Sarbanes-Oxley Act of 2002: Overview, Impact, and Case Law

Introduction to the Sarbanes-Oxley Act

During the past few decades, the number of white-collar business fraud cases increased dramatically. Due to intense public interest and press investigations, these crimes were brought to the public's attention, causing citizens to lose confidence in the fairness of business conduct. In July 2002, Senator Paul Sarbanes and Representative Michael G. Oxley presented the American Senate with the Public Company Accounting Reform and Investor Protection Act of 2002.

Also known as SOX or SarBox, the Sarbanes-Oxley Act "establishes a new quasi-public agency, the Public Company Accounting Oversight Board, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as auditor independence, corporate governance, and enhanced financial disclosure."

In other words, the Act is meant to ease the prosecution process against white-collar offenders and decrease the overall number of such crimes. Even though it promotes a worthy objective, the Act faced significant criticism, as its implementation requires substantial costs that can push small businesses toward bankruptcy.

White-Collar Prosecutions Before SOX

The conditions under which corporations must comply with the legal provisions of SOX have become the subject of continuous debate and have even reached courts of law. However costly or demanding the compliance process may be, it offers several benefits to companies as well, including higher risk assessment, improved quality of internal controls, and significant enhancements in internal communications.

The SOX Act of 2002 introduced sweeping regulation in the field of white-collar crime, particularly regarding the withholding of information and the destruction of documents. The primary intent of the bill was to clearly define operations that contradict legal and competitive fairness and to establish repercussions for those actions.

Before the enactment of the 2002 Act, prosecutors frequently found it impossible to bring white-collar fraud perpetrators to justice, as the existing legislation was rather unclear. "For instance, prior to Sarbanes-Oxley, federal prosecutors relied on a series of obstruction of justice statutes to prosecute individuals for destruction of documents. Although these statutes provided some powerful tools, they were fraught with loopholes, and prosecutors were required to craft indictments with great care."

In cases of document destruction, the federal government was entitled to prosecute those involved, but only if the destruction occurred during an already ongoing government judicial investigation.

Enactment of SOX and Business Criticism

Another significant drawback in the pre-SOX legal framework was that prosecutions had to be grounded in the "corrupt persuader theory." In other words, district attorneys could only prosecute individuals against whom they had solid evidence of convincing others to destroy documents.

Sarbanes and Oxley's Act changed white-collar crime legislation by broadening "both the subject matter and the range of circumstances in which the government can prosecute document destruction."

In the summer of 2002, the United States House of Representatives voted for the bill with 423 in favor and only three against. The American Senate passed the Sarbanes-Oxley Act with a vote of 99 in favor and zero against. The SOX Act was intended to contribute to white-collar crime legislation through five courses of action: "internal monitoring, gatekeeper regulation, regulation of insider misconduct, more disclosure, and regulating securities analysis."

As anticipated, the new laws generated numerous objections from business leaders and corporate entities. Their dissatisfaction was widely publicized and created significant national controversy. Among their main grievances was the shortened timeframe for disclosing stock option grants. Section 403 of Sarbanes-Oxley, which in 2002 amended the Securities and Exchange Act of 1934, "now requires that grants of stock options be reported to regulators within two days of the grant date," compared to 45 days under the previous legislation.

The overarching complaint was that the government had imposed excessively strict rules that would not benefit employees, employers, or the American economy. Supporting this view, "James Glassman, a resident fellow at the American Enterprise Institute, told the chamber that Sarbanes-Oxley will have four chief effects on industry. It will: raise compliance costs and other expenses; deter innovation and risk-taking; increase lawsuits; and distract CEOs and executives from other important tasks. 'Facing a possibility of 20 years in jail and $5 million fines, executives are going to spend lots of time going over financial statements, and less time creating, innovating, and leading.'"