25. What is the “Sarbanes-Oxley Act”?
The Sarbanes-Oxley Act (SOX) is a set of federal laws addressing criminal and unethical conduct of public company boards and management. It also addresses the accounting and auditing practice of firms servicing these public companies. The criminal sanctions under the statute are as follows:
• Title VIII & XI – This portion of SOX contains the “Corporate and Criminal Fraud Accountability Act of 2002”. It provides criminal charges for the creation or destruction of fraudulent corporate records. It generally addresses fraud through the uses of corporate records and provides established ranges of criminal penalty. It also establishes protections against retaliation for those reporting such activity.
• Title IX – This portion of SOX is called the “White Collar Crime Penalty Enhancement Act of 2002”. It provides criminal charges for illegal and unethical conduct by officers and managers that harms the public. It specifically requires corporate managers to certify that records are true and accurate.
SOX was passed in the wake of numerous corporate scandals that rocked the financial markets, such as World Com, TyCo, Enron & Arthur Andersen.
• Discussion: Do you think that additional government regulation of corporate practices in the form of criminal penalties helps to curve unethical conduct? Do any positive effects outweigh the negative consequences to the business (such as increased costs, bureaucracy, etc.)?
• Practice Question: Derek is CFO of ABC, Inc. After years of declining profits, Derek devises a method for improving the appearance of ABC’s balance sheet. Derek creates a group of limited liability companies that are owned by ABC. ABC transfers corporate debt to these entities, which is reported off of the main balance sheet and in the footnotes of the financial statements. Derek knows that this form of disclosure is likely to convince investors that ABC has a strong financial position. Has Derek committed a crime?