Question

Cathy is an accountant with a major corporation that is on the list of corpo- rations to be audited under the new Sarbanes-Oxley law. She knows that one of the direc- tors, Aaron, wants to start a hotel business of his own but is having a hard time coming up with the needed funds. She overhears another director suggesting to Aaron that he take out a personal loan from the company and pay it back later. Aaron trusts Cathy’s judgment

and asks her opinion. If you were Cathy, what would you tell Aaron?

Answer 1

Cathy should tell Aaron that Sarbens Oxley Act states that it is unlawful for any issuer, directly or indirectly, to extend or maintain credit, or to arrange for the extension of credit, in the form of a personal loan to or for any director or executive officer. If the company has arranged for or is involved in a third party loan to a director or executive officer, there is a risk that the company may be viewed as having “arranged for the extension of credit,” thereby violating the Sarbens Oxley law. The act recommends companies to be sensitive to any situation in which a director or executive officer receives an economic benefit that is repaid at a subsequent time, no matter how brief the interval. So, Aaron should not take any loan from the company.

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