Vol 1 (2004) - Issue 1

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Sarbanes-Oxley Act

In the US, the first criminal charges have been brought under the Sarbanes-Oxley Act. This sweeping legislation was designed to restore public trust in corporate accounting and reporting, and will have implications far beyond the US borders, explains Andrew Durant, a specialist in fraud investigations and partner at BDO Stoy Hayward.

In November 2003, the first chief executive to be charged with breaching the Sarbanes-Oxley Act emerged. Richard Scrushy, the former head of US hospital group HealthSouth, was charged with fraud on 85 counts. If convicted, he faces a prison sentence of up to 650 years and more than $36m in fines.
The allegations include conspiracy to commit fraud, money laundering, securities fraud and - the new charge under Sarbanes-Oxley - falsely certifying the accuracy of the financial statements. In essence, Scrushy is accused of directing staff to inflate earnings by $2.7 billion to help the company meet financial targets. Chris Wray, the assistant attorney general, said, “The magnitude of the alleged fraud is staggering".

Since March 2003, 15 former HealthSouth executives, including five former chief financial officers, have pleaded guilty but Scrushy has maintained his innocence. Under the Sarbanes-Oxley Act, however, chief executives must certify the accuracy of their company’s financial statements. Under the penalties imposed by Section 906 of the Act, if Scrushy is found guilty of certifying the statements “knowing that the periodic report does not confer with the requirements of the Act”, he could be fined up to $1m, imprisoned for up to 10 years, or both. If the Court determines that he wilfully certified the statements knowing them to be false, he could be fined up to $5m, imprisoned for up to 20 years or both.
This is just one of many changes brought about by Sarbanes-Oxley. Below we examine how the Act came about, take a detailed look at what it says and explore implications for UK companies. In particular, we look at legal protection for whistleblowers and how to make audit committees more effective.

Background to Sarbanes-Oxley

“We all know what happened to Enron. Moral bankruptcy led to fiscal bankruptcy.”
- Governor Howard Dean, candidate for the 2004 Democratic nomination for US President

The Sarbanes-Oxley Act was prompted by a series of high-profile corporate scandals, most notably the collapse of Enron. The Act, passed as law on 30 July 2002, contained sweeping reforms for issuers of publicly traded securities, auditors, executive officers, board members, lawyers and the investment banking community.
Companies directly affected by Sarbanes-Oxley are:
- US publicly traded companies and their worldwide subsidiaries.
- Companies with total assets in excess of $10m and a class of equity securities held by at least 500 US resident shareholders.
- Companies registered with the Securities Exchange Commission (SEC), intending to list on a National Stock Exchange in the US or issue equity or debt securities in the US.

In practice, organisations in all locations and their advisors will feel the effects of Sarbanes-Oxley - especially those interested in best practice and ethical behaviour.

A detailed look at Sarbanes-Oxley

A number of the provisions of the Act were immediately effective. However, many substantial and important provisions of the Act are subject to future regulations and guidance being issued and adopted by the SEC, which has much of the responsibility for policing compliance. In the Appendix, I provide a list of the eleven titles comprising Sarbanes-Oxley and a summary of its main provisions.