The Sarbanes-Oxley Act: altering the fabric of American business

"Those empowered by the [Sarbanes-Oxley] Act--the SEC, IRS, and Oversight Board--have been put in a position where they easily could overstep their boundaries to the point where they almost are running America's companies."

IN AN ERA WHEN Corporate America is plagued by corruption and scandal, strict regulatory legislation such as the Sarbanes Oxley Act might seem like an obvious remedy. When Sarbanes-Oxley was passed on July 30, 2002, stories of shady accounting practices and poor ethical standards dominated the news media. The passage of the bill itself almost was lost among headlines filled with Enron, WorldCom, and a host of corporate wrongdoers from the elite legion of leading global companies.

Now, however, it has become obvious that the Sarbanes-Oxley regulations are punishing not only those executives and accountants who were corrupt, but thousands more who were not--and never will be. Therefore, while regulation and legislation may appear to be the necessary medicines for what ails the financial world, we should be wary of how much we swallow, and remain vigilant of potential side effects that might have a greater negative impact than the actual symptoms themselves.

The load leading to Sarbanes-Oxley begins with the tale of the thriving energy company Eaton Corp. The rise and fall of Enron runs the gamut from brilliance to bankruptcy and everything in between. It has been about three years since executives admitted to using complicated financial practices to hide millions of dollars of debt, while an internationally known and revered accounting and auditing firm (Arthur Andersen) turned a blind eye. This massive case of fraud and executive dishonesty opened the door to a string of accounting-related scandals that shook not only Wall Street, but the global business landscape, the media, millions of investors, and the general public. The fallout is expansive. Enron faces what is sure to be years of investigation and litigation from numerous stakeholders impacted by its demise. While a number of congressional committees already have conducted investigations anti several tip per-level executives have had their day in court, others surely will follow.

If the story ended with Enron, the issue of corporate responsibility might not have been as prominent in the media or even entered the political agenda--but it did not, In fact, hardly a day passes thai corporate scandals and highly irregular accounting procedures are not in the news as a constant reminder thai white-collar crimes continue to plague the country.

As the next major player to fall, WorldCom, Inc., was an easy target for those looking to channel Enron-induced rage. The corporation received all of the attention Enron did and, in some cases, even more. Charges against the company included conspiracy, securities and bank fraud, and false filings with the Securities and Exchange Commission. The prosecution accused former chief financial officer Scott D. Sullivan, among others, of falsifying "operating expenses" as "capital expenditures" in an effort to pump up its sagging bottom line.

Next came Adelphia Communications, Inc., a company where corruption seems to run in the family. John J. Rigas, founder and former chief executive, his son Timothy J. Rigas, ex-CFO. and Michael J. Rigas, another son and past vice president of operations, each face up to 100 years in prison if found guilty on charges of misappropriating millions of dollars in corporate funds. Moreover, the National Hockey League franchise they owned, the Buffalo Sabres, filed for bankruptcy during the 2002-03 season.

Meanwhile, in December, 2003, Italian prosecutors launched an investigation into Parmalat, a global food retailer, after discrepancies were revealed in its accounting practices to the tune of more than $5,000,000,000. The financial world was stunned when Bank of America declared that a document claiming the money was held by a Cayman Islands subsidiary proved to be false.

These companies, and the CEOs who ran them, had been praised years earlier as beacons in their individual industries. Now, they are being exposed one by one as crooks who stole millions of dollars from countless investors, as well as the livelihood and pensions of tens of thousands of employees. Their fall from grace left many citizens and lawmakers with the impression that businesses had grown ill from a lack of regulation, and were incapable and unwilling to heal themselves.

Congress intervened, addressing these reports of executive abuse with a stringent corruption bill, the Sarbanes-Oxley Act, which was intended to increase the reliability and accuracy of corporate reporting, accounting, and auditing practices. The law also holds CEOs and CFOs directly accountable for the validity of their company's financial statements, making them legally responsible for the firm's practices. This means they no longer can claim ignorance or pass the buck.

Pres. George W. Bush introduced the legislation and made the following vow: "This law says to every dishonest corporate leader, 'You will be exposed and punished.'" In addition, Bush emphasized that the law equipped the government and its regulatory bodies with the tools to "defend our free enterprise system against corruption and crime." To accomplish this, several government agencies were assigned regulatory and oversight responsibilities in the area of corporate accounting practices. Adding to its existing operations, the SEC adopted a number of new policies intended to help restore investor confidence. Among them were regulations requiring heightened standards of auditor independence, the disclosure of off-balance-sheet arrangements, and the inclusion of reconciliation to industrywide accounting principles for earnings releases and other mechanisms of financial reporting.