White Collar Crime

White Collar Crime

LAW 421

White Collar Crime


In July 2002, following a myriad of large corporate financial disasters, U.S. Senator Paul Sarbanes of Maryland and U.S. Representative Michael Oxley of Ohio co-authored the Sarbanes Oxley Act of 2002 (SOX Act). This essay will show how the SOX Act has affected ethical decision making in today’s business environment, how it has been implemented, the criminal penalties it provides, and whether or not it is successful in eliminating “cooked books.” The SOX Act came about as a reaction to corporate scandals by giants such as Enron, WorldCom, and Tyco who all covered up or misrepresented a variety of questionable transactions. The actions of these companies not only affected company stakeholders and caused investors to lose their life savings, but shook investor confidence nationwide and strained the United States financial structure. The Sarbanes-Oxley Act is intended to provide government oversight and make corporations accountable for their actions, or inactions. It does that by:

formalizing and strengthening internal checks and balances within corporations

instituting various new levels of control and sign-off designed to

ensure that financial reporting exercises full disclosure

corporate governance is transacted with full transparency (Slaughter, 2014)

In short, the SOX Act makes CEO’s and CFO’s accountable for accurate financial statement and provides protection to investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes (” Sarbanes-Oxley Essential Information”, 2003-2012).

Ethical decision making

The Sox Act was made to keep companies from altering and reporting wrong financial numbers. The SOX Act forces companies to include all the information off the balance sheet from the accounting department. Companies are also required to have a code of ethics and accepted accounting principles which are reviewed by the commission. By keeping companies properly reporting financial numbers companies are managed properly and kept from manipulating numbers for financial gain. Without the Sox Act, company executive would be free to alter accounting numbers to making the business look more profitable which would attract more investors and allow the company to profit more money. The code of ethics that is enforced by the Sox Act keeps companies operating properly, limits greed, and keeps companies from facing similar issues that caused the fall of Enron. In the event that a company does not abide by these rules the company can face fines, penalties and possibly jail time for up to twenty years.


After a few years and several lessons learned, more corporate executives have started to realize some of the benefits of implementing SOX in their organizations. New guidelines have been issued, reducing some of the costs and greatly decreasing the burden on a company’s finance and internal audit staff. Financial statement restatements are decreasing, while the quality of relevant financial data is increasing, allowing company executives to make quicker decisions. Financial reporting and operational excellence have become more efficient. In addition, some companies are starting to use SOX as a springboard to a more holistic enterprise risk management initiative. One reason why it should be considered may be the immediate benefits. Organizations often experience increased confidence in the company’s internal financial reporting and a reduction in fraud exposure. In addition, if a private company has strong financial reporting controls, it may yield more value and a more efficient due diligence process in an acquisition by a public company and would be perhaps better prepared if the entity or a division of the entity is brought public. Another reason: there is now an abundance of predefined tools, templates, and methodologies for SOX compliance in the marketplace. As a result, implementation is easier and less costly than it was in its infancy. The best thing to come out of strengthening the internal control environment may be the risk assessment efforts employed by management. With a focus on financial reporting, a risk assessment is usually analyzed either by financial statement caption or by financial statement process (expenditure process, revenue process, treasury process, etc.). Each financial statement caption is then ranked using a likelihood and magnitude approach. The likelihood and magnitude approach considers how likely it is that there will be a misstatement in the process and, if so, how significant could the misstatement be. Evaluating likelihood and magnitude prior to the consideration of internal controls is a way to evaluate inherent risk. Based upon the level of inherent risk, organizational management can decide where to focus its attention.

