The Sarbanes-Oxley Act: An In-Depth Overview of the SOX Regulation Protections & Benefits for Corporate Fraud Whistleblowers

Sarbanes-Oxley Act of 2002 (SOX): Definitive Summary with Explanations

(A Major change in Corporate Regulations)

The Sarbanes-Oxley Act, known as the “SOX Act”, was passed by the United States Congress in 2002.

The SOX Act established significant regulations on publicly traded corporations.

To date, the corporate fraud whistleblower law is responsible for over 6,500 people coming forward with tips to blow the whistle from at least 68 countries and has resulted in over $150 million in restitution and fines, more than $15 million in qui tam bounty payments to relators - this according to the Wall Street Journal.

These regulations on corporate financial reporting, the accounting profession and protection of employees (whistleblowers) where enacted to curb corporate fraud.

The sections below will provide a in-depth breakdown of the SOX Act. You will learn what the Sarbanes Oxley Act is, who it benefits, and what it was enacted to resolve.

By reviewing these 9 sections you will have an excellent understanding of why knowledge of the SOX Act is so important in today’s corporate environment.

"Sarbox is responsible for over $150 million in restitution and fines, over $15 million in bounty payments to whistleblowers..."
corporate finance regulation

 

 

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Keep reading to learn how Sarbox helps safeguard the reliability of publicly reported financial information.

 

Introduction to Sarbanes-Oxley. (SOX Breakdown in 3 points)

SOX Act of Congress (When & Who)

Enacted by the 107th US Congress in 2002. Named the “Public Company Account Reform and Investor Protection Act” it is commonly named after its key contributors - Senator Paul Sarbanes and U.S. Representative Michael Oxley.

Reasons for SOX (Why an Act of Congress?)

  1. Enron & WorldCom Scandals: In 2001 two of the largest companies in America at the time collapsed. Corporate executives were methodically falsifying company records of assets, liabilities and earnings to influence stock price.
  2. Curb Fraudulent Reporting: Independent accounting firms responsible for auditing these public companies were also involved in the manipulation of company records. This collusion led directly to the Sarbanes-Oxley Act.
  3. Protect & Incentivize Whistleblowers: The SOX Act was needed to curb the fraudulent and manipulative behavior of public corporations. SOX also provides essential protection to investors and whistleblowers.

Primary Sections Overview (What SOX Provides)

Reforms: Requirements on Corporations
  • Corporate Executives must certify company’s financial reports. Internal controls must be in place and maintained to prevent fraudulent behavior.
  • Criminal penalties and huge fines will result if companies are found misleading shareholders, falsifying documents or hindering investigators.
Oversight of Accounting Profession
  • The Public Company Accounting Oversight Board (PCAOB) was established by SOX. PCAOB provides audits, regulations and standards on the accounting profession.
  • SOX regulates the connection between corporations and accounting firms.
Protection for Whistleblowers
  • SOX’s provides protection for employees who report corporate fraud all known as “whistleblowers”. Protecting whistleblowers from employer retaliation encourages the disclosure of corporate wrongdoing. Which in-turn benefits the public good.

Key Sections In The Sox Regulation (Individually Broken-Down)

 

Protection for SOX Whistleblowers (Section 806)
"This makes employer retaliation a criminal offense."

Sarbanes-Oxley 806 promotes the exposure of corporate fraud by protecting employee whistleblowers. This protection is provided through the U.S. Department of Labor (DOL) and the Department of Justice (DOJ).

The DOL provides protect from employer retaliation and the DOJ can bring criminal charges against those responsible for retaliatory actions. This makes employer retaliation a criminal offense.

Retaliatory actions are broadly defined by SOX. These employer actions consist of termination, demotion, suspension, harassment, transferring, or exposure of a whistleblower. Any act of discrimination against a whistleblower who provides information to the proper authorities falls under corporate retaliation.

SOX allows employees who are victims of retaliation to seek civil rewards and compensation from their employer. A qualified whistleblower attorney in the field of SOX Law violations should be consulted when bringing a lawsuit.

 

Corporate Financial Reporting (Executive Responsibility: Section 302)
"Holds primary executives directly responsible."

Section 302 essentially holds the CEO and CFO directly responsible for accurately documenting and submitting all financial reports and company internal control structures to the Securities and Exchange Commission (SEC).

SOX requires that each principal officer of the corporation certifies each annual of quarterly report that:

  • the officer has reviewed the report
  • to the best of their knowledge the report is does not contain untrue information
  • based in material fact and is not misleading based on the Officer’s knowledge the financial statements and information contained in the report fairly represent the financial condition of the company.

A critical aspect of this section is a direct link between the SOX Act and the Securities Exchange Act of 1934. This gives SOX authority to hold executives accountable under both Acts of Congress.

 

Prevention of Fraud (Internal Company Controls: Section 404)
"No hiding... responsibility for internal control structures..."

