January 18, 2006
In 2002, Congress passed the Sarbanes-Oxley Act ("SOX”). Since its enactment, SOX has become a standard for good governance principles for businesses, including having independent board members on an audit committee, adopting and enforcing a code of conduct, maintaining rigorous internal controls, and having truly independent external auditors. Lenders and insurers are increasingly looking for governance standards required by SOX in all companies with which they do business.
Most members of the construction community are privately held companies, often family owned and controlled, which, moreover, tend to operate locally. And while the focus and substance of SOX surely was aimed predominantly at companies whose securities are traded publicly and registered with the U.S. Securities and Exchange Commission, SOX does contain some provisions that apply to privately held companies too. For those companies, the following SOX provisions should be of interest.
Cover-up Conduct is Punishable
If any one lesson stands out from recent business debacles, it is that the cover-up may be worse than the crime. SOX addresses the problem in two ways.
(i) The knowing destruction, alteration, or falsification of records in Federal investigation or bankruptcy will result in a mandatory fine or imprisonment for up to twenty (20) years or both.
(ii) Intentionally tampering with or concealing a document or other object or otherwise obstructing, influencing or impeding an official proceeding is punishable by a fine or imprisonment for not more than 20 years, or both.
Retaliation Against Whistleblower is Punishable
SOX provides penalties for intentional retaliation against whistleblowers. Section 806 contains the civil remedies and procedures. Although this provision is aimed primarily at publicly traded companies, it also applies to a “contractor, subcontractor or agent” of such a company. There are very few private companies that are not covered by one of these categories. Section 1107 provides criminal penalties, including, in addition to a monetary fine, imprisonment for up to ten years.
Notice of Blackout Periods Under Defined Contribution Plans Must Be Provided
If a company offers a Defined Contribution Plan, SOX Section 306(b) states that Plan administrators must notify participants in writing at least 30 days prior to any “blackout period.” A “blackout period” is defined as any period of more than three consecutive business days during which participants are restricted from diversifying assets in their account or obtaining plan loans or distributions