G White Collar Criminal Defense Alert July 31, 2002 Sarbanes-Oxley Act of 2002 Creates New Federal Crimes By R. Scott Thompson, Esq. and Matthew M. Oliver, Esq. n the wake of the largest corporate accounting The Act seeks to remedy the purported conflict I scandals in this country’s history, the United of interest inherent in the dual audit/ consulting States Congress has passed legislation that relationship by directly prohibiting accounting radically alters the legal landscape in which public firms from providing most non-audit services, companies and the accounting firms who audit including bookkeeping, information technology, those companies operate. The Sarbanes-Oxley Act valuation, and actuarial services, to companies for of 2002 (the “Act”), which President Bush signed whom public audit services are performed. into law yesterday, contains a number of diverse provisions the broad reach of which extends not The Act also creates the Public Company only to the perceived targets of Congressional ire -- Accounting Oversight Board, which operates the public accounting industry and the officers and under the supervision of the Securities and directors of large public companies - but to small Exchange Commission. The Board is charged with and medium-sized public and private companies, the broad task of regulating the public accounting and their directors, officers, and employees. industry. Its role has been described as “auditing the auditors”, and its specific duties include Separation of Auditing promulgating and enforcing registration and Consulting Businesses requirements, industry rules, regulations and The heart of the Sarbanes-Oxley Act is the professional standards. The Board is empowered mandatory separation of the audit function to monitor compliance with its directives through provided by accounting firms from the consulting investigations and disciplinary proceedings. services such firms offer to their publicly-traded New Federal Crimes: clients. Until very recently, the major accounting Document Destruction and Tampering firms routinely provided a variety of consulting services to their public audit clients, often The Act also confronts one of the more well- generating more revenue from the consulting publicized issues emanating from the Enron practice than from the traditional audit work. Such scandal by criminalizing the destruction of practices led to the inference in the well-publicized documents relating to a federal investigation or case of Enron and Arthur Andersen that bankruptcy, as well as the destruction of audit accounting firms were willing to scrutinize audits records. Specifically, the Act makes it a crime less closely in order to maintain the more lucrative punishable by fines and imprisonment up to twenty consulting relationships. years to knowingly alter or destroy documents or records “with the intent to impede, obstruct, or This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. L Roseland, New Jersey Telephone 973.597.2500 65 Livingston Avenue www.lowenstein.com 07068-1791 Fax 973.597.2400
G influence the investigation or proper defraud, or attempt to engage in a scheme or administration of any matter within the artifice to defraud, in connection with a registered jurisdiction of any [government] department or security; or (ii) obtain money or property by false agency” or in any bankruptcy case. This new pretenses in connection with the purchase or sale federal crime applies not only to public companies, of a registered security. The crime is punishable by but to privately-held companies and their officers, fine and imprisonment of up to twenty-five years. directors, and employees, as well. As a practical matter, the new federal crime of The Act also requires accountants to securities fraud adds little to the arsenal of federal “maintain all audit or review workpapers [in prosecutors. Criminal securities fraud is routinely connection with the audit of a public company] for prosecuted under existing mail and wire fraud a period of 5 years from the end of the fiscal period statutes and, given the reach of those statutes and in which the audit or review was conducted.” The the nature of securities transactions, it is difficult Securities and Exchange Commission is charged to conceive of a factual scenario in which the new with promulgating more detailed rules for the criminal securities fraud provisions would be enforcement of this prohibition, and knowing violated but the existing mail and/ or wire fraud violations of the Act or the rules promulgated statutes would not. Accordingly, the creation of thereunder are punishable by fines and the new federal crime of securities fraud appears to imprisonment up to ten years. be more cosmetic than substantive, with one caveat - the penalties for the new crime exceed Finally, the Act seeks to close a perceived those applicable to mail and wire fraud. loophole in the existing federal witness tampering New Federal Crime: statute by specifically prohibiting the alteration or Certification of False Financial Statements destruction of documents or records relating to an official government proceeding. Such conduct The Act also requires chief executive officers also is punishable by fines and imprisonment of up and chief financial officers of public companies to to twenty years, and is applicable equally to public certify, in SEC filings containing the company’s and privately-held companies. financial statements, that such statements are true and accurate in all material respects. Those who New Federal Crime: Securities Fraud knowingly certify false or misleading financial The Sarbanes-Oxley Act purports to deal not statements are criminally liable for fines of up to only with the perceived abuses of corporate power $1,000,000 and imprisonment for up to ten years. which the recent spate of accounting scandals has Knowing and willful violations are punishable by highlighted for the public, but also broadly extends fines of up to $5,000,000 and imprisonment for up the reach of federal criminal law by creating to twenty years. several new federal crimes and also by increasing Enhanced Penalties for penalties applicable to existing crimes. Various Existing Federal Crimes The Act creates a new crime of securities The Act also strengthens federal criminal law fraud. Criminal liability attaches to those who (i) through the enhancement of penalties applicable knowingly engage in a scheme or artifice to to various existing crimes. For example, the Act
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