Business Law Article Review – Sarbanes-Oxley Act


This article is about accounting misconduct by Ian J. McCarthy, the former Chief Executive Officer and board member of an Atlanta-based home builder, Beazer Homes USA, Inc. According to the Securities and Exchange Commission, Beazer’s former Chief Executive Officer has just agreed to reimburse the company several millions of dollars that he received in compensation and profits when the company was committing accounting fraud. The Securities and Exchange Commission had previously filed a case against Beazer and its Chief Executive Officer who committed the fraud. However, McCarthy failed to reimburse the company as stated in Section 304 of the Sarbanes-Oxley Act. In this article, McCarthy has accepted to repay the company 6, 479, 281 cash, 40, 103 as restricted stock units, and 78, 763 as shares of restricted stock (all values are in United States Dollars). The bonuses, compensations, and profits in United States Dollars that Beazer obtained in the entire fiscal year 2006 during McCarthy’s tenure are as follows; 772,232 in stock sale profits, 5,706, 949 in cash, 78,763 shares of restricted stock, and 40, 103 in restricted stock units (U.S Securities and Exchange Commission, 2011).


McCarthy, the former Chief Executive Officer of Beazer Homes USA Inc., used to manipulate the company’s land development and house cost-to-complete accounts for a period of 12 months in 2006 fiscal year. Additionally, McCarthy improperly recorded certain model home financing transactions as sales with the aim of increasing the company’s income. McCarthy’s accounting misconduct made Beazer to fraudulently overstate its income during the fiscal year 2006, thereby misleading investors.


McCarthy’s accounting misconduct can affect the business in a number of ways. First, manipulation of Beazer’s land development and house cost-to-complete accounts can make the company bankrupt and unable to meet its financial obligations both in the short run and in the long run. Second, increasing Beazer’s income can mislead investors who might place their huge finances in the company but fail to earn profits. Third, McCarthy’s accounting misconduct can make Beazer acquire a negative image among its stakeholders, leading to drop in sales. Fourth, Beazer has to spend additional time and finances in having its accounting statements for the fiscal year 2006 restated. These reasons explain why McCarthy’s accounting misconduct is punishable under Section 304 of the Sarbanes-Oxley Act (U.S Securities and Exchange Commission, 2011).

Section 304 of the Sarbanes-Oxley Act compels senior corporate executives to reimburse any bonuses and compensations received during their tenure as a result of accounting misconduct. This provision also applies to individuals who have not been personally charged with the misconduct in question, but have violated the federal securities laws. The legal issue in this article could have been avoided if McCarthy could have complied with the financial reporting requirements recognized under Generally Accepted Accounting Principles, (GAAP), in order to avoid violation of the federal securities laws (U.S Securities and Exchange Commission, 2011).

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