Corporate Governance (Sarbanes-Oxley – SOx –  Application – Individuals)

 

• Senator Sarbanes and Representative Oxley apparently wanted to make a point (perhaps more like an exclamation point!) about the application of personal integrity to specific individuals when they sponsored their bill.

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• The United States had just experienced a wave of corporate malfeasance on a massive scale; huge enterprises, outwardly respected and stable – such as: Adelphia; Enron; Peregrine International; Tyco International; WorldCom – had collapsed in financial ruins, seemingly overnight; more importantly, the savings of their employees in the benefits programs of those enterprises, and the high values of their stocks purchased by eager investors, had dwindled to almost nothing, due in large part to the avarice of the executives of those enterprises.

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• Perhaps the infamous catchphrase of the character Gordon Gekko from the movie “Wall Street” – “Greed...is good.” – may have been ringing in their minds when Senator Sarbanes and Representative Oxley sat down to hammer out their bill.

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• From the words in the final version of SOx, it is clear that Senator Sarbanes and Representative Oxley wanted to make sure that the people at the top of an enterprise, the successors to those same people who had recently inflicted such damage on corporate credibility and the finances of the American people, should be held personally liable for any fraudulent conduct, through massive fines and lengthy jail time.

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• Thus, SOx Section 906 requires that chief executive officers (CEOs) and chief financial officers (CFOs) of SOx-regulated enterprises must personally certify in the annual SOx report that they have each personally reviewed such report and must each make an affirmative written statement that such report does not contain any untrue statements; this is an incredibly-dangerous statement for them to make, considering that they may be executives of huge, global enterprises worth billions of dollars, with thousands of employees, and considering that personal liability attaches to these executives regardless of whether they had any actual knowledge of any untrue statements or not; thank goodness for directors’ and officers’ (D&O) liability insurance.

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• SOx Section 1001 requires the CEO personally to sign the annual corporate tax return.

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• Unfortunately, no amount of threatened fines or jail time can prevent any person lacking a conscience from committing wantonly-destructive acts, but Senator Sarbanes and Representative Oxley apparently expended much time and effort to make their bill as much of a poison pill as possible to those who callously-disregard civilized behavior.

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• Some of the more-draconian penalties for violations of SOx include:

• clawback of any bonuses paid to executives within a year of any identified SOx violation;

• delisting of the enterprise stock from the relevant public stock exchanges;

• fines of up to five million dollars ($5,000,000);

• invalidation of the D&O insurance policies that might have been invoked to protect the corporate bad actors from personal liability;

• jail time of up to twenty (20) years for CEOs and CFOs who willfully submit an incorrect certification audit

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• Many other SOx Sections provide detailed guidance for compliance tasks to be performed by the appropriate corporate leaders, and target them specifically with various severe penalties for any misconduct; to that end, the CEO, CFO and any other senior corporate leaders – who may have been delegated various responsibilities in writing by the board of directors, CEO, CFO, audit committee (the formation and staffing of which is mandated by SOx-related rules) or corporate policies – (collectively often referenced as “signing officers”) must:

• establish internal controls (whether administrative, mechanical, physical or technical, internal controls are checks and balances assigned to various key actions within the enterprise, to ensure that the appropriate personnel are performing the correct steps to verify that a corporate process was performed correctly, and was witnessed personally by the designated person, who then signed a corporate form attesting that such process was performed correctly and was witnessed personally by the signatory; one prominent example of an internal control is the SOx Section 906 requirement that CEOs and CFOs of SOx-regulated enterprises must personally certify in the annual SOx report that they have each personally reviewed such report and must each make an affirmative written statement that such report does not contain any untrue statements; another excellent example of an internal control is the SOx Section 1001 requirement that the CEO must personally sign the annual corporate tax return; yet another example of an internal control would be a hiring manager engaging a background check firm to perform a search regarding a potential candidate for a position within the enterprise, to verify that the information provided by such candidate is retrospectively-valid for at least the minimum number of years required in the applicable corporate policy) to ensure that any information provided by the enterprise is both accurate and available to auditors;

• evaluate such internal controls and ensure that such internal controls have been continuously-effective within the ninety (90) days prior to the issuance of the annual SOx report;

• identify any deficiencies in the design or operation of such internal controls;

• communicate any such deficiencies to the auditors; and,

• inform the auditors of any changes that may have been made to any such internal controls for whatever reason (whether to implement new internal controls, improve the overall functioning of the internal controls systems, remediate defective internal controls, or the like) since the annual SOx report was issued.

 

• Drafting and negotiating all SOx-related documents and legal support for all SOx-related tasks.

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