AFTER NEARLY TEN YEARS, SARBANES-OXLEY MAY BE STATUTORY OVERKILL
The start of the twenty first century brought with it some spectacular corporate accounting scandals: Enron, World-Com, Adelphia, and Tyco, to name a few. The subsequent congressional hearings investigating the accounting and ethical failures of these companies resulted in a parade of one corporate executive after another claiming they had no knowledge of the massive fraud in their firms. In response to this rapid-fire succession of corporate scandals, Congress enacted the Sarbanes-Oxley Act of 2002 (“SOX”). It is a statute first introduced by Senator Paul Sarbanes and Congressman Michael Oxley, and signed into law by President George W. Bush in July 2002. The two major problem areas that SOX sought to remedy were personal accountability of corporate managers, and that of auditor independence. In this essay, I will argue that there are some provisions within SOX that wrongfully make the innocent suffer for the guilty. I will first look at Section 206, which prohibits an auditor from taking a position with a client for at least one year after participating in an audit of that same client. I will next look at Section 203, which requires that an auditing firm rotate its partner if it worked with a specific client for the previous five years. Finally, I will look at Section 304, which requires the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of a publicly traded corporation to disgorge their profits if the financial statements must be restated due to fraud. In doing so, I do not mean to suggest that enacting SOX was unnecessary or unsuccessful; I am merely pointing out that even a right motive can sometimes yield a harshly wrong result.
This document is currently not available here.