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Opinion

Law keeps tight leash on businesses

Jason Richardson

In the halls of business schools across the country, accounting students are jumping for joy. The Sarbanes-Oxley Act, which created a huge increase in the demand for accountants and auditors, has survived its first major judicial test in a federal court in Alabama. The job outlook for accountants looks good for some time.

Sarbanes-Oxley, or SOX, passed in 2002, was enacted in the aftermath of the outrageous corporate scandals involving the corporate officers of WorldCom, Global Crossing and Enron. The demand for corporate officer liability was deafening, and Congress reacted quickly to placate the legions of enraged stockholders and pension-fund beneficiaries.

The heart of SOX lies in its new certification and disclosure requirements which are imposed on a corporation's principal executive and financial officers. CEOs and CFOs are required to disclose and certify the actions of their corporation through reports filed with the Securities and Exchange Commission. More specifically, these officers are required to sign and certify that, to their knowledge, the filed reports do not contain any material misrepresentations or omissions of material fact, the reports contain a fair representation of the corporation for investors, and they have made full disclosure to the auditing committees.

Non-compliance with SOX can result in significant criminal penalties that attach to the officers themselves, and not the corporation. For example, a knowing violation of the certification requirement would result in 10 years in jail and a $1 million fine; a willful violation would be punishable by up to 20 years in jail and a $5 million fine.

SOX was recently challenged by former HealthSouth Corp. CEO Richard Scrushy, the first corporate executive to be criminally charged under the law. Scrushy contended that SOX was unconstitutional on its face because it was too vague to give adequate notice as to what particular conduct was unlawful and provides no limitation on the discretion of government officials to prevent arbitrary and capricious enforcement.

There is legitimacy in Scrushy's argument. There is no way that the CEO or CFO of a multi-billion dollar company can possibly verify the accuracy of every report that is submitted to them. The law imposes a legal duty on CEOs that may be impossible to fulfill, and which carries draconian criminal sanctions. If a mid-level manager accidentally submits an erroneous report to the CEO, and the CEO signs a statement certifying to the report's accuracy, the CEO can face up to 10 years in prison and millions of dollars of fines and legal fees. Due process should not allow someone to be jailed for so long for underlying conduct that is not illegal.

Such unbridled liability is producing a chilling effect in the business world. Once considered a dream job, the CFO position is now fraught with so much risk and potential criminal liability that the most qualified people for the jobs are abandoning their posts in favor of safer havens. The law discourages the brightest younger workers from seeking to attain the position. By creating a condition in which less-capable people attain the position of CFO, the law is failing to provide its intended result: more fair and accurate accounting and disclosure of accurate financial information.

The judge in the Alabama court overruled Scrushy's objections to the Sarbanes-Oxley Act, ruling that the law did in fact provide adequate notice to corporate officers. 

This ruling will ensure that businesses will continue to spend billions of dollars a year in compliance costs, which should keep all those fresh accounting graduates employed for a long, long time.

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