There are some provisions of Sarbox that "wrongfully make the innocent suffer for the guilty," Harvey Gilmore, a professor of taxation and business law at New York's Monroe College, argues in an essay recently posted on the Social Science research Network.
Some of these "innocents," Gilmore maintains, include auditors hamstrung by Sarbanes-Oxley provisions that prohibit them from taking a job with a company for at least one year after auditing it.
CFOs may also be innocent fall guys.
Take the sad case of the finance chief at "XYZ Co.," a publicly traded firm with $600 million of revenue. Unbeknownst to the CFO, a low-level accountant, some three levels down the food chain, figures out a way to embezzle a tidy $462,082 from the company.
Although the miscreant is able to steal over hundreds of thousands from right under the company's nose, the company's profits end up being understated because of the fraud. In the meantime, all XYZ Co. employees receive year-end bonuses, including $250,000 for the CFO and $500 for the embezzler.
Under Sarbox Section 306, CEOs and CFOs are required to reimburse the companies for any incentive- or equity-based compensation received within one year of a financial statement that -- due to fraud -- requires subsequent restatement.
This claw-back would involve the CFO in the example company paying back the $250,000 bonus, while the embezzler, not covered under the Sarbox disgorgement requirement, would get to keep his $500, Gilmore says.
"Of course, there are many other remedies that the company can pursue (both criminally and in tort)," he adds. "I am not suggesting [that the embezzler] could walk away untouched."
"To be fair, the massive corporate accounting scandals the country had been exposed to necessitated a legislative response," Gilmore says. "However, in the Congressional haste to come up with a response to Enron, World-Com, Tyco and the rest, I believe that Sarbox committed a touch of overkill in the pursuit of accounting integrity."
He concludes that the existence of certain situations in which "an individual can suffer inequitable consequences for someone else's misconduct" under Sarbox is not only unfair, "but the fact that these 'loopholes' have not been adequately addressed in the nearly 10 years of Sarbanes-Oxley's existence guarantees that the hidden unfairness of a supposedly remedial statute will continue unabated."
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