Sarbanes-Oxley

MDC Consulting

January 15, 2003

TO: Michael Justin, CEO Aguri Industries

FROM: MDC Consulting

VIA: Bruce Fox

SUBJ: SARBANES-OXLEY ACT

In response to your request, our team has examined the effects that the Sarbanes-Oxley Act of 2002, will have on your company, when key sections of the Act become effective November 15, 2004. The Act covers a whole range of governance issues, many covering the types of trade that are allowed within a company, responsibilities of audit committees and even offers protection to whistleblowers. Our research includes discussions of the following aspects of the Sarbanes-Oxley Act and its impact on your company:

a) Origin and general background.

b) Explanation of major provisions

c) Pros and Cons

d) Assessment of impact

e) Ethical considerations

Origin and General background

On July 30, 2002 President Bush signed into law the Sarbanes-Oxley Act of 2002, it is also known as the Public Company Accounting Reform and Investor Protection Act. The shorter name comes from the two senators, Michael Oxley and Paul Sarbanes, who are credited for engineering the Act. The law is intended to bolster public confidence in the nation's capital markets and imposes new duties and significant penalties for non compliance on public companies and their executives, directors, auditors, attorneys and securities analysts. The full implications of the legislation will come after further actions by the Securities and Exchange Commission and the newly created Public Company Accounting Oversight Board (PCAOB). Most of the provisions of this new law only apply to public companies that register with the Securities and Exchange Commission their auditors and securities analysts.

Explanation of major Provisions

The stated goal of the Act is to restore investor confidence in the public marketplace after the emotional and financial damage caused by Enron. Keep in mind that the Act is not designed to create benefits for any individual company. The Sarbanes-Oxley Act contains 11 titles but only four (III, IV, VIII and IX) address the systems and accountability of reporting companies.

1. TITLE I--PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD. The law will created the Public Company Accounting Oversight Board (PCAOB), which is responsible for auditing standards, the regulation of auditors, and quality control in audits of publicly held companies.

2. TITLE II--AUDITOR INDEPENDENCE. Prohibits an auditor from performing specified non-audit services contemporaneously with an audit.

3. TITLE III--CORPORATE RESPONSIBILITY. Requires each member of the audit committee to be a member of the board of directors, but otherwise independent. Provides a ban on trading by directors and executive officers in a public company's stock during pension fund blackout periods.

4. TITLE IV--ENHANCED FINANCIAL DISCLOSURES. Requires companies to maintain detailed financial records. Also requires financial reports filed with the SEC to reflect all material correcting adjustments that have been identified. CEO and CFO compensation and profits must be made public. Personal loans to executive officers and company directors are banned. Requires issuer to disclose whether it has adopted a code of ethics for its senior financial officers and whether its audit committee consists of at least one member who is a financial expert.

5. TITLE V--ANALYST CONFLICTS OF INTEREST. Unrelated services Audit firms are banned from providing services to their clients unrelated to their audit work.

6. TITLE VI--COMMISSION RESOURCES AND AUTHORITY. Expands the scope of the SEC's disciplinary authority by allowing it to consider orders of state securities commissions when deciding whether to limit the activities, functions, or operations of brokers or dealers. Also states that a violation of rules set forth by the PCAOB will be treated as a violation of the Act itself.

7. TITLE VII--STUDIES AND REPORTS. Sets up various reports and studies including:

* The role of credit rating agencies in the securities markets.

* The number of securities professionals practicing before the Commission who have aided an abetted Federal securities violations but have not been penalized as a primary violator.

* SEC enforcement actions it has taken regarding violations of reporting requirements and restatements of financial statements.

* GAO report on whether investment banks and financial advisors assisted public companies in earnings manipulation and obfuscation of financial conditions.

8. TITLE VIII--CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY. Imposes criminal penalties for knowingly destroying, altering, concealing or falsifying records with intent to obstruct or influence either a Federal investigation or a matter in bankruptcy. An auditor must maintain for a five year period all audit or review work papers pertaining to an issuer of securities. Additionally, has a provision to protect corporate whistleblowers.

9. TITLE IX--WHITE-COLLAR CRIME PENALTY ENHANCEMENTS. Increases penalties for mail and wire fraud from five to twenty years in prison. Establishes criminal liability for failure of corporate officers to certify financial reports, including maximum imprisonment of ten years for knowing that the periodic report does not comply with the act or for twenty years for willfully certifying a statement knowing it does not comply with this act.

10. TITLE X--CORPORATE TAX RETURNS. Expresses the sense of the Senate that the Federal income tax return of a corporation is to be signed by its chief executive officer.

11. TITLE XI--CORPORATE FRAUD AND ACCOUNTABILITY. Amends Federal criminal law to establish a maximum 20 year prison term for tampering with a record or otherwise impeding an official proceeding. Increases penalties for violations of the Securities Exchange Act of 1934 to up to $25 million dollars and up to 20 years in prison

Sarbanes-Oxley: Pros and Cons

The purpose of the Sarbanes-Oxley Act is to restore public confidence in investing in public traded companies and to prevent the repeat of the corporate scandals created by unchallenged unethical behavior. The good news is that it seems to be working, public