The Sarbanes-Oxley Act of 2002 came in the wake of some of the nation’s largest financial scandals, including the bankruptcies of Enron, WorldCom, and Tyco. As such, the Act is widely considered to contain some of the most dramatic changes to federal securities laws since the 1930s.
The Sarbanes-Oxley Act goes beyond requiring corporate boards to adopt codes of ethics. It substantially raises the standards and requirements for directors, officers, auditors, securities analysts, and corporate lawyers. As part of its eye toward reform, the Act also toughened the consequences for financial misconduct. Violations of the Act can range from censure to prison sentences and multimillion-dollar penalties. The statute of limitations on several kinds of securities fraud charges were also extended, and more provisions were made to ensure that the victims of the fraud – frequently individual investors – received at least some of the monetary damages paid by the violators. Importantly, the SEC now has the authority freeze any payment to an officer, director, partner, or agent during an investigation.
The Act is not without disadvantage, however. The legal, managerial, and technological costs of compliance can total millions of dollars, even for small companies. These high coasts have motivated (and may continue to motivate) some companies to delist their shares from the major exchanges, to go private or in some cases to stay private. Arguably, for some small firms, the cost savings associated with avoiding compliance may actually increase shareholder value.