The Sarbanes-Oxley Act was enacted on 30 July 2002 in response to a number of high-profile accounting and corporate governance scandals at large US public companies. Richard Baumann, Steven Azzariti and Darius Naraghi of Norton Rose explain the ramifications of the Act for those non-US companies that are listed stateside.

While a number of provisions of the Sarbanes-Oxley Act (the Act) became effective immediately, the effectiveness of other provisions has had to await regulatory or other action by the US Securities and Exchange Commission (SEC), the US securities exchanges or other supervisory bodies. In April 2003, the SEC adopted Rule 10A-3 to implement the Act's provisions relating to audit committees. Rule 10A-3 requires the US securities exchanges, including the New York Stock Exchange (NYSE), and national securities associations such as the National Association of Securities Dealers (NASD), which partially owns and operates Nasdaq (each an "SRO" and collectively, the "SROs"), to prohibit the initial or continued listing of any company, whether US or non-US, that does not comply with the audit committee requirements set out in the rule.

The new requirements set out in Rule 10A-3 apply directly to the SROs, including the NYSE and Nasdaq, which must each incorporate the rule's requirements into their own listing standards for companies that have a class of securities listed on, or that are seeking to list a class of securities on, such SRO. The final SRO listing standards applicable to audit committees must be approved by the SEC no later than 1 December 2003. Non-US companies must be in compliance no later than 31 July 2005. Importantly, Rule 10A-3 merely sets out the minimum standards for audit committees that must be required by the SROs. The actual final listing standards applying to non-US companies are expected to be more restrictive than the requirements under Rule 10A-3, and to vary somewhat from SRO to SRO

A US-listed, non-US company will need to have an audit on committee or an acceptable equivalent (the rule sets out several, acceptable equivalents for non-US companies, which include, subject to meeting certain requirements, the supervisory board of a two-tiered board, boards of auditors or statutory auditors and a joint audit committee serving dual holding companies). To the extent that such company does not designate an audit committee or acceptable equivalent, the entire board of directors will constitute the audit committee for the purposes of the new rule and therefore would have to meet its requirements.

Audit committee independence standards

A US-listed, non-US company's audit committee (or, in the absence of an audit committee or acceptable equivalent, the entire board of directors) will need to consist entirely of "independent" directors who are members of the board of directors of the listed company, subject to a few key exemptions. To be considered independent under Rule 10A-3, an audit committee member may not (i) other than in his or her role as a member of such committee, the board, or any other board committee, accept any consulting, advisory or other compensatory fees from the company or (ii) be "affiliated" with the company. Certain key exemptions are likely to be available to non-US companies under certain circumstances which will allow employee directors required under "Works Council" laws, non-US government representatives, controlling shareholders, directors with certain overlapping board affiliations (eg, a director serving on both the company's audit committee and the board of a company subsidiary) and directors of audit committees shared by dual holding companies, to serve on the audit committee.

Listing standards proposed by the NYSE and Nasdaq would make the applicable audit committee independence standards even stricter, and would, for example, require companies to "look back" for up to five years at a director's compensation and affiliations to determine independence.

Audit committees responsible for outside auditors

A US-listed, non-US company's audit committee must be directly responsible for the appointment, retention, termination, compensation and oversight of the company's independent auditors (subject to certain exemptions). The auditors must report directly to the audit committee.

Procedures required to handle employee complaints

A US-listed, non-US company will need to establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls and auditing matters, including procedures for the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

Audit committees must have access to outside advisers

A US-listed, non-US company's audit committee will need to have the authority to engage outside advisers, including independent counsel. Furthermore, the company will need to provide its audit committee with sufficient funds in order to retain such independent advisers.

New disclosure requirements associated with audit committees

A US-listed, non-US company that relies on exemptions from the independence standards under Rule 10A-3 will be required to disclose its reliance on such exemptions in its annual report filed on Form 20-F and must also state in that report its assessment of whether, and if so, how, reliance on the exemption will materially adversely affect the ability of its audit committee to act independently and satisfy the other requirements of Rule 10A-3.

Immediate practical suggestions regarding these provisions: