Much controversy exists about the Sarbanes-Oxley Act (the “Act”) of 2002. Enacted into law by then-President George W. Bush on July 30, 2002, the Act had been heralded as a gigantic step toward reforming the ills of unethical conduct that plagued major corporations after the collapse of Enron, Worldcom, and Tyco. Ten years later, the Act has become one of the most debated issues in MBA schools and, now, in the current presidential race.
The magnificent highlight of the law was to shed daylight on mischievous corporate behavior in various arenas. There was too much activity going on behind the scenes and the Security Exchange Commission seemed to allow these issues to go unnoticed. A plethora of problems blew up and got out-of-control. President Bush’s response to the public’s demand for greater accountability by 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.
CEO’s and CFO’s are now required to certify the appropriate financial reports after having them audited. While this is all well and good, the reality is that what was happening was the fox was guarding the hen house and no one was watching the fox. The symbiotic relationships between the corporate giants and their accounting firms had become overly cozy. The accounting firms began playing “I’ve got your back,” to keep the corporations’ business, only to now be regulated greater than before.
New standards created an oversight board for the regulation of auditors and determining auditor independence came to the fore. New audit standards for reporting companies under the Act included a proscription thwarting independent auditors from, other than tax services, providing many non-audit services. To effectuate this, mandatory audit partner rotation was imposed.
Two provisions under the Act require senior management of corporations to certify periodic reports filed with the SEC. The rules require CEO’s and CFO’s of each reporting company to certify periodic reports to be filed with the SEC. The U.S. Criminal Code was amended requiring each periodic report containing financial statements be accompanied by a certification of the CEO and CFO of the company.
Anyone who files a defective certification knowing that the periodic report accompanying Section 906 does not comply with all of its requirements can be fined up to $1,000,000, imprisoned not more than 10 years, or both. Anyone who willfully, and in the context of the requisite scienter, certifies any statement in the Section 906 certification knowing that the accompanying report is not in compliance with all the requirements of Section 906 will 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 willfully, 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 up to 20 years.