Sarbanes-Oxley, also known as Sarbox or SOX, is also known as the “Public Company Accounting Reform and Investor Protection Act” and “Corporate and Auditing Accountability and Responsibility Act. The creation of Sarbanes-Oxley was due to the number of corporate accounting scandals and it often described as the most powerful piece of legislation aiming toward corporate financial accountability. Among the major scandals was Worldcom Company.
Worldcom Company, at one point was the second largest telecommunication company, founded by Bernard Ebbers. The company merged with MCI in 1997 and eventually merged with Sprint. Bernard Ebbers remained as the company’s Chief Financial Officer after both mergers. Following the mergers, Bernard Ebbers received a large amount of capital and ...view middle of the document...
According to CBS News, accounting irregularities involving spending and capital expenditures inflated in cash flow that otherwise would have been shown as a loss in the fourth quarter of 2001 and the first quarter of 2002 (CNN.com). Worldcom filed for Chapter 11 bankruptcy in 2004 and the company was acquired by Verizon. Bernard Ebbers was eventually indicted, convicted and sentenced to 25 years in prison. The scandal cost investors billions of dollars when the company collapsed.
The creation and passing of the Sarbanes-Oxley Act helped regained public confidence in the nation’s securities markets. Sarbanes-Oxley contains 11 sections, ranging from creating of an oversight board to corporate board responsibilities and criminal penalties. Specifically, Sarbanes-Oxley requires that the following are followed by all corporations:
1. Senior executives are personally responsible for the accuracy and completeness of the financial reports. Section 302 requires that the Chief Executive Officer and Chief Financial Officer certify and approve the integrity of their company financial reports.
2. Require reporting on financial transactions and stock transactions of corporate officers. The new rule requires internal control and accuracy of financial reports and disclosures.
3. Describes specific criminal penalties for manipulation, destruction or alteration of financial reports and providing certain protections for whistle-blowers.
4. Increases the criminal penalties associated with white-collar crimes and conspiracies. Sarbanes-Oxley Act recommends stronger sentencing guidelines. Failure to certify corporate financial reports is considered a criminal offense.