How the Sarbanes-Oxley Act Has Knocked the “SOX” off the DOJ and SEC and Kept the FCPA on Its Feet

Abstract

Congress passed both the Foreign Corrupt Practices Act (“FCPA” or “the Act”) and Sarbanes-Oxley Act (“SOX”) in reaction to national corruption and bribery scandals.[1]  The reputation and integrity of American companies were under attack as these scandals unraveled and made international news.  Allegations of fraud, bribery and illegal practices plagued corporate America.  Congress needed legislation to address these problems to ensure its own country, as well as the international community, that the legislature would not tolerate corrupt business practices.  The FCPA was enacted to decrease corruption and bribery and to improve the accuracy of accounting and record-keeping of companies, and the SOX was enacted for very similar purposes, yet twenty five years later.  The FCPA requires companies to report their financial information in accordance with its provisions, while the SOX requires the Chief Executive Officers and Chief Financial Officers of public companies to guarantee that their financial reports are accurate.[2]  During the first twenty five years after the FCPA was enacted, the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) did not conduct many investigations into companies that had potentially violated the Act’s provisions.  However, in the aftermath of the Enron[3] and WorldCom[4] scandals, which lead to the enactment of the SOX in 2002 and subsequent increased international awareness of the problems of bribery and financial fraud, there has been a significant increase in FCPA enforcement.[5]

[1] The FCPA was enacted in 1977 in response to the Watergate scandal, and the SOX was enacted in 2002 in response to the Enron and WorldCom scandals. Lawrence A. Cunningham, Sharing Accounting’s Burden: Business Lawyers in Enron’s Dark Shadows, 57 Bus. Law. 1421, 1427 (2002) (commenting that the Enron scandal that led to the enactment of the SOX is “akin to the straw that broke the camel’s back, not a bull in a china shop.  The accounting camel’s back has been broken before in a similar way.  The early 1970s were riddled with accounting horror stories . . .  that led to the enactment of the Foreign Corrupt Practices Act.”).

[2] See Robert Prentice, Sarbanes-Oxley:  The Evidence Regarding the Impact of SOX 404, 29 Cardozo L. Rev. 703, 706 (2007) (The SOX places more responsibility on CEOs and CFOs, as Congress felt that “executive certification would be more meaningful and persuasive to investors if those executives had reasonable grounds to believe that the internal financial controls on the process producing those numbers were solid.”).

[3]  The Texas-based energy company used complex partnerships to mask over $500 million of debt from its books and records.  By disguising its financial statements, the company continued to obtain cash and credit payments to run its business operation, despite operating with such a large amount of debt.  Enron filed for protection from creditors on December 2, 2002, which became the biggest corporate bankruptcy in American history.  Its stock plummeted to merely pennies in 2002, although it previously was worth over $80.  See Bethany McLean and Peter Elkin, The Smartest Guys in The Room: The Amazing Rise and Scandalous Fall of Enron (2003); Press Release, U.S. Dep’t of Justice, Federal Jury Convicts Former Enron Chief Executives Ken Lay, Jeff Skilling on Fraud, Conspiracy And Related Charges (May 26, 2006), available at http://usdoj.gov/opa/pr/2006/May/06_crm_328.html (commenting that the Enron “scheme” was designed “to make it appear that Enron was growing at a healthy and predictable rate, consistent with analysts’ published expectations, that Enron did not have significant write-offs or debt and was worthy of investment-grade credit rating, that Enron was compromised of a number of successful business units, and that the company had an appropriate cash flow.”).

[4]  The Mississippi-based telecommunications company owned MCI, the second largest U.S. long distance carrier.  From 1999 to 2002, the company improperly recorded their operating expenses as capital expenses, which falsely and drastically increased its profit margins.  See Kyle Vasatka, WorldCom Scandal: A Look Back at One of the Biggest Corporate Scandals in U.S. History, Associated Content, March 8, 2007, http://www.associatedcontent.com/article/162656/worldcom_scandal_a_look_back_at_one.html?cat=3.

[5] See David Hess &  Cristie L. Ford, Corporate Corruption and Reform Undertakings: A New Approach to an Old Problem, 41 Cornell Int’l L.J. 307, 307-08 (2008) (commenting “[a]lthough [the FCPA’s] first twenty-five years were relatively quiet, the same cannot be said for its last five years.”); Justin F. Marceau, A Little Less Conversation, A Little More Action: Evaluating and Forecasting the Trend of More Frequent and Severe Prosecutions Under the Foreign Corrupt Practices Act, 12 Fordham J. Corp. & Fin. L. 285, 285 (2007) (stating that “the Department of Justice has initiated four times more prosecutions over the last five years over the previous five years.”); Erin M. Pedersen, , The Foreign Corrupt Practices Act and Its Application to U.S. Business Operations in China, 7 J. Int’l Bus. & L. 13, 14 (2008) (noting that the SEC and DOJ “have recently begun an aggressive enforcement approach to the FCPA. . . . .”).