The Sarbanes Oxley Act of 2002 was signed into law after a series of corporate financial scandals affected companies such as Enron, WorldCom, and Arthur Anderson. It provides a solid set of government rules that will discourage and punish corporate and accounting fraud and corruption by imposing severe penalties for wrongdoers, while protecting the interest of workers and shareholders. Acknowledged as the most significant change to securities laws since 1934, the Sarbanes Oxley Act, a new penal law, 18 U. S. C. $1348, became effective on July 30, 2002.
The Act contains reforms for issuers of publicly traded securities, corporate board members, auditors, and lawyers. It was designed to improve the quality of financial reporting, accounting services, and independent audits (Zameeruddin, 2005). The provisions of the act apply to U. S. companies that are required to file annual reports with the Securities and Exchange Commission (SEC) as well as foreign companies that that are listed in the U. S. r are obligated to report to the SEC periodically. Title I of the Sarbanes Oxley Act stipulates that a new Public Company Accounting Oversight Board will be appointed and overseen by the SEC. The Board, which is made up of five full-time members, will oversee and investigate the audits and auditors of public companies and penalize for violations of laws, regulations, and rules. It is funded by fees to be paid by all public companies. The Board has the authority to set accounting standards and conduct annual quality reviews.
The SEC will appoint the chairperson and other members of the board and members are not allowed to engage in any other professional or business activity while serving on the board. Prior to the Act, a common loophole for executive officers was that they did not sign off on company reports, and thus were not held accountable, for possible fraudulent activity within their company. The Sarbanes Oxley Act now requires personal certification by the company’s CEO and CFO of periodic reports files with the SEC.
It also places a series of requirements and restrictions on executive officers and directors of companies, including a civil and criminal certification. The civil certification requires that CEO’s and CFO certify each quarterly and annual report, establish internal controls, and disclose of any fraud or significant deficiencies in design or operation of internal controls. The criminal certification requires that CEO’s and CFO certify that the information in the reports fairly represents the company’s financial condition and results of operations.
The Act also imposes a severe fines and possible imprisonment for willfully certifying reports that are non-compliant with SEC regulations. With the effective date of the Act, it became unlawful to extend credit to a director or executive officer. This had an immediate effect on executive compensation: Any advances to officers and directors per personal expenses such as home purchases or college tuition are now strictly prohibited. Split dollar Life insurances, in which a company pays all or part of the premiums, as well as Stock option broker assisted trading plans may be considered extended credit by the company (Zameeruddin, 2005).
Should company be required to restate its financial statements due to noncompliance with financial reporting requirements resulting from misconduct, the CEO and CFO are must reimburse the company for any bonuses or incentive based pay received within twelve months following the filing of the non-compliant document. Impacts of the Sarbanes Oxley Act to the accounting profession are quite dramatic. It affects not just the large accounting firms, but any CPA or auditor working for a publicly traded company.
Audit requirements have changed under the new law and auditors will now report to, and be overseen by, a company’s audit committee, not the company’s management. Furthermore, an accounting firm will not be able to provide audit services to a public company, if one of the company’s executives was employed by the firm and participated in the company’s audit the prior year. It is also prohibited that auditors provide certain non-audit services such as appraisals, valuations, broker and investment banking services, or legal services to audit clients (Donaldson, 2005). Financial Reporting responsibilities have also changed under the new law.
Management must now assess and make representations about the effectiveness of the internal control structure for financial reporting. The Second Partner Review requirement stipulates that auditors have a thorough second partner review and approval for every company audit report. The Act provides several provisions that need to be closely monitored by CPA’s. Some consulting services are now considered unlawful that were previously allowed. CPA’s have a greater duty to communicate and coordinate with corporate audit committees, which are now responsible for hiring, compensating and overseeing internal auditors.
