Sarbanes-Oxley Act (SOX) of 2002 is a law that was enacted in United States to set standards for all public companies, management and all accounting firms. It brought many changes to the regulation of corporate governance and financial practice in public companies. The act was named after senator Paul Sarbanes and Representative Michael Oxley who drafted the bill. The Act contains eleven sections. The act is applicable to all public companies in United States as well as multinational companies with registered securities with the Securities and Exchange Commission (SEC).
The main aim of SOX was to improve accuracy and reliability of public company disclosures and to ensure that they are made pursuant to the securities law. The act set standards for corporate accountability and set penalties for violating the standards. The act also specifies financial reporting responsibilities which included internal control reports and procedures that will ensure the financial reports are valid. The top management must individually certify that the financial information is accurate and reliable. This makes them accountable when such information is submitted to SEC or is used by an investor.
The act was enacted due to the high number of corporate scandals with companies misrepresenting a variety of questionable transactions. Some of the scandals involved companies such as Enron, Tyco International, and WorldCom among others. This resulted in huge loses to shareholders. Investors also lost their confidence in the securities market. The act addressed the problems by enhancing corporate governance and strengthening corporate accountability. This was achieved through strengthening internal control; instituting new levels of control and ensuring that there if full disclosure in financial reporting.
Noncompliance with the act may result in loss of listing in the exchange market, loss of D&O insurance, fines and sometimes imprisonment. It also results in loss of investor confidence.
Work Cited
Coates, John C. "The Goals and Promise of the Sarbanes-Oxley Act ." Journal of Economic Perspectives 21.1 (2007): 91–116. http://www.aeaweb.org/articles.php?doi=10.1257/jep.21.1.91. Web. 15 Oct. 2012.
