Sarbanes-Oxley rises as a phoenix from the ashes of Enron.  Yet, the application of the Act to intellectual property has origins predating the Enron scandal and can now be attributed to the convergence of three related trends.

1.         The Intellectual Asset Movement[1]

Intellectual property must be recognized as a major corporate asset.  Beginning in the early 90's, there was growing recognition that financial reports dramatically under reported the large portion of total corporate value represented by intellectual assets.  The gap can be seen in the ratio between reported book value on financial statements and market value reflected in the stock exchange.  It is now common for experts to report that IP accounts for as much as 80% of the value of corporate assets.[2]

2.         New Accounting Standards

One of the effects to emerge from the intellectual asset movement was a change in Generally Accepted Accounting Principles (GAAP) promulgated by the Financial Accounting Standards Board (FASB) in 2001.  It was no longer permissible to show the value of acquired IP assets in the financial report as amortized "goodwill."  Instead, the FASB regulations require a publicly traded company to determine value of acquired intellectual property assets and report on impairment of that value in the company's financial reports.[3]  FASB explains the rationale for this change as follows:

Analysts and other users of financial statements, as well as company managements, noted that intangible assets are an increasingly important economic resource for many entities and are an increasing proportion of the assets acquired in many transactions. As a result, better information about intangible assets was needed. Financial statement users also indicated that they did not regard goodwill amortization expense as being useful information in analyzing investments.[4]

3.         Sarbanes-Oxley:  The Key Provisions of SOX Relating to IP

Recognition that intellectual assets comprise a material part of the financial condition of a company together with more robust disclosure in financial reports led to recognition that intellectual property is necessarily a management concern.

Among the changes imposed by Sarbanes-Oxley are the requirements under Section 302 and 404 of the Act that the company CEO and CFO must certify they have reviewed the company's financial report and have determined that it does not contain any untrue statement of material fact, and that it fairly presents in all material respects the financial condition and results of the company.  The CEO and CFO must also certify that they are responsible for internal controls designed to ensure that material information is made known to management and that the internal controls are effective and audited.  Willful violations of the certification requirement results in criminal liability, including fines up to $5 million and 20 years in prison.[5]

TO BE CONTINUED . . .