With the passage of the Sarbanes Oxley Act, two different legal
routes for punishment were created, one for criminal penalties
and one for civil penalties.
The civil penalties for the Sarbanes Oxley Act are listed under
15 U.S.C. §7241 (Section 302). These penalties are designed to
make certain full and accurate financial disclosure is made, and
requires signing officers to be personally accountable for the
papers they are signing off on. Implicitly under the Sarbanes
Oxley Act, they are agreeing that they're responsible for
establishing and maintaining internal controls, and that they
have ensured that all of a company's material information
necessary for investors to make intelligent decisions is made
known by internal procedures of the company.
This guarantees that, unlike the MCI and Enron officers of
yesterday, tomorrow's executives cannot plead ignorance. If they
are ignorant of the daily finances of their own company, they
have no one but themselves to blame. After all, they were the
ones who designed the internal controls and promised to ensure
these controls worked properly.
In addition, under the Sarbanes Oxley Act officers are required
to evaluate the effectiveness of these controls, and to report
on their conclusions after the testing.
Section 404 also requires that management produce an internal
control report for each annual Exchange Act report. These
reports guarantee every year that management signed off for
responsibility on under the requirements of the Sarbanes Oxley
act. Ultimately, Congress has made the SEC responsible for
ensuring regulations related to these provisions are
communicated and enforced.
Criminal Penalties for Violating the Sarbanes Oxley Act
Criminal penalties for the Sarbanes Oxley Act are found under 18
U.S.C. §1350 (Section 906). Among them are:
1. a whistleblower's protection clause; 2. a clause invoking
criminal penalties if corporations destroy, alter, or conceal
documents relating to a criminal or civil investigation by the
Federal government, or that relate to a bankruptcy proceeding;
3. a clause extending criminal liability to accountants who do
not maintain a complete audit paper trail.
Federal mail fraud statutes have been extended to cover many
fraudulent business practices associated with the Sarbanes Oxley
Act and very serious criminal as well as civil penalties for
corporate officers who certify financial statements as accurate
when they are aware that these statements are not.
Corporate officers are highly liable in many phases of the
Sarbanes Oxley Act. Moreover, ignorance is not an acceptable
excuse. Corporate officers are expected to be accountable for
the contents of anything they sign off on, and if they don't
know what's in the document it's considered to be their own
fault.
Oddly, the one item not specifically listed as making you liable
for either civil or criminal penalty is not signing off on
financial statements at all. This may be to prevent corporate
officers who dispute the accuracy of a statement from being
damaged by someone else's errors.
In order to protect yourself from penalties in the Sarbanes
Oxley Act, you should get some sort of training on how the
Sarbanes Oxley Act affects you specifically. For larger
corporations, complete training for each section of your company
affected, as well as overall training to let each section know
how the Sarbannes-Oxley Act affects the company at large, is
recommended.
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