May 20, 2019 SEC Fraud
Sarbanes-Oxley Act of 2002
Congress passed the Sarbanes-Oxley Act of 2002 (also known as “SOX” and the Corporate Responsibility Act of 2002) in response to high-profile financial scandals in the early 2000s involving publicly traded companies such as Tyco, WorldCom and Enron, which called into question the trustworthiness of corporate financial statements. Its goal is to help protect investors from fraudulent financial reporting by corporations. The act took its name from its two sponsors—Sen. Paul S. Sarbanes (D-Md.) and Rep. Michael G. Oxley (R-Ohio).
Important Provisions of the Sarbanes-Oxley Act
The three key SOX provisions are:
Senior corporate officers must personally certify in writing that the company’s financial statements “comply with SEC disclosure requirements and fairly present in all material aspects the operations and financial condition of the issuer.”
The Certification pertains to:
- Accuracy and fair presentation of the report’s disclosure,
- Establishment and maintenance of disclosure controls and procedures, and
- Reporting of deficiencies in, and changes to, internal accounting controls.
Officers who sign off on financial statements that they know to be inaccurate are subject to criminal penalties, including prison terms.
Public corporations must hire an independent auditor to review their accounting practices. SOX defers this rule for companies with a market capitalization of less than $75 million.
Section 404 makes managers maintain “adequate internal control structure and procedures for financial reporting.” Companies’ auditors had to “attest” to these controls and disclose “material weaknesses.”
Sarbanes-Oxley Act 802
This section affects corporate recordkeeping in three significant ways:
- Penalties, fines and/or prison terms of up to 20 years may be imposed for the destruction and falsification of records;
- Records must be stored for 5 years; and
- The specific business records that companies are required to store include electronic communications.
SOX also created the Public Company Accounting Oversight Board (“PCAOB”) to oversee the accounting industry. It bans company loans to executives and prohibits accounting firms from doing business consulting with the companies they are auditing, but they can still act as tax consultants so long as the lead audit partners rotates off the account after five years.
SOX also protects employees who report fraud and testify in court against their employers by forbidding companies from changing the terms and conditions of their employment, and reprimanding, firing or blacklisting them. Sarbanes-Oxley whistleblowers can report any such corporate retaliation to the SEC.
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