To get your company moving in a positive direction for 2003, consider these steps as your first two items of business -- resolutions No. 1 and No. 2 -- for the new year.

What is an audit committee?

The U.S. Congress has provided guidance on both steps through enactment of the Sarbanes-Oxley Act, which was signed by President Bush and became law in July of this year. The Securities and Exchange Commission has since been busy proposing and adopting rules to implement and interpret the new law.

Under the Sarbanes-Oxley Act , an audit committee is a committee of a company's board of directors. It is established for the purpose of overseeing the accounting and financial reporting process and audits of financial statements for the company.

The act also provides that an audit committee is directly responsible for the appointment and compensation of the external auditor employed by the company for the purpose of preparing or issuing audit reports or related work.

Finally, under the new law, the audit committee is responsible for establishing procedures for handling complaints received by the company regarding accounting, internal auditing controls, and audit matters. It also must create a mechanism for confidential, anonymous submission by company employees of their concerns about questionable accounting or auditing matters.

Under the Sarbanes-Oxley Act, the members of an audit committee must be "independent." To be independent, a member of the committee may not:

What is a code of ethics?

You may further ask, what is a code of ethics?

The Sarbanes-Oxley Act defines a code of ethics as a codification of standards reasonably designed to promote:

Neither the new law nor the proposed rules of the SEC thus far include a "model" code of ethics. The SEC has stated that it believes such a code may vary from company to company and that decisions as to specific provisions of a code should best be left to the company adopting it.

Is my company affected?

The provisions of new law apply primarily to public companies, defined as those which have securities registered under the Securities Exchange Act of 1934. If your company is such a public company, it is subject to the law's audit committee and code of ethics provisions, as well as the final rules of the SEC regarding the Sarbanes-Oxley Act.

You may say, my company is not a public company, so why should I even consider the act's terms? That's a good question. The point here is that, even if your company is not currently subject to the act, its provisions are useful guidelines in addressing ethics issues.

Objective, independent review by a company of its audit and accounting functions are critical to the company's not becoming another sordid news story -- at best, one of accounting or audit irregularities, and, at worst, one of embezzlement and fraud. Think of establishing and operating an audit committee as preventive medicine to avoid the malaise of these accounting and auditing issues.

While under the Sarbanes-Oxley Act a code of ethics is mandated for the chief executive officer and chief financial officer of a public company, you might consider its application to all officers, directors and employees of your company.

You might further consider expanding the code to become a code of business conduct and ethics. As such, the code could address conflicts of interest and compliance with applicable laws and regulations and provide for enforcement in the context of your company.

Setting forth in such a code a resolve by the company to deal fairly with its customers, suppliers, competitors and employees projects a positive image for conduct of the company's business. In this way, the code becomes tailor-made for your company.

Establishing and operating an audit committee and establishing and following a code of business conduct and ethics are not only good for the company, they are good for its investors, the community and marketplace in which it operates. Try them for 2003 and resolve to keep them in place for the full new year. It makes good sense. Happy New Year!

Julius Brecht is managing shareholder and an attorney in private practice with the law firm of Wohlforth, Vassar, Johnson & Brecht in Anchorage. He may be reached via e-mail at jbrecht@wvjb.com. The content of this article was not prepared as, and must not be construed as, legal or investment advice to anyone.