The needs and implications of the
SARBANES-OXLEY ACT OF 2002
The Enrons and Worldcoms made it clear that the financial markets cannot be left under the tutelage of corporate directors and officers, without oversight authority. The corporate abuses and fraud that Enron exemplified, while not a first in the financial markets, they were certainly a first in terms of the magnitude of the losses to stockholders and the confidence the public reposed in the financial sector (Bequai 2003).
The allegation against Enron was that it "used special purpose vehicles for $8.5 billion of deals to hide real level of debt" (Student Accountant 2002, p.9). WorldCom was alleged to have "treated over £3.8 billion revenue costs - network maintenance - as capital expenditure to inflate profits". Also, "Loans of $2.5 billion were misreported" (Student Accountant 2002, p.9).
Both companies came under criminal investigation, went bankrupt - WorldCom being the biggest ever bankruptcy - and the auditor for both companies (Anderson) was convicted for obstruction of justice.
The Sarbanes Oxley Act of 2002 was instigated as a direct result of the Enron, WorldCom and other accounting scandals in the US. It does not affect UK companies unless they are subsidiaries of US firms or are listed on US stock exchanges.
The act combines bills originally drafted by US senator Paul Sarbanes and Congressman Michael Oxley. It is designed to enforce corporate accountability through new requirements, backed by stiff penalties. Under the Act, Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) must personally certify the accuracy of financial statements, with a maximum penalty of 20 years in jail and a $5m fine for false statements (It Week 2003)
President George W. Bush signed the Act on 30 July 2002 (the Enactment Date). This landmark legislation and the resulting regulations, will have a significant impact on management of reporting companies, auditors, lawyers and securities analysts. Below is a short summary of some of the more critical aspects of the Act (Reed Smith 2002):
CORPORATE RESPONSIBILITY AND DISCLOSURE
Section 906 of the Act requires that a certification by the CEO and CFO accompany each periodic report containing financial statements filed with the Securities and Exchange Commission (SEC). The required certification is a written statement from the CEO and CFO of the issuer certifying that the report complies with Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information provided in the report fairly represents, in all material respects, the financial condition and results of operations of the issuer. Criminal penalties - both significant monetary fines and imprisonment - are established under the Act for any certification that is knowingly or willfully false.
Further, under Section 302 of the Act, the SEC must adopt regulations, to be effective within 30 days of the Enactment Date,...