The implications for CPA’s with tax practices are not yet clearly defined by the act and might not be permitted by the act, if they could be construed as “expert” services (Hoseoup, 2005). New disclosure requirements which demand more extensive financial disclosures by issuers, such as the requirement to disclose to the public on a rapid and more current basis are designed to protect the investors and the public interest. Outlined by the Sarbanes Oxley Act of 2002 is also several new criminal penalties and civil liabilities for securities law violations.
These are covered in title VIII of the Act. The U. S. Sentencing Commission was directed to “adopt Federal Sentencing Guidelines that will reflect the serious nature of the offenses and the penalties set forth in the act, the growing incidences of serious fraud offenses and the need to deter, prevent, and punish offenses” (Scheer, 2003). Several new crimes have been identified and established. “It is now a felony to knowingly destroy or create documents to impeded, obstruct, or influence any existing or contemplated federal investigation or bankruptcy proceeding; violation cans result in fines and up to 20 years imprisonment. ” Outlined in the act are also three main civil liabilities.
The first one is an amendment to the bankruptcy code, which stipulates that an individual with an outstanding judgment against him (or her) for securities law violations or fraud will not able to discharge obligations in a bankruptcy proceeding. The second is an extension of the statue of limitations for investors to file civil action. This means the time period for an investor to file a civil action has been extended from one to two years after discovering the facts. If there is an actual violation, the time period for filing a civil action has been extended from three to five years.
The third, and probably most know of the three civil liabilities is the so called whistleblower protection provision. Several laws provide protection of employees from retaliation by employers fro disclosure of illegal activities. The Sarbanes Oxley Act goes one step further and makes it a federal crime to “knowingly, with the intent to retaliate, take any action harmful to a person, including interference with the lawful employment or livelihood of any person, for providing to law enforcement any truth full information relating to the commission or possible commission of any federal offense. A whistleblower whose right has been violated may also seek remedy of special damages, back pay, attorney fees, or reinstatement. When the Enron / Arthur Andersen scandal first unraveled in late 2001, followed by similar stories such as ImClone and Global Crossing, Congress did very little. A number of bills were introduced to address corporate misconduct; however, the differences between the Senate, the House of Representatives and White House, on how to address the problems were so great that no legislation appeared imminent.
After a second wave of scandals, led by WorldCom and Adelphia in early 2002, Congress and the White House saw the need for action. This time, Congress passed the complicated Sarbanes-Oxley Act without much delay. President Bush, who had earlier expressed skepticism about some of the bill’s main provisions, signed the measure into law on July 30, 2002. While opponents of the law argue that the costs and efforts to implement the Sarbanes Oxley Act are too high especially for small businesses, I believe that this law is necessary to ensure that larger organizations are deterred from corporate and accounting fraud and corruption.
Examples, such as the sentencing of former Wordcom boss Bernard Ebbers, who was sentenced to 25 years in jail after being found guilty of fraud and conspiracy as well as accounting fraud, hopefully discourage similar actions. Ebbers was found guilty of seven counts of knowingly filing false documents (BBC News UK edition, 2005).
Scheer, Anne. What employers need to know about Sarbanes Oxley. (October 2003). New Hampshire Business Review. Retrieved November 10th, 2005 http://gcglaw. com/resources/employemnt/sarbanes. html BBC News UK edition (13. July 2005. Retrieved on November 30th, 2005. http://news. bc. co. uk/1/hi/business/4680221. stm Zameeruddin, R. BQuest Business Journal University of West Georgia. Retrieved November 10th, 2005. http://www. westga. edu/~bquest/2003/auditlaw. htm Hoseoup, Lee. Effects of Sarbanes Oxley Act of 2002. Retrieved December 3rd, 2005. http://www. sba. muohio. edu/abas/2003/vancouver/lee_auditor%20independence. pdf The US Congress. 2002. Sarbanes-Oxley Act. H. R. 3763. http://www. findlaw. com Donaldson, William. Testimony Concerning the Impact of the Sarbanes-Oxley Act of 2002. April 21, 2005. Retrieved December 3rd, 2005. http://www. sec. gov/news/testimony/ts042105whd. htm