Often abbreviated as SOX, the Sarbanes-Oxley Act was signed by the U.S. Congress into law in 2002 (U.S. Securities and Exchange Commission, 2013). The Act was designed to restore public confidence in corporate financial reporting and to initiate reforms in protecting investors from the possibilities of accounting fraud (U.S. Securities and Exchange Commission [SEC], 2013). Congress also enacted SOX 2002 to improve the accuracy of corporate financial disclosures as well as shield the public from bookkeeping inaccuracies (SEC, 2013).
According to Jahmani and Dowling (2008), the SOX 2002 was intended to not only advance the accuracy and reliability of corporate financial disclosures but was also meant to increase the accountability of such reports. For example, to protect the integrity of published financial statements and prevent scandals such as those of the Enron era, Section 201 of the Act requires the Board of Directors through the audit committee to pre-approve all the audit services provided by its auditors (Jahmani & Dowling, 2008). Section 203 mandates the auditing firms to rotate periodically the managing partner off a client’s audit team in long-term engagements. This provision was meant to restore public faith in financial reporting of corporations. Moreover, Section 204 requires the accounting firm report directly to the contracting company’s independent audit committee (Jahmani & Dowling, 2008).
Section 302 further encapsulates one of the core elements of the Act in protecting the integrity of corporate financial statements. Here, SOX mandates the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of a firm to take personal responsibilities of all the financial disclosures (Jahmani & Dowling, 2008). This requirement is to ensure that the certifying officers take measures to establish as well as evaluate the effectiveness of the firm’s financial integrity and disclosure controls (Jahmani & Dowling, 2008).
References
Jahmani, Y., & Dowling, W. A. (2008). The Impact Of Sarbanes-Oxley Act. Journal of Business & Economics Research (JBER), 6(10), 57-65. Retrieved from http://cluteinstitute.com/ojs/index.php/JBER/article/viewFile/2479/2525
U.S. Securities and Exchange Commission. (2013, October 1). Federal Securities Laws. Retrieved September 6, 2016, from https://www.sec.gov/about/laws.shtml
