Sarbanes Oxley Penalties


The Sarbanes-Oxley Act of 2002 was passed in response to a number of highly publicized accounting scandals, involving some of the most influential firms in the country. Sarbanes-Oxley regulates corporate accounting procedures and enforces the adherence to generally accepted accounting principles (GAAP) with some tough new penalties.

Certifying Reports

  • Sections 906 and 302 of Sarbanes-Oxley require the CEO and CFO to certify the accuracy and truthfulness of periodic (annual or quarterly, etc.) reports. These reports must represent a fair and honest picture of the company's financial condition. Certification of these reports confirms, through the authority of the highest executive officers, that the reports are accurate.

    If certification is made and the reports are found to be financially unrepresentative, the CEO and CFO can be found criminally liable and face imprisonment of 10 to 20 years. In addition, civil penalties can include fines of up to $5 million.

Securities Fraud

  • Under Sarbanes-Oxley, any person who knowingly executes or attempts a scheme to defraud any other person by misrepresenting or making false claims or promises in connection with a purchase or sale of securities can be fined or imprisoned for up to 25 years, or both. While securities fraud had been an offense for decades before Sarbanes-Oxley, the act made prosecution of the charge much easier.

Altering Documents

  • The destruction, mutilation, alteration, concealment or falsification of documentation with the intent to obstruct or influence an investigation that is ongoing or being considered can result in fines or imprisonment of up to 20 years, or both. The language "ongoing or considered" within this provision allows offenders to be prosecuted even if the offense took place before an official investigation takes place.

Whistle-blower Protection

  • Sarbanes-Oxley prohibits any acts of retaliation against employees who alert the government to possible SEC violations. This is a key provision of the act since the majority of investigations regarding Sarbanes-Oxley violations are spurred by reports from employees within the offending company. The punishment for retaliation on a "whistle-blower" can include fines or imprisonment of up to 10 years, or both.

SOX Precedents

  • The first case enforcing Sarbanes-Oxley Act provisions involved Miami-based Rica Foods, a firm that produces chicken products for fast food chains. Rica Foods' CEO and CFO certified their annual reports as accurate and complete. However, Sarbanes-Oxley requires a signed audit statement from a third party auditor (Rica had employed Deloitte & Touche for this purpose). The audit is conducted to catch errors before the reports are published. Rica certified and published the reports without the audit and there were subsequent errors within the report. The SEC was surprisingly lenient in this case and ordered the CEO to pay a fine of $25,000.


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