The Sarbanes Oxley Act of 2002 was passed in the wake of accounting scandals, making disclosure requirements more stringent by making companies to divulge balance sheet transactions. The Act also created the public company accounting oversight board (managed by the SEC), which is tasked with registering public accounting firms, controlling ethical and quality control standards, generally monitoring the performance of public accounting firms, and leading the act of disciplining and investigating accounting firms for unethical conduct. All large and small companies must comply with the act to deter wrongfulness, fraud, and corruption. After it was first passed, there were some companies who favored it and those who opposed it. Those who did not favor the Act included small companies and foreign private issuers who opposed it because of the costs required to fully disclose their books.
Failure to comply with the Act can result in both civil and criminal violations. If an official or an employee alters documentation and engages in tampering, it would be considered criminal, and could be punished by up to 20 years in prison or a fine. There are several civil liabilities mandated by Sarbanes Oxley Act, including whistle blower protection, or protection against termination, for employees testifying or assisting with an ongoing investigation on behalf of a company. An amendment also mandates that employees under scrutiny by the SEC will not be able to discharge their financial obligations by filing for bankruptcy. Further, the statute of limitation to file a lawsuit for fraud has also been amended to two years.
Under its provisions, the Sarbanes Oxley Act mandates every CEO and CFO to submit certifications of financial statements drafted by lawyers. Those involved directly with accounting processes must disclose and sign off on the agreement stating that they practiced their due diligence, attesting to the accuracy of the reports they file with the Securities and Exchange Commission (SEC). Their acknowledgement of their due diligence, or thorough review must be filed with the annual (10K) and quarterly (10Q) reports. Meanwhile, attorneys under are now responsible for reporting material violations and breaches of fiduciary duty to the company's CEO.
The Act further prohibits corporate loans to officers and directors of the corporation, due to the potential conflict of interest inherent in such a transaction, though an exemption applies if the loan is under $60,000. However, these type of exemptions may complicate the filing procedure.