The Sarbanes-Oxley Act: Corporate America's Big Brother

The Sarbanes-Oxley Act: Corporate America’s Big Brother

In late 2001, Enron, one of America’s largest energy producers filed bankruptcy. Enron created off-the-books partnerships and used aggressive accounting methods to hide massive debt and inflate the firm's bottom line which caused them to restate its earnings and debt to reflect a $618 million third quarter loss and a reduction in shareholder equity of $1.2 million (Brickley, 357), and when the news broke, Enron’s auditor, Arthur Andersen, shredded all the documents relevant to the investigation and was indicted for obstruction of justice. At the time it was the largest corporate bankruptcy filing in U.S. history, but they wouldn’t keep that standing long because WorldCom joined the race. WorldCom, the large telecommunications giant also sought Chapter 11 bankruptcy protection after it was revealed that its Chief Financial Officer made the decision to categorize monies paid to local phone companies to connect calls as long-term investments, with at least 15% of those connections not producing any revenue. It was revealed that over a three year period, WorldCom had hidden costs and inflated profits by more than $7 billion. Then in January 2002, Global Crossing, Ltd. also filed for Chapter 11 bankruptcy protection after the SEC, Department of Justice and the House began probing into whether they and other telecom carriers traded network capacity they may not have needed to make revenues appear artificially high. What each of these scandals has in common is that they all involved what has been called, “…skewed reporting of selected financial

transactions.” (SOX-Online.com). The loss in public trust in accounting and reporting practices as a result of these scandals spurred the enactment of the Sarbanes-Oxley Act; corporate America’s “Big Brother.”

The Sarbanes-Oxley Act (“SOX or “The Act””) was enacted into law in July 2002 and was designed to deter and punish corporate and accounting fraud and corruption; threaten severe penalties for wrongdoers, and protect the interests of workers and shareholders. (Zameeruddin, 1). SOX has introduced significant changes in the reporting responsibilities of management and the scope and nature of the responsibilities of the auditor. (Zhang, 1). It is considered one of the most significant changes to securities law since the 1934 Securities Exchange Act, with President Bush calling it, “…the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt” at the White House signing ceremony (Allen, Washington Post). Many see the act as a political product, i.e. the Republicans way to ease the Democrats charge about the Bush Administration being soft on corporate scandals during the November 2002 congressional election, with the major concerns of business being the costs associated with compliance. (Zhang, 1).

One the Act’s major provisions created the Public Company Accounting Oversight Board (“PCAOB”). The PCAOB is funded by fees paid by all public companies and has investigative and enforcement powers to oversee the accounting industry, as well as the authority to regulate auditors of public companies, set auditing standards, and investigate violations of accounting practices. (Zameeruddin, 1). Most recently, the pro-business enterprise conservative group, Free Enterprise Fund is challenging the creation of the PCAOB in court; arguing it violates the Constitution’s mandated separation of powers among the three branches of government and

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former Special Prosecutor, Kenneth Starr is of the lawyers leading the charge; stating, “[the Boards creation] constitutes and excessive delegation of power by the executive branch,” further

stating that due to the nature of the issues raised, “It is likely that the Supreme Court would be interested in the case eventually.” (Gordon, The Associated Press).

The Act consists of eleven sections, but some of the most important, in terms of compliance are Section 302 (Corporate Responsibility