Chief Executive Officer (CEO)

Securities Exchange Commission and other Governmental Agencies

CEOs of firms with publicly traded stock have regular financial reporting responsibilities to the Securities and Exchange Commission (SEC). CEOs and chief financial officers (CFOs) are ultimately accountable for the accuracy of these reports, as signified by their signature. Individual penalties may occur if information in these reports is later found to be untruthful.

While they do not personally develop them, CEOs are also responsible for other reports that are made regularly to government agencies, such as the Internal Revenue Service, the Occupational, Safety and Health Agency, the Environmental Protection Agency, and the Department of Labor. In addition, CEOs are responsible for compliance with a number of acts and regulations that affect how business operates, such as the American with Disabilities Act, the Employment Retirement Income Security Act, and the Sarbanes-Oxley Act.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act has had perhaps the largest impact on CEO behavior since the Securities Acts of the 1930s. It is an extremely complex piece of legislation. Sections 302 and 906 are particularly relevant to CEOs because of the individual accountability imposed on them. Following Sarbanes-Oxley, CEOs and CFOs must certify the effectiveness of internal controls and the fair and accurate representation of financial reports. Section 302 of the Sarbanes-Oxley Act addresses the fairness of financial statements, and Section 906 addresses the adequacy of internal control.

While both Sections 302 and 906 have similar requirements, Section 302 is less stringent because it allows certification based on the officer's knowledge. In contrast, under Section 906, the CEO needs to acquire whatever expertise is necessary to attest to the quality of internal control; the CEO cannot rely on other people's knowledge.

While faulty Section 302 certification does not have specific penalties, faulty Section 906 certification can result in criminal penalties and/or imprisonment for individuals. Criminal penalties under Section 906 include fines up to $5 million and/or imprisonment of up to 20 years. In addition, CEOs who are found guilty may be temporarily or permanently barred from serving as an officer or director of another firm.

For certification under Section 906, CEOs rely on documents produced in compliance with Section 404 of the Sarbanes-Oxley Act. Section 404 requires companies to oversee the documentation, testing, and issuance of a report on the effectiveness of internal controls. External auditors then must attest management's report on internal control. While there are no penalties or sanctions for poor internal control, the strength of the internal control system affects the amount and scope of work that needs to be completed by the external auditors before they can determine an audit opinion. Material weaknesses in internal control must be reported to the audit committee and the board of directors.

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