Criminal Penalties

The criminal penalties provided within the Sarbanes Oxley act include penalties for destruction, alteration, or falsification of records in federal investigations and bankruptcy. Anyone in the company who alters documents, destroy them, mutilates, conceals and makes false entry in any type of records shall be fined under chapter 73 of title 18, imprisoned for up to 20 years or possibly even both under sec. 1520 destruction of corporate audit records. Failure to maintain audit or review “workpapers” for at least five years will result in a fine and/or up to 5 years imprisonment. Anyone who “knowingly executes, or attempts to execute, a scheme” to defraud a purchaser of securities will be punished with a fine and/or 10 years imprisonment. When it comes to the CEO or CFO there are two different penalties assessed based on intent. If the CEO/CFO “recklessly” violates his or her certification of the company’s financial statements the penalty is a fine of up to $1,000,000 and/or up to 10 years imprisonment. If the CEO/CFO “willfully” violates his or her certification of the company’s financial statements the penalty is increased to a fine of up to $5 million and/or up to 20 years imprisonment. Sarbanes-Oxley section 1107 includes criminal penalties for retaliation against whistleblowers. This act says that whoever tries to harm the person that reported the fraudulent activity in the company such as falsifying records, destroying them and making false entries will be fined, imprisoned for no more than 10 years or both. In addition, any person who “corruptly” alters, destroys, conceals, etc., any records or documents with the intent of impairing the integrity of the record or document for use in an official proceeding will be punished with a fine and/or 20 years imprisonment.

Eliminating “Cooked Books”

The understanding of “cooked books” means they were not accurate and maybe stealing and problems were happening inside of their companies and giant corporations if they took care of getting rid of those people or policies that caused the books to be wrong. The Sarbanes-Oxley Act (SOX Act) of 2002 has been successful in eliminating “cooked books”. Since SOX Act has successfully eliminated the deceptive financial practices of some of these giant corporations. Also the SOX Act has had some positive effects on the financial aspects of companies and protection that is provided to companies and giant corporations and their stakeholders because of it. After Sarbanes-Oxley Act (SOX Act) of 2002 was passed it impacted by the cracking down of deceptive financial practices and other deceptive practices by putting successful laws to stop any wrong doing inside companies and giant corporations. There are some positives effects under SOX Act have to strengthen corporate governance and restore investor confidence in corporations to invest in. In addition, SOX tightens disclosure rules, requires management to certify the firm’s periodic reports, strengthens boards’ independence and financial-literacy requirements, and raises auditor-independence standards (RAND Corporation, 2014). The last thing that SOX Act widely credited for strengthening at least two major areas of investor protection: (1) CEO and CFO responsibility and accountability for all financial disclosures and related controls; and (2) increased professionalism and engagement on the part of corporate audit committees (Verschoor, CMA, 2012). Overall Sarbanes-Oxley Act (SOX Act) of 2002 has been good with helping crack down on deceptive financial practices and help companies and giant corporations by staying true and right arrow with what is going on inside them.


Unfortunately the SOX Act was enacted in reaction to financial failure of a number of corporate giants. It took many hard working Americans losing their job and life savings before it became apparent that trusting major corporations to make ethical business decisions on their own was not possible. This Act is in place to help ensure the people at the helm of major companies make ethical business decisions and are held accountable for the actions that they take or allow to be taken within the company. With steep fines and the threat of lengthy jail sentences, the SOX Act has returned ethics to the business world and seems to be effectively creating more transparency with financial reporting. All of these results are returning confidence to the U.S. investor and strengthening a positive public perception of big business in America.


Sarbanes-Oxley Essential Information. (2003-2012). Retrieved from http://www.sox-online.com/basics.html

Slaughter, J. (2014). The Impact of the Sarbanes-Oxley Act on American Businesses. Retrieved from http://smallbusiness.chron.com/impact-sarbanes-oxley-act-american-businesses-1547.html

Investopedia. (2014). Sarbanes-Oxley Act Of 2002 – SOX. Retrieved from http://www.investopedia.com/terms/s/sarbanesoxleyact.asp

RAND Corporation. (2014). Do the Benefits of Sarbanes-Oxley Justify the Costs. Retrieved from http://www.rand.org/pubs/research_briefs/RB9295/index1.html

Verschoor, CMA, C. C. (2012). Has SOX Been Successful?. Retrieved from http://www.accountingweb.com/article/has-sox-been-successful/219796

A Guide to the Sarbanes-Oxley Act. (2006). Retrieved from http://www.soxlaw.com/

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