STUDY NOTE 1 – Sarbanes-Oxley Act of 2002 (SOX Act) 8/27/21
What is the Sarbanes-Oxley Act? 2. Increased criminal punishment
3. Accounting regulation
The Sarbanes-Oxley Act of 2002 cracks 4. New protections
down on corporate fraud. It created the
Public Company Accounting Oversight Penalties for non-compliance with SOX can
Board to oversee the accounting industry. It include:
banned company loans to executives and
Fines
gave job protection to whistleblowers. The
Act strengthens the independence and Removal from listings on public
financial literacy of corporate boards. It stock exchanges
holds CEOs personally responsible for Invalidation of Directors and Officers
errors in accounting audits. (D&O) insurance policies
The Act is named after its sponsors, Senator Sarbanes Oxley Act - Summary of Key
Paul Sarbanes, D-Md., and Congressman Provisions
Michael Oxley, R-Ohio. It's also called
Sarbox or SOX. It became law on July 30, SOX Section 302 - Corporate Responsibility
2002. The Securities and Exchange for Financial Reports
Commission enforces it.
a) CEO and CFO must review all financial
Why Congress Passed Sarbanes- reports.
Oxley? b) Financial report does not contain any
misrepresentations.
The Securities Act of 1933 regulated c) Information in the financial report is "fairly
securities until 2002. It required companies presented".
to publish a prospectus about any publicly d) CEO and CFO are responsible for the
traded stocks it issued. The corporation and internal accounting controls.
its investment bank were legally responsible e) CEO and CFO must report any
for telling the truth. That included audited deficiencies in internal accounting controls,
financial statements. or any fraud involving the management of
the audit committee.
Although the corporations were legally
f) CEO and CFO must indicate any material
responsible, the CEOs were not. So, it was
changes in internal accounting controls.
difficult to prosecute them. The rewards of
"cooking the books" far outweighed the risks
SOX Section 401 - Disclosures in Periodic
to any individual.
Reports
SOX addressed the corporate scandals at
All financial statements and their
Enron, WorldCom, and Arthur Anderson.
requirement to be accurate and presented in
It prohibited auditors from doing consulting a manner that does not contain incorrect
work for their auditing clients.28 That statements or admit to state material
prevented the conflict of interest which led information. Such financial statements
to the Enron fraud. Congress responded to should also include all material off-balance
the Enron media fallout, a lagging stock sheet liabilities, obligations, and
market, and looming reelections. transactions.
The new law set out reforms and additions SOX Section 404 - Management
in four principal areas: Assessment of Internal Controls
1. Corporate responsibility
STUDY NOTE 1 – Sarbanes-Oxley Act of 2002 (SOX Act) 8/27/21
All annual financial reports must include an SOX Section 906 - Corporate Responsibility
Internal Control Report stating that for Financial Reports
management is responsible for an
"adequate" internal control structure, and an Section 906 addresses criminal penalties for
assessment by management of the certifying a misleading or fraudulent
effectiveness of the control structure. Any financial report. Under SOX 906, penalties
shortcomings in these controls must also be can be upwards of $5 million in fines and 20
reported. In addition, registered external years in prison.
auditors must attest to the accuracy of the Requirements
company management’s assertion that
internal accounting controls are in place, SOX created a new auditor watchdog, the
operational and effective. Public Company Accounting Oversight
Board. It set standards for audit reports. It
SOX Section 409 - Real Time Issuer requires all auditors of public companies to
Disclosures register with them. The PCAOB inspects,
Companies are required to disclose on a investigates, and enforces the compliance
almost real-time basis information of these firms. It prohibits accounting firms
concerning material changes in its financial from doing business consulting with the
condition or operations. companies they are auditing. They can still
act as tax consultants. But the lead audit
SOX Section 802 - Criminal Penalties for partners must rotate off the account after
Altering Documents five years.
This section specifies the penalties for But SOX hasn't increased the competition in
knowingly altering documents in an ongoing the oligarchic accounting audit industry. It's
legal investigation, audit, or bankruptcy still dominated by the so-called Big Four
proceeding. firms. They are Ernst & Young,
PricewaterhouseCoopers, KPMG, and
SOX Section 806 - Protection for
Deloitte.
Employees of Publicly Traded Companies
Who Provide Evidence of Fraud Other key provisions and requirements
This section deals with whistleblower under the Act include:
protection. mandated disclosure in periodic
The Whistleblower Protection Act under the reports of transactions and
Sarbanes-Oxley Act mandates protection for relationships that are off-balance
whistleblowers, stating that employees and sheet that could impact financial
contractors who report fraud and/or testify status;
about fraud to the Department of Labor are near-ubiquitous prohibition of
protected against retaliation, including personal loans from a corporation to
dismissal and discrimination. executives;
establishment of fines and terms of
SOX Section 902 - Attempts & Conspiracies imprisonment for tampering or
to Commit Fraud Offenses destroying documents in events of
It is a crime for any person to corruptly alter, investigations or court action; and
destroy, mutilate, or conceal any document requirements for attorneys who
with the intent to impair the object's integrity represent public companies before
or availability for use in an official the SEC to report security violations
proceeding. to the CEO.
STUDY NOTE 1 – Sarbanes-Oxley Act of 2002 (SOX Act) 8/27/21
The Sarbanes-Oxley (SOX) Act of
2002 came in response to highly
Criticism of the Sarbanes-Oxley Act publicized corporate financial
The Act had critics from the start, including scandals earlier that decade.
many executives who felt they were unfairly The act created strict new rules for
burdened by new regulations due to the accountants, auditors, and corporate
dishonest and negligent acts of a few officers and imposed more stringent
others. In 2008, Newt Gingrich blamed the recordkeeping requirements.
financial crisis on the Act, citing it as the The act also added new criminal
reason for a low number of initial public penalties for violating securities
offerings, and asked Congress to repeal the laws.
Act.
REFERENCES:
Critics also charged that the Act was a
politically motivated reaction to a few, albeit https://www.investopedia.com/terms/
high-profile, corporate financial scandals s/sarbanesoxleyact.asp
and that the law would hinder competition https://corporatefinanceinstitute.com/
and business growth. resources/knowledge/other/sarbane
s-oxley-act/
Corporate leaders also voiced concerns that https://www.thebalance.com/sarban
meeting the regulations laid out in the es-oxley-act-of-2002-3306254
Sarbanes-Oxley Act would take too much https://searchcio.techtarget.com/defi
executive time and that compliance costs nition/Sarbanes-Oxley-Act
would amount to an exorbitant amount of https://www.illumeo.com/blogs/illume
money. Many complained about Section o-customer-
404 and said it was overly burdensome. success/2020/10/06/sarbanes-oxley-
Updates since its inception act-2002-summary
https://www.sarbanes-oxley-
Despite early and ongoing criticism, the 101.com/sarbanes-oxley-
Sarbanes-Oxley Act remains in place, compliance.htm
essentially unchanged from when it was first
enacted in 2002, with studies showing that
the law improves financial reporting.
However, many business leaders continue
to believe that the resources required to
meet the law's mandates are burdensome,
noting that research has found that smaller
companies are disproportionately burdened
by the Act.
Although proponents and critics continue to
assess the overall impact of the law, it is
seen as the most significant piece of
security legislation since the Securities
Exchange Act of 1934.
KEY TAKEAWAYS
