Sarbanes-Oxley: A Thumbnail Review

Much controversy surrounds the Sarbanes-Oxley Act (the “Act”) of 2002. Signed into law by then-President George W. Bush on July 30, 2002, the Act had been heralded as a giant step toward reforming the evils of lack of ethics. conduct that affected large corporations after the collapse of Enron, Worldcom and Tyco. Ten years later, the Law has become one of the most debated topics in MBA schools and, now, in the current presidential race.

The grand highlight of the law was shedding light on mischievous corporate behavior in various arenas. There was too much behind-the-scenes activity and the Securities and Exchange Commission seemed to let these problems go unnoticed. A plethora of problems erupted and spiraled out of control. President Bush’s response to public demand for greater accountability from publicly traded organizations was to clamp down on corporate responsibility, accounting, and auditing. The Act imposed stricter regulations on how corporations do business through regulations in each of these areas, except for tax compliance.

Chief Executive Officers and Chief Financial Officers are now required to certify the appropriate financial reports after having audited them. While this is all very well, the reality is that what was happening was that the fox was guarding the chicken coop and no one was looking at the fox. The symbiotic relationships between the corporate giants and their accounting firms had grown too cozy. Accounting firms began playing “I’ve got your back” to keep the corporations in business, only to now be more regulated than ever before.

The new rules created an oversight board for the regulation of auditors, and determining the independence of auditors came to the fore. The new auditing standards for companies reporting under the Act included a prohibition that prevented independent auditors, in addition to tax services, from providing many non-audit services. To this end, mandatory rotation of the auditing partners was imposed.

Two provisions of the Act require senior management of corporations to certify periodic reports filed with the SEC. The rules require the chief executive officer and chief financial officer of each reporting company to certify periodic reports to be filed with the SEC. The US Penal Code was amended to require that each periodic report containing financial statements be accompanied by a certification from the company’s chief executive officer and chief financial officer.

Any person who files a defective certification knowing that the periodic report accompanying Section 906 does not meet all of its requirements may be fined up to $1,000,000, imprisoned for not more than 10 years, or both. Anyone who knowingly, and in the context of the scientific requirement, certifies any statement in the Section 906 certification knowing that the attached report does not meet all the requirements of Section 906 shall be fined not more than $5,000,000, imprisoned not more than 20 years , or both. A violation of the Act also becomes a violation of the Exchange Act. Under Section 906 certification, if done deliberately, officers will be prosecuted for criminal violations under Section 32 of the Exchange Act, which provides for fines of up to $5,000,000 and imprisonment for up to 20 years.