The Sarbanes-Oxley Act and corporate governance compliance

SOX Case

This set of facts definitely presents significant problems for both XYZ and Big 4 when it comes to violations of the Sarbanes-Oxley Act of 2002. Though sections 302 and 402 of the legislation are often focused on by companies and individuals in terms of compliance (with the latter being especially bemoaned by many), this case actually involves more diverse and less-familiar parts of the legislation dealing with auditor independence, conflicts of interest, and corporate responsibility while at the same time touching (to a lesser degree) on issues of disclosure to investors and even potential fraud or other criminal behavior (H.R.3763.ENR 2002; Kuschnik 2008). Titles Two, Three, and Eight all have some bearing on the facts at hand, and specific provisions make it clear that certain of the actions and relationships taking place between members of XYZ and Big 4 are inappropriate for companies involved in an auditing relationship under Sarbanes-Oxley.

The fact that Big 4 performs bookkeeping services for XYZ is in clear and direct violation of Section 201 of the Sarbanes-Oxely Act, which explicitly forbids the same public accounting firm or any individual associated with that firm from performing both bookkeeping and auditing duties for another corporation (H.R.3763.ENR 2002). This means that it is unlawful for Big 4 to act as the auditing entity for XYZ at all, rendering all actions taken by both Big 4 and XYZ to represent the audit as legal and compliant are false on their face, whether or not this is known to the specific individuals at all. Aside from the totality of the illegality here, however, there are several other violations of the legislation in the presented facts.

There are several other management and human resources functions mentioned in the facts of this case that are also in violation of Section 201 of the Sarbanes-Oxley Act (H.R.3763.ENR 2002). Washington's valuation of companies for XYZ could potentially be argued as not compromising Big 4's integrity in the audit according to the standards set forth by Sarbanes-Oxley, but the performance of background checks on prospective XYZ employees by Johnson, another partner at Big 4, is a clear performance of human resources duties, and this entanglement is explicitly forbidden by Section 201 (H.R.3763.ENR 2002). Then there are the obvious issues of dishonesty that are tantamount to fraud in some cases, and perhaps even qualify as fraud. Certainly, the i=outright attempt to persuade Smith to ignore certain material facts in his audit is in violation of Section 303, and if Smith carried through with this request he (and arguably anyone who asked him to falsify information, though this is not entirely clear in the Sarbanes-Oxley Act as written) would also be in violation of Section 802, which carries a potential prison sentence of up to twenty years as well as a fine (H.R.3763.ENR 2002).