H.R.3763 - The Sarbanes-Oxley Act of 2002
A lot has been made, perhaps without justification, of the July 30, 2002 passage of H.R. 3763, The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley" or The Act). Having read the Act, I suspect that the great praise is unfounded. I intend to address three issues presented within the act. First, I will address stock options as considered (or neglected, as the case may be) by Sarbanes-Oxley. Second, I will address the creation of a Commission designed to oversee audits and corporate accounting practices, and the potential efficacy of this Commission. Finally, I will address the modifications to the Federal Sentencing Guidelines as it relates to corporate fraud.
The failure to directly address accounting practices as they relate to stock options and other corporate incentives in Sarbanes-Oxley indicates the flaw in Federal regulation of corporate practices.
Sarbanes-Oxley was designed to address the fraudulent accounting practices undertaken by the accountants for Enron and WorldCom. One of the biggest problems with regard to the accounting used in preparation of financial statements by corporations has been the issue of non-salary executive compensation. Corporations, as part of a combined incentive and retention program, often offer executives stock options and enhanced performance pay. The key debate, with regard to accounting practices, has been how these incentives should be depicted on annual and quarterly corporate financial reports.
The position of the Internal Revenue Service has been that corporations, in order to fairly obtain the tax benefits often garnered on corporations based on their compensation plans, should list these compensation plans (options, in particular) as expenses on their financial reports. See Simon Kennedy and Brendan Murray, IRS Proposes Stock Options be Expensed for Some U.S. Affiliates, Bloomberg News Wire Service(Jul. 26, 2002). If corporations were to expense executive compensation plans, this would reduce their overall profits. However, there are those, including the celebrated and successful CEO of Berkshire Hathaway, Warren Buffett, who argue that this reduced profit figure is a more accurate reflection of a corporation's performance. See Warren E. Buffett, Who Really Cooks the Books, NY Times (Jul. 24, 2002). "When a company gives something of value to its...
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...reased (the maximum possible fine is now $25 Million per violation, instead of $2.5 Million), as have prison terms (20 years maximum). Still, the problem remains: who cares if they are fined $25 Million if they make $250 Million? There needs to be stronger enforcement policies. A theory I think might be useful is to borrow from the Racketeering Influenced Corrupt Organizations Act (RICO). Fines should not be set as a constant. They should reflect the social cost of the crime. Thus, as with RICO, fines should be set at a level three times that of the social cost of the criminal act (a.k.a., treble damages). Imagine how reluctant Milken would have been to engage in insider trading had he known that he would make -$600 Million as a result of $300 Million in social costs?
Conclusion
Sarbanes-Oxley is a very well-intentioned act. However, it lacks teeth in areas where it needs them, and goes too far in areas where actual enforcement of pre-existing laws would solve the present regulatory problem. The Act, I suspect, may be the source of more problems in the future. Further, it is unlikely to work as the curative salve it is intended to be for the stock market/economy.
beginning in the millennium. These scandals prompted the government to pass new accounting regulations to increase the control and accuracy of financial reporting. A prominent piece of legislation is the Sarbanes-Oxley Act of 2002, which applies to publicly traded businesses. The basis of Sarbanes-Oxley is to increase the reliability and accuracy of financial reporting (Noreen). At the time of these scandals, many businesses and individual professions already had ethical and accounting standards in
The Sarbanes-Oxley Act of 2002 was passed by Congress to protect investors from fraudulent accounting records. The passing of the act forced strict regulations upon publicly traded companies to improve the accountability of accounting records for investors as a result of the extreme levels of malpractice that occurred in the late twentieth and early twenty-first centuries. The implementation of the SOX Act changed the way accounting records were checked for injustices. With the act, upper level managers
assigning responsibility, separating duties to provide checks and balances, hiring an independent verification agent and through the use of technology and physical controls. In many instances, internal controls are required and overseen by the Sarbanes-Oxley Act of 2002. Assignment of responsibility for certain functions of the bookkeeping and accounting process ensures that when a problem occurs a specific person is accountable. This, in turn, provides an incentive to that person to do their job correctly
