Who do They Think They Are?

The “Era of Responsibility,” as it stands now, is limited to the arena of individual and corporate responsibility. Over the past several years, Americans have witnessed the largest corporate failures in their history. The federal government relied on the use of contracts and sanctions to end wrongdoing and abuse of the public trust in public capital markets by corporate executives. More than 15,000 corporations, regulated by the Securities and Exchange Commission (SEC), actively buy and sell publicly held shares of stock. A small number of these companies are large enough to be actively traded on the predominant stock exchanges. In light of these scandals and the government’s response, life changed drastically for numerous directors, CEOs and CFOs when President Bush signed into law the Sarbanes-Oxley Act of 2002.

Within weeks of the President signing this law, senior executives of almost 1,000 of the largest publicly traded corporations were required to file sworn statements and personal liability contracts with the SEC attesting to the validity of all financial reports filed. Smaller companies were given more time to file.

 Section 906 of the Act adds a significant new section to the mail fraud statute titled "Failure of corporate officers to certify financial reports."  For those CEOs and CFOs who certify the statement knowing that the report accompanying the statement does not comply with all the requirements of Section 906, the maximum penalties are a $1 million fine, ten years in prison, or both. For corporate officers who “willfully” certify the statement required by the section with knowledge that the report associated with the statement fails to comply with all of the requirements of the section, the maximum penalties increase to a $5 million fine, 20 years in prison, or both. There are other sections of the Sarbanes-Oxley Act that substantially increase civil and criminal liabilities for corporate directors. If one has knowledge of the destruction, or allows the destruction of documents (digital or paper) that might become part of a government investigation, they will go to jail. Action taken against a whistle-blower can result in similar sanctions. 

The Sarbanes-Oxley Act holds CEOs and CFOs personally responsible for the content and accuracy of the financial reports their corporations file with the SEC. Prior to the Sarbanes-Oxley Act, corporate executives were for the most part shielded from this liability by the corporate umbrella. To proclaim a lack of knowledge of wrongdoing no longer will suffice. This is a tremendous shift in liability. In the future, those heading publicly traded corporations will be held individually responsible, by contract, for the actions of that corporation.