The Sarbanes-Oxley Act holds company executives responsible for certifying that company accounts are accurate.
The Sarbanes-Oxley Act was passed by Congress in 2002 as a response to scandals involving corporate fraud, such as Enron and WorldCom. The Act requires all companies to disclose a variety of financial information, and for company executives to certify the information is accurate. Penalties are very strict and can be imposed on individual company executives. For this reason, it is vitally important that all businesses are familiar with the requirements of the Act.
History
Senator Paul Sarbanes and Representative Michael Oxley proposed the Act to strengthen corporate accountability and governance and prevent the type of fraud epitomized by the Enron scandal. In the case of Enron, corporate executives deliberately misrepresented large numbers of transactions to government auditors, in order to hide huge loses. To prevent this type of fraud, the Act requires procedures to ensure companies have transparent accounting practices in place. The Act also holds executive officers and financial officers responsible for financial information.
Financial Certification
The Sarbanes-Oxley Act requires the CEO and CFO of all publicly traded companies to certify that financial statements and annual reports are correct and represent the true state of the company's finances. The CEO and CFO must prepare a statement that they have reviewed the financial report and, based on their knowledge, it does not contain any untrue statements and contains all relevant financial information.
Audit Certification
During a financial audit, executives make oral and written representations to the auditor in answer to any questions the auditor may ask. The company executives are also asked for a letter certifying the answers given to any questions the auditor asked. The Act makes it a crime for company executives to fraudulently mislead, influence or coerce any accountant performing an audit by giving a false or misleading audit certification.
Internal Controls
The Sarbanes-Oxley Act requires companies to have in place internal controls on its system of financial reporting. Annual reports must include an assessment of the company's system of financial reporting. This assessment, called a 404 audit, must demonstrate that there are sufficient safeguards in place to ensure the accuracy of the company's financial reporting. The company executives are also required to certify the assessment.
Penalties
Executives who certify that company financial records are accurate when they are not can face up to a five-year prison sentence, a fine and civil and criminal litigation. They could also be barred from serving as executive officers in the future. Companies that are not in compliance with the certification requirements of the Sarbanes-Oxley Act can face loss of insurance, removal from the stock exchange and fines. Any employee, including executive officers, who deliberately hides or presents misleading information can face up to 20 years in jail. An executive officer who deliberately submits an incorrect or misleading section 404 audit faces up to 10 years in jail and a $1 million fine.