Introduction Sarbanes-Oxley act was passed in 2002 in reaction to several scandals and the dot com bubble involving major corporations. Eron, Tyco and Worldcom were the prime scandals. In the light of those scandals, Sarbanes- Oxley was passed with an intention to make corporate governance more rigorous, protect investors from fraudulent activities performed by the corporation by making financial practises more transparent, strengthen corporate oversight and promote/improve internal corporate control
Sarbanes Oxley Act of 2004 The Sarbanes-Oxley Act of 2002 was signed into law on July 30, 2002 by President Bush. The new law came after major corporate scandals involving Enron, Arthur Anderson, WorldCom. Its goals are to protect investors by improving accuracy of and reliability of corporate disclosures and to restore investor confidence. The law is considered the most important change in securities and corporate law since the New Deal. The act is named after Senator Paul Sarbanes of Maryland
deception intended to result in financial or personal gain” (Oxford University Press, 2014). It is arguable that only individuals have the ability to engage in fraud, but these individuals may lead corporations, which allows corporations also to commit acts of fraud. From a high-level perspective for combating this issue, many governments build a regulatory environment that interacts through firms and individuals. This regulatory environment exists as a series of laws and directives on the various government
Between the years 2000 and 2002 there were over a dozen corporate scandals involving unethical corporate governance practices. The allegations ranged from faulty revenue reporting and falsifying financial records, to the shredding and destruction of financial documents (Patsuris, 2002). Most notably, are the cases involving Enron and Arthur Andersen. The allegations of the Enron scandal went public in October 2001. They included, hiding debt and boosting profits to the tune of more than one billion
The Sarbanes-Oxley Act Overview: The development of the Sarbanes-Oxley Act (SOX) was a result of public company scandals. The Enron and Worldcom scandals, for example, helped investor confidence in entities traded on the public markets weaken during 2001 and 2002. Congress was quick to respond to the political crisis and "enacted the Sarbanes-Oxley Act of 2002, which was signed into law by President Bush on July 30" (Edward Jones, 1), to restore investor confidence. In reference to SOX, penalties
Individual Article Review Lily Cobian LAW/421 March 31, 2014 Ramon E. Ortiz-Velez Individual Article Review Introduction My article review is based on Sarbanes-Oxley and audit failure, a critical examination why the Sarbanes-Oxley Act of 2002 was established and why it is not a guarantee to prevent failure of audits. Sarbanes-Oxley Act talks about scandals of Enron which occurred in 2001 and even more appalling the company’s auditor, Arthur Anderson, found guilty of shredding company documents
Accounting Fraud, the Investor and the Sarbanes Oxley Act Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes
The Sarbanes-Oxley Act was enacted on July 30, 2002. It was enacted by the 107th United States Congress. It is named after sponsors U.S. Senator Paul Sarbanes and U.S. Representative Michael G. Oxley. It is also known as the ‘Public Company Accounting Reform and Investor Protection Act’ in the Senate and ‘Corporate and Auditing Accountability and Responsibility Act’ in the House. The main purpose of this act was to protect investors by improving the accuracy and reliability of corporate disclosures
are also an accurate series of checks and balances and are in place to find discrepancies. The Sarbanes-Oxley Act of 2002 (SOX) was named after Senator Paul Sarbanes and Michael Oxley. The Act has 11 titles and there are about six areas that are considered very important. (Sox, 2006) The Sarbanes-Oxley Act of 2002 made publicly traded United States companies create internal controls. The SOX act is mandatory, all companies must comply. These controls maybe costly, but they have indentified areas
Sarbanes-Oxley Act (SOX) Name Name of Institution Introduction The Sarbanes-Oxley Act is a legislation aimed at increasing the accuracy of financial statements that were issued by companies that are publicly held (Livingstone, 2011). The passing of this act was a response to some of the financial malpractices that took place at companies such as WorldCom and Enron. According to Livingstone, making ethical decisions is critical because ethical lapses can lead to severe unforeseen consequences
passed a law known as the Sarbanes-Oxley Act of 2002 also known as the Public Company Accounting Reform and Investor Protection Act. This law was passed in hopes of thwarting illegal and misleading acts by financial reporters and putting a stop to the decline of public trust in accounting and reporting practices. Two important topics covered in Sarbanes-Oxley are auditor independence and the reporting and assessment of internal controls under section 404. Sarbanes-Oxley contains eleven titles and
However, when looking at the Sarbanes-Oxley Act which was supported by Paul Sarbanes and Michael Oxley represented a massive adjustment to the securities law. Further due to the Sarbanes-Oxley Act, publicly-traded and privately-held companies are obligated to implement and report in-house accounting controls to the SEC for compliance. Nonetheless, I will expand on whether executive compensation is ethical or unethical in the workplace, as well as if the Sarbanes-Oxley Act too strict or not strict enough