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Corporations • Federal Securities Laws
CORP#072
Legal Definition
The Sarbanes-Oxley Act of 2002 applies to reporting companies, and requires them to establish independent audit committees to oversee their public accounting firm. Additionally, the CEO and CFO to certify that, based on their knowledge, all reports filed with the SEC contain no material falsehoods. Willful certification of a false report could bring a $5 million fine and 20 years in jail. If false reports have to be corrected and restated, the corporation (directly or derivatively) may recover any benefit to an officer made from trading the company’s securities within any 12-month period after the false reports were filed, and may recover any incentive-based compensation during that time. Corporations (directly or derivatively) may also recover any benefits made by the officers from trading on the corporation’s stock during “blackout” periods when employees are prohibited from trading in their retirement plan’s securities.
Plain English Explanation
In 2001 and 2002, a couple super naughty companies caused a lot of financial fraud and drama: Enron and Worldcom. Their shenanigans exposed how large companies and their leadership had no fear of consequence for being crooks. In response, Congress passed the Sarbanes-Oxley Act ("SOX").
SOX applies to large corporations that have a higher risk of harming people via fraud (because they have a lot of investors and assets, or because they are traded on national stock exchanges). What SOX basically does is say, "Hey, Leaders of Big Companies, we want to make sure you are keeping an eye on your employees and company so we need you to do a couple things for us. First, you need to set up an audit committee to be in charge of keeping an eye on your finances so they can snitch on anyone found to be doing anything naughty. Second, we need your CEO and CFO to review all the financial reports your company submits to the SEC to make sure they are accurate and personally guarantee to us that they are accurate, because if they aren't, we're going to be pissed, and we're going to slap the CEO and CFO personally with some huge fines and jail time. Got it?"
Beyond that, SOX also allows a company to punish its officers who are responsible for submitting bad reports by taking back any bonuses or stock profits they made within a 12 month period of their actions.
SOX applies to large corporations that have a higher risk of harming people via fraud (because they have a lot of investors and assets, or because they are traded on national stock exchanges). What SOX basically does is say, "Hey, Leaders of Big Companies, we want to make sure you are keeping an eye on your employees and company so we need you to do a couple things for us. First, you need to set up an audit committee to be in charge of keeping an eye on your finances so they can snitch on anyone found to be doing anything naughty. Second, we need your CEO and CFO to review all the financial reports your company submits to the SEC to make sure they are accurate and personally guarantee to us that they are accurate, because if they aren't, we're going to be pissed, and we're going to slap the CEO and CFO personally with some huge fines and jail time. Got it?"
Beyond that, SOX also allows a company to punish its officers who are responsible for submitting bad reports by taking back any bonuses or stock profits they made within a 12 month period of their actions.
