The Sarbanes - Oxley Act of 2002 and Background Checks for Public Companies

As a result of the Sarbanes-Oxley Act of 2002 , signed into law on July 30, 2002, publicly held companies have a new set of rules when it comes to corporate ethics.   The far-reaching law radically changes the landscape when it comes to corporate governance, controls, audits and financial disclosures. It affects some 15,000 publicly held corporations. 

What it means for public companies according to experts is that corporations must have an ongoing effort aimed at instituting and documenting corporate controls to ensure honesty and ethical dealing.   There are a number of important tasks that a public firm must do in order to be in compliance.   However, on any list of Sarbanes-Oxley compliance tasks are conducting background checks.  

Among the many critical provisions is section 404. That section requires that public firms to establish and maintain internal financial controls and processes. Publicly held corporations are also required to conduct periodic evaluations of the control that are in place.

Under section 404, just having financial controls is inadequate. That is because one of the most important provisions of Section 404 is that external auditors must also attest to the effectiveness and adequacy of the controls in the annual report.

SEC. 404. MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS.

(a) R ULES R EQUIRED .—The Commission shall prescribe rules

requiring each annual report required by section 13(a) or 15(d) of

the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) to

contain an internal control report, which shall—

(1) state the responsibility of management for establishing

and maintaining an adequate internal control structure and

procedures for financial reporting; and

(2) contain an assessment, as of the end of the most recent

fiscal year of the issuer, of the effectiveness of the internal control

structure and procedures of the issuer for financial reporting.

(b) I NTERNAL C ONTROL E VALUATION AND R EPORTING .—With respect

to the internal control assessment required by subsection (a),

each registered public accounting firm that prepares or issues the

audit report for the issuer shall attest to, and report on, the assessment

made by the management of the issuer. An attestation made

under this subsection shall be made in accordance with standards

for attestation engagements issued or adopted by the Board. Any

such attestation shall not be the subject of a separate engagement.

The need for background checks was confirmed with the publication in November, 2003 of a white paper by PricewaterhouseCoopers(PwC), titled "Key Elements of Antifraud Programs and Controls."   It was published in conjunction with the Committee of Sponsoring Organizations of the Treadway Commission (COSO).   That organization has authored, "Internal Control - Integrated Framework," winch has been widely accepted as a framework by which management and auditors  evaluate internal controls.     The white paper outlined very specifically steps a public firm should take in regard to creating the critical Control Environment as a part of an overall framework of internal controls for Sarbanes-Oxley compliance. 

 The PricewaterhouseCoopers white paper specifies the nature and types of positions that should be subject to a background investigation as well as the areas that should be screened, such as employment and education history and criminal records.  The white paper also calls for documentation that the process is  being performed.   See »»

The emerging standards being complied by the Open Standards and Ethics Group (OCEG) also supports employment background screening as a key business practice.  OCEG was formed by a multi-industry, multi-disciplinary coalition that saw the need to integrate the principles of effective governance, compliance, risk management and integrity into the practice of everyday business. See »»

In addition, employment background screening is emerging as a key element is any SAS 70 compliance audit.

ESR has prepared a Special Report on the role of background checks for purposes of compliance with Sarbanes-Oxley.

ESR offers a wide range of Sarbanes-Oxley compliance services in the critical area of background check.

For more information, please contact Employment Screening Resources (ESR) at http://www.esrcheck.com/contact.php.   

Employment Screening Resources (ESR)

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