What Is the Essence of the Sarbanes-Oxley Law?
President George W. Bush signed into law the Sarbanes-Oxley Act on July 30, 2002. According to the Securities and Exchange Commission, the Act "mandate[s] reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the 'Public Company Accounting Oversight Board,' to oversee the activities of the auditing profession." The law came as a result of corporate accounting scandals at Enron, WorldCom and other institutions.
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Corporate Responsibility
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The act requires that the chief executive officer and chief financial officer certify that financial disclosures are free from false statements or relevant omissions and fairly represent the corporation's financial state. If the SEC requires a restatement of the disclosure, the officers must forfeit certain compensation. The law also bans corporate staff from improperly influencing audit reports with the goal of misleading recipients. Attorneys representing the corporation must report violations of securities laws and breaches of fiduciary duty to the corporations CEO or counsel. The law also allows for financial recovery to benefit fraud victims.
Financial Disclosures
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Under the Sarbanes-Oxley Act, SEC filings must reflect all adjustments to the financial disclosure, including relevant relationships that may have a financial impact on a security. Generally, the law bans personal loans to corporate officers and directors, with several exceptions. Senior officers, directors and stockholders must disclosure any changes to their ownership of the corporation's securities within two business days. The corporation must disclose whether officers are bound by codes of ethics, and the SEC must periodically review the corporation's financial disclosures. Also, the CEO of each corporation must sign off on tax returns.
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Accountability
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The act makes it a federal crime, punishable by 10 years in prison, for "knowingly destroying, altering, concealing, or falsifying records with intent to obstruct or influence either a Federal investigation or a matter in bankruptcy and for failure of an auditor to maintain for a five year period all audit or review work papers pertaining to an issuer of securities." The chapter also subjects any employee who "knowingly defrauds shareholders" to a prison term of up to 25 years. The act boosted whistle-blowers protections, banning publicly traded corporations from retaliating if the whistle-blower assisted in a fraud investigation. Also, people who violate fraud provisions cannot discharge certain debts in bankruptcy.
White-Collar Penalties
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The Sarbanes-Oxley Act requires corporate officers to certify the accuracy of periodic financial disclosures, making the officers subject to a prison term of up to 10 years if they have knowledge that the report does not comply with the Act, or 20 years if they purposefully certify a non-complying statement. The chapter also increases the penalty for mail and wire from five to 25 years in prison.
SEC Responsibilities
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The act sets a maximum term of 20 years in prison for "tampering with a record or otherwise impeding an official proceeding." Additionally, the SEC gains a corporate controlling role in certain scenarios, and may seek a court order to block payments for parties being investigated for violating securities laws. The SEC can also prevent a person accused of using manipulative and deceptive devises from serving as a corporate office or member of a board of directors. The act sets the maximum penalty for violating the Security and Exchange Act of 1934 to 20 years in prison and $25 million dollars.
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