The Sarbanes-Oxley Act of 2002, which goes into effect on November 15, was passed in the wake of the Enron accounting scandal. Interestingly, it will have profound ramifications for the recording industry according to an essay by Richard Menta:

The Sarbanes-Oxley act was designed to protect investors by improving the reliability of corporate disclosures. It places very stringent reporting conditions with criminal penalties for executive management and the board of directors if they fail in their due diligence in providing accurate and fair information.

Due Diligence

"Due diligence" is they key word here. Before Sarbanes-Oxley, one would have to prove outright fraud on the part of executive management before some legal action could be taken. With Sarbanes, the standard has been lowered greatly. The firm's books now have to be perfectly transparent and orderly. If they aren't, the CFO, the CEO and members of the board of directors will be in violation of the law and can go to jail.

And when the government says orderly it means orderly. Publicly traded corporations now have to account for every single penny and that accounting has to be perfect with easily accessible records for audit purposes. The point of all this is so that there is absolutely nothing hidden from investors who risk their savings nor are there any practices that might mislead them with regards to the actual income that the company honestly generates.

The real kicker of this law is section 404, which requires the CEO and CFO to sign off that they know - not think they know, but know for certainty - that the numbers are accurate. That signature holds them personally responsible for any deficiencies in the company's financial statements..

The criminal penalties for executive managers and board members who fail in their due diligence are severe. The maximum fine ranges from $1 million to $5 million with a maximum prison term of from 10 to 20 years.

A lot of pensioners lost their money in the Enron scandal. They wanted blood and the Sarbanes-Oxley Act gave it to them. Companies must begin to comply with the new amendments for their first fiscal year ending on or after Nov. 15, 2004.

The Record Industry and its Artists

There have been many accusations over the accounting practices employed by the record industry. That will stop now for all of the publicly traded labels. It will also stop for the one privately owned major label Bertelsmann. Even though technically Bertelsmann does not have to comply with the act (it only applies to publicly traded firms) and is not subject to its criminal penalties, Sarbanes-Oxley sets a standard known as best practice which potentially can be used against them in civil court down the road.

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