Financial Statements And Sox

Corporate fraud is unfortunately too common these days because companies want to look good so that people will want to invest with them. Financial statements can be "cooked" or falsified especially if the CEO is in on it. It has to be falsified very thoroughly but it is possible to fool everyone. An auditing company may be in on falsifying financial statements. Accounting firms want to keep their largest clients happy so that they will stick with them and pay their huge fees. An audit of a large public company brings in very hefty fees to the CPA firm. If the accounting firm provides other services to this client as well then there is even more of an incentive to cover up wrong doing on the part of the client so as not to lose the client.

President George W. Bush signed the Sarbanes- Oxley (Sox) law on July 30, 2002 to fight corruption at big public companies. According to Wikipedia it is also known as the " Public Company Reform and Investor Protection Act". It set new standards for public companies which of course can help prevent financial statements from being falsified without anyone picking up on it. The Sarbanes- Oxley law was named after Senator Paul Sarbanes and Representative Michael G. Oxley, the ones who introduced it. One of the things that SOX suggests is that the huge bonuses that were paid to the CEO's and CFO's of companies which have engaged in misconduct should be required to be returned. I'd definitely vote for that one. Wouldn't you?

The Sox law also says that any "insiders" in a company or officers or directors cannot sell their shares of stock in the co. during a blackout period. This refers to the time just before a company goes bankrupt, when no one but the insiders know what is about to happen. If they do sell their shares during this blackout period then they can be sued by the shareholders to get the money back that they made selling their shares. Hopefully laws such as these will help to prevent the common problem of bogus financial statements and corporate fraud in general.