, rapidly changing, global industry
  • Increasing regulatory oversight
  • Complex and inconsistent regulations around the world
  • Heightened awareness of compliance as a result of corporate scandals
  • Compliance risks impact almost everyone in the global enterprise
  • Fraud (Sarbanes-Oxley)
  • Foreign Corrupt Practices Act
  • RICO
  • Anti-Trust
  • Federal Sentencing Guidelines
  • Financial Reporting (e.g., Revenue Recognition)

Health & Safety

  • Medicare
  • Medicaid
  • Environmental Protection (EPA)
  • Occupational Health (OSHA)
  • Food & Drug (FDA)

Consumer Protection

The Compliance challenge – to leverage and integrate the full resources of the enterprise to manage key risk and product quality

  • HIPAA
  • Gramm Leach Blilely
  • EU Directive
point of view
Point of View
  • Organizations tend to manage risks in “silos”
    • Limited ability to aggregate risk exposures
    • Difficult to identify interrelationships between risks
    • Timely, frank communication of emerging issues may not always occur
  • Inconsistent approaches to managing risks between “silos”
    • Quality, Compliance and Risk Management not well integrated
    • IT often an issue – opportunity for Compliance to take a broader view in assessing IT controls across the silos
    • Few internal audit functions have a true enterprise-wide view of risk
  • Opportunity for Compliance to play a more strategic role:
    • New compliance requirements demand that companies take a broader view of risk (e.g., Sarbanes-Oxley, OIG compliance guidelines, FDA)
    • Compliance impacts almost all functions and employees
    • Processes to monitor compliance can be used to monitor other risks and quality
    • Compliance can serve as a focal point for debating emerging risk issues, quality and management strategies
    • Compliance well placed to “connect the dots” across the enterprise
the role of compliance
The Role of Compliance

The effectiveness of Senior Management’s oversight is typically limited because:

  • Limited linkage between governance and control activities
  • Existing internal control structures do not address the full range of risks
  • Key risks are managed by separate groups (e.g., FDA compliance, clinical trials, manufacturing quality)

Compliance

The “missing link” is a compliance program and infrastructure to measure and monitor the effectiveness and alignment between corporate governance and business unit / functional risk management, compliance and quality activities.

slide73

Compliance

Finance

SEC

(e.g., Sarbanes)

Sales

&

Marketing

Kickbacks

Privacy

Accounts

Receivable

False Claims

SEC

Service

Delivery

FDA

Privacy

False Claims

CoPs

Traditional Model

Quality, compliance and business risks managed by silo -

difficult to track all of the moving parts

73

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Emerging Model

Board

Regulatory Risk

System Risk

Chief Compliance Officer

Compliance Risk

  • Financial Risk
  • Regulatory Risk
  • Systems/IT Risks
  • Operational Risks

Operational Risk

Day-to-Day

Operations

Financial Risk

Quality, compliance and business risks managed in a coordinated manner -

easier to see key interrelationships and interdependencies

organizational approaches
Organizational Approaches
  • Board Oversight
    • Committee of Directors
  • Senior Management Involvement
    • Compliance Committee
  • Centralized vs. Decentralized Strategy
    • Strong central function
    • Pockets of expertise in the business units
  • Teaming with Other Risk Management Functions
    • Internal Audit
    • IT
    • Manufacturing
    • Sales and Marketing
    • Etc.
some critical success factors
Some Critical Success Factors
  • Senior Management/Board commitment
  • Clearly defined mission, communicated and understood throughout the organization
  • Mutual agreement on respective roles of compliance and other risk management groups
  • Realistic and manageable short-term objectives
  • Effective communication mechanisms
  • Effective strategy for identifying and monitoring key risks
  • Robust methodologies and tools that are consistent with the corporate culture
for more information contact
For More Information Contact:

Michael L. Shaw

Senior Manager

PricewaterhouseCoopers

1300 K Street, N.W. – Suite 800

Washington, D.C. 20005

(202) 414-1552

michael.l.shaw@us.pwcglobal.com

Nancy Lanis

Senior Vice President & General Counsel

Curative Health Services

150 Motor Parkway

Hauppauge, N.Y. 11788

(631) 232-7016

nlanis@curativehealth.com

Jody Ann Noon RN, JD

Partner

Deloitte & Touche LLP

Health Care Regulatory Practice

jodynoon@deloitte.com

(503) 727-5207