Sarbanes-Oxley Act of 2002 and Impacts Term Paper

Pages: 7 (2014 words)  ·  Bibliography Sources: 1+  ·  Level: College Senior  ·  Topic: Business

Sarbanes-Oxley Act of 2002 and Impacts on Post and Pre-Using Case Examples as References

Sarbanes-Oxley Act of 2002

During the past few decades, the number of white-collar business fraud cases seemed to increase dramatically. Due to an immense interest and press investigations, these crimes were brought to the publics' attention, causing them to lose their confidence in the fairness of business actions. In July 2002, Senator Paul Sarbanes and Representative Michael G. Oxley presented the American Senate with the Public Company Accounting Reform and Investor Protection Act of 2002.

Also known as SOX or SarBox, the Sarbanes-Oxley Act "establishes a new quasi-public agency, the Public Company Accounting Oversight Board, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as auditor independence, corporate governance and enhanced financial disclosure."

In other words, the act is meant to ease the prosecuting process against white-collar delinquents and decrease the number of overall crimes. Even if it promotes a noble project, the act was faced with several criticism as its implementation requires significant costs, pushing small businesses to bankruptcy.

The conditions under which corporations respect the legal provisions in the SarBox have become the subject of continuous debate and even reached courts of law. However costly or effort demanding the process is, it has several benefits upon the company as well. Among these benefits for the company are a higher risk assessment, higher quality of the control and significant improvements with internal communications.

2. Case Information

2.1 White-collar prosecutions prior to the Sarbanes-Oxley act of 2002

The SarBox Act of 2002 promotes drastic regulation in the field of white-collar crimes referring to the withdrawing of information and document destructions. The main intent of the bill is to clearly state the operations that contradict legal and competitive fairness and to state the repercussions for these actions.

Before the enactment of the 2002 Act, prosecutors were often faced with the impossibility of bringing to justice those committing white-collar fraud as the legislation at the time was rather hazy. "For instance, prior to Sarbanes-Oxley, federal prosecutors relied on a series of obstruction of justice crimes to prosecute individuals for destruction of documents. Although these statutes provided some powerful tools, they were fraught with loopholes, and prosecutors were required to craft indictments with great care." 2

In the case of document destruction, the American Government was entitled to prosecute the persons involved in the destruction, but only if the destruction took place during an already existing government judicial investigation.

Another drawback in the previous SarBox Act legislature was the fact that the prosecuting act had to be based on the "corrupt persuader theory."3 in other words, the District Attorneys could only prosecute those against they had solid evidence that they had been convincing others to destroy documents.

Sarbanes' and Oxley's act changed the white-collar crime legislature in the meaning that they broadened "both the subject matter and the range of circumstances in which the government can prosecute document destruction.4"

2.2 the Enactment of the Sarbanes-Oxley act of 2002 - Criticism

In the summer of 2002, the United States House of Representatives voted for the bill with 423 in favor and only three against. The American Senate passed the Sarbanes-Oxley Act with a vote of 99 in favor and zero against. The SOX Act was intended to contribute to the white-collar crime legislation in five courses of action: "internal monitoring, gatekeeper regulation, regulation of insider misconduct, more disclosure and regulating securities analysis."5

As it had been expected, the new laws brought about numerous criticism from business men and corporate companies. Their objections were exaggerated and almost created a national chaos. Among their main dissatisfactions was the time limitation under which they would disclose their option grants. "Section 403 of Sarbanes-Oxley, which, in 2002, amended the Securities and Exchange Act of 1934, now requires that grants of stock options be reported to regulators within two days of the grant date"6 instead of 45 days according to the previous legislature.

