What Is The Sarbanes-Oxley Act?
In 2002, Congress passed the Sarbanes-Oxley Act in response to a number of corporate scandals, including Worldcom and Enron. This law reformed the accounting profession and corporate financial reporting. It was meant to improve the integrity of financial reports and to regulate accounting in a better way. To learn more about the Sarbanes-Oxley Act, talk to the lawyers at Swartz Swidler.
How the Enron scandal led to reform
Companies that are publicly traded must file financial reports. These reports are meant to give the public important information about the companies’ liabilities, assets, cash flow, revenue, and business operations. This information is very important for the market. Investors rely on the reports to determine whether or not to sell or buy stock. Competitors rely on the information to make decisions. Finally, the market relies on the information in the financial reports to analyze industries and individual companies. The information contained in the financial reports helps to assess a company’s value. When the reports are false or misleading, there can be far-reaching repercussions that result.
In 2001, Enron was the seventh-biggest company in the U.S. Its accounting practices led to a scandal and its ultimate collapse. Investigations found widespread practices within the company to manipulate its stock price. The executives misrepresented the companies assets and liabilities on a systematic basis. Several executives of the company were convicted of financial crimes. Its accounting firm was Arthur Anderson, which also later closed. The Enron scandal along with another one at WorldCom led Congress to pass the Sarbanes-Oxley Act.
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Key provisions of the Sarbanes-Oxley Act
The Sarbanes-Oxley Act reformed financial reporting and the accounting profession in numerous ways. Corporate executives are now required to certify that their companies’ financial reports are accurate. They must also assess and maintain internal controls to prevent financial data from being wrong, fraudulent or misleading. There are also criminal penalties for altering documents and misleading shareholders. The law established an accounting profession oversight board and regulates the relationships between accounting firms and corporations. Finally, the law includes protections for corporate whistleblowers who report their companies for violating the Sarbanes-Oxley Act.
Certification of financial statements
The chief financial officer and chief executive officer of a public company must both certify the accuracy of the company’s financial reports. They must certify that they have reviewed the reports and that the information contained in them is accurate. There must also be internal controls to help to ensure that the financial disclosures are accurate.
Internal controls
Companies are required to have internal controls in place so that their financial reports will be accurate. Every financial report will contain a report about the internal controls. the company’s annual report will assess the controls’ effectiveness. An external auditor must attest to the assessment of the effectiveness of the controls, too.
The accounting oversight board
Under the law, the Public Company Accounting Oversight Board was established. This is a private sector board that regulates the accountants who audit public companies. The PCAOB is able to issue regulations governing accounting.
Criminal penalties
Under the Sarbanes-Oxley Act, defrauding shareholders by filing false or misleading financial reports is now a crime. Executives who knowingly certify misleading or false financial reports may be fined up to $1 million and face up to 10 years in prison. The penalties may be increased for executives who willfully certify financial reports that are noncompliant. They may face up to 20 years in prison and fines up to $5 million. Finally, destroying or falsifying records in an effort to obstruct an investigation is also a crime.
Protection for whistleblowers
Employees who report corporate fraud are protected by the Sarbanes-Oxley Act. Employers may not retaliate against whistleblowers for reporting the fraud. They may not fire, demote, harass, suspend, discriminate against or threaten whistleblowers who give information to investigators or cooperate with investigations. Whistleblowers are able to file lawsuits against their employers for violating the anti-retaliation provisions of the Sarbanes-Oxley Act.
If you have knowledge that your company has engaged in fraudulent or misleading financial reporting practices, you may want to talk to the attorneys at Swartz Swidler. Fill out our contact form, and we will contact you to learn more about your potential case.
Most Frequently Asked Question: Do I Have A Case?
While it is true that every case is different, The law is pretty clear in most cases. The best way to determine if you have a case is to contact one of our attorneys. For more information check out the FAQ below or visit our FAQ Page
Most Frequently Asked Question:
Do I Have A Case?
While it is true that every case is different, The law is pretty clear in most cases. The best way to determine if you have a case is contact one of our attorneys. For more information on a just a few scenarios checkout the flip box FAQ below or visit our FAQ Page.
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Our Locations
Haddonfield Headquarters
9 Tanner Street, Ste. 101
Haddonfield, NJ 08033
Phone: (856) 685-7420
Fax: (856) 685-7417
Philadelphia Satellite Office
123 South 22nd Street
Philadelphia, PA 19107
Phone: (215) 995-2733