What is the most likely outcome of the situation?
SOX would have been able to help prevent the PharMor scam. Sarbanes-Oxley Act of 2001 is a 2002 law designed to help protect investors by forcing companies to share accurate, reliable financial information with the public. In this particular case, the relevant sections are 302 and 404.
Section 302 requires CEOs and CFOs of publicly traded companies to certify their company’s financial statements as accurate and complete. It would have been easier to detect attempts made by Phar-Mor’s senior management to manipulate or falsify its financial reports.
The section 404 of the Securities Exchange Act requires public companies to implement an internal system for financial reporting. They must also evaluate the effectiveness of their ICFR annually, which will help them uncover any accounting mistakes or frauds before they are too late. A good ICFR could have detected any irregularities related to the Phar-Mor fraud, such as inflated profit margins and creating fake vendors in order to get discounts on stock purchases.
The two sections will ultimately place greater responsibility on employees and executives of public companies in terms of providing accurate and true information to investors about the company’s finances. This allows them to make more informed choices about where their money is invested.