The overall dissatisfaction consisted in that the government had imposed too stern rulings which would not be in the benefit of employees, employers and the American economy. Supporting this cause, "James Glassman, a resident fellow at the American Enterprise Institute, told the chamber that the Sarbanes-Oxley will have four chief effects on industry. It will: Raise compliance costs and other expenses, Deter innovation and risk-taking, Increase lawsuits, Distract CEOs and executives from other important tasks. "Facing a possibility of 20 years in jail and $5 million fines, executives are going to spend lots of time going over financial statements, and less time creating, innovating and leading,"7

2.3 Long-term effects of the bill upon white-collar crime and corporate behavior

Supporters of the SarBox claim that a clear understanding and obedience to the 2002 Act would lead to a decrease in the number of white collar fraud cases. They believe that the company CEOs would place more interest in the correctness of legal documents, "the completeness and accuracy of information contained in the reports, as well as the effectiveness of the underlying control."8

Gary Grindler, a white-collar criminal defense lawyer at King and Spalding points out the growing importance of attorneys in the economic process. According to him, "corporations, executives, in-house lawyers and outside counsel must be more proactive than ever before in ensuring compliance with the law."9 if prior to the SarBox, companies could easily find ways to break the law and not suffer the consequences, now, after the SarBox was enacted, prosecutors find it easier to convict companies and individuals. "With several perceived impediments now removed by the act, prosecutors may be more prone to bringing straightforward obstruction cases alleging executive misconduct."10

In a nutshell, the direct effects of the Sarbanes-Oxley Act of 2002 would number decreased cases of white-collar fraud. The reason behind this would be a change in the corporate behavior in the meaning that a company's managing department would place more emphasis on the correctness of financial statements and accounting documents.

2.4 Economic impact of Sarbanes-Oxley

The bottom line of the Sarbanes-Oxley Act of 2002 is that it obliges corporations to pay more attention on "certifying internal controls and attesting the accuracy of information."11 the direct outcome of such measures is a significant increase of the it industry department in both importance on the market as well as revenues. "Regulatory compliance, security audits and mandatory information disclosure [...] can be very costly from a budget standpoint because internal resources need to be allocated [...] into increased investments in technologies that facilitate compliance."12 in other words, the enactment of the SarBox Act was directly responsible for the tremendous economic growth of the it domain.

Aside from the it growth, the SarBox also has economic impacts on small companies in the meaning that it drastically increases their costs. Most small businesses do not possess sufficient finances to acquire the hard and software requested by the bill and doing so might lead to their going into bankruptcy.

3. The SOX case of Richards vs. Lexmark International Inc.

In the four years since its enactment, the Sarbanes-Oxley Act has been able to firmly point out their position with regard of several corporate whistleblowers. Most of these cases that got into the court's attention received favorable sentence for the employer, however this was not the case of Richards vs. Lexmark.

The situation

After a two-year period of collaboration between Richards, the plaintiff, and Lexmark, the employer, the company was preparing to let Richards go as they were unsatisfied with his performance and continuous misunderstandings with his colleagues. However, they did not share this intent with him but decided to postpone it until after the winter holidays of December 2002, January 2003.

On January 3rd, 2003 Richards was expected to hand in his assessment of "the company's inflated levels of inventory over the preceding two years. He provided his preliminary analysis [...] asserting that the company's methods would lead to erroneous inventory management reporting. The following business day, Richards was discharged"13 and decided to sue his former employer.

The evidence

During the judicial process, the employer was able to prove that they had: "previously transferred Richards several times because of performance issues and difficulty working with other employees; placed Richards on a performance improvement plan, and that inadequate progress had been made on that plan; was actively contemplating a termination for cause for several weeks prior to any complaint being received."14

However, Richards attorney of law "held that the proximity in time between his (client's) protected activity and his discharge was more than sufficient to raise an inference of causation, and that Lexmark failed to show by clear and convincing evidence that it would have fired him even in absence of this conduct."15

The court's ruling

The OSHA administrative law judge ruled in favor of Richards, concluding that his "termination was retaliatory when it occurred a day after Richard's filed a complaint, because the timing created a causation inference."16… [END OF PREVIEW]

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