This Section of the Sarbox Act outlines compliance standards for companies. Quarterly and Annual financial statements must include an Internal Control Report. This report declares that:

  • management is responsible for proper internal control structures
  • an assessment of the control structure effectiveness has been completed by management
  • any deficiencies of controls is reported
  • independent auditors verify company executives statement that internal controls are active, operating correctly and effective

Each public accounting firm is required to attest to and report on the assessment made by the management of the company for independent audits they perform.

For companies this is the most expensive and difficult section of Sarbanes-Oxley to implement. Section 404 is highly contested during the litigation process when violations of the SOX Act occur.

 

Conspiracy to Commit Fraud (Management Section 902)
"Persons who conspire to violate are subject to the same penalties as prescribed for the offense."

Section 902 holds that “any person who attempts or conspires to commit any offense under this chapter shall be subject to the same penalties as those prescribed for the offense, the commissions of which was the object of the attempt or conspiracy”.

Explained simply, Section 902 states that the normal penalties (fines & incarceration) for fraudulent acts will apply to executives and persons that violate the Sarbanes-Oxley Act.

 

 

 

Public Company Accounting Oversight Board: PCAOB
"The PCAOB establishes congressional oversight of relationships between public corporations and accounting firms."

This portion of Sarbanes-Oxley is Title I; Section 101. Being the first part of the SOX Act is an indication of its overall importance.

Establishment: Until the SOX Act public accounting firms were self-regulated. The collusion between Enron and its accounting firm Arthur Anderson exposed the need for more regulation of the relationship between public corporations and accounting firms.

What is the PCAOB? The PCAOB is a non-profit/non-governmental oversight Board established in the District of Columbia answerable to the U.S. Congress

The Mission: according to the PCAOB is “to establish auditing and related professional practice standards for registered public accounting firms to follow in the preparation and issuance of audit reports”.

employer retaliation against whistleblowers

Fines & Penalties for SOX Violations


New Criminal Offenses and Fines from Sarbanes-Oxley

SOX applied new criminal charges to executives and companies who defrauded shareholders using misleading and duplicitous financial reports about publicly traded companies.

  • Executives “knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $1,000,000 or imprisoned not more than 10 years, or both”. (Section 906:1350)
  • Executives that “willfully certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $5,000,000, or imprisoned not more than 20 years, or both.’’(Section 906: 1350)
  • This means that falsification of reports “knowingly” carries up to a 10 year/$1 million fine and “willingly” falsifying records carries a 20 year/$5 million fine.
  • Sarbanes-Oxley Act Section 802 - knowing vs. willingly submitting false documents
financial legal bounty

SOX Whistleblower Retaliation Penalties

Whistleblower retaliation penalties for executives and employers were also enacted.

  • “Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.’’ (Title 11:Section 1107)
  • This means for any retaliation by an employer (termination, demotion, discrimination, etc.) against an employee who discloses fraudulent behavior can face up to 10 years in federal prison.

Reporting, Proving and Settlements from the SOX Act (Legal Representation)

Reporting Violations.

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    • There is limited time for Whistleblowers to initiate a SOX claim of employer retaliation. Whistleblowers have 90 days (Section 1514.b.2.D) to disclose acts they “reasonably believe constitute a violation”.
    • Whistleblowers should report directly to the Department of Labor or the Department of Justice (FBI). It is highly recommended to seek legal counsel from a qualified attorney before taking this action.

    Proving a Retaliation Case

    Four things an employee whistleblower will need to prove in a retaliation case.

    • The whistleblower was involved in a protected disclosure activity
    • The employer knew of this protected activity
    • The whistleblower was subject to some type of discrimination
    • The protected disclosure was a contributing factor in this discrimination

    Employer’s Defense: Employer’s will defend their actions by stating that in the normal course of events the action taken against the whistleblower would have occurred regardless of disclosures the employee made.

    Settlements provided under the SOX Act

    Compensatory damages for Retaliation

    • Reinstatement with the same seniority status that the employee would have had, but for the discrimination.
    • The amount of back pay and lost wages, with interest.
    • Compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney fees.
    • Continued civil action can be taken against corporations for pain and suffering, emotional distress and reputational harm. There is no monetary limit on whistleblower retaliation settlements. Plaintiffs can receive multi-million dollar settlements if properly represented in a SOX Case.

    * The statute of limitations is 180 days. Specifically, a whistleblower may bring a SOX claim “not later than 180 days after the date on which the violation occurs, or after the date on which the employee became aware of the violation.” 18 U.S.C. § 1514A(b)(2)(D).

    Wrapping It Up

    The Sarbanes-Oxley law was enacted to protect public confidence in the financial reporting of public companies, the regulation creates oversight and is intended to curb corporation-accounting company collusion to defraud the public. The reforms provide corporate and auditing accountability, responsibility and transparency and has has a major impact in the work to restore public and investor confidence in public company reporting.

    Most importantly Sarbox was created to incentivize and protect employees with knowledge of fraud to come forward and blow the whistle when executives conspire to cook the books.

     

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