The Sarbanes-Oxley Act of 2002, often abbreviated as SOX, is a United States federal law enacted in response to high-profile corporate accounting scandals, including those involving Enron, WorldCom, and Tyco International. The Act is named after its sponsors, Senator Paul Sarbanes and Representative Michael Oxley.
The primary purpose of the Sarbanes-Oxley Act is to enhance transparency and accountability in financial reporting and to restore investor confidence in the wake of these corporate scandals. The key provisions of the Act include:
- Public Company Accounting Oversight Board (PCAOB): SOX established the PCAOB to oversee and regulate the auditing profession, particularly the auditors of public companies. The PCAOB sets auditing and ethical standards for public company audits.
- Corporate Responsibility: The Act places greater responsibility on corporate executives and boards of directors for the accuracy and completeness of financial reports. CEOs and CFOs must certify the accuracy of their company’s financial statements.
- Internal Controls: SOX requires companies to establish and maintain adequate internal controls over financial reporting. This is aimed at preventing and detecting fraudulent activities and ensuring the accuracy of financial information.
- Audit Committee Independence: The Act mandates that most of a company’s audit committee members must be independent directors. The audit committee is responsible for overseeing the financial reporting process and the external auditors.
- Whistleblower Protection: SOX includes provisions to protect employees who report corporate fraud and misconduct. It prohibits retaliation against whistleblowers who report such activities.
- Enhanced Financial Disclosures: The Act requires companies to provide more detailed and accurate financial disclosures, including off-balance-sheet transactions and relationships with unconsolidated entities that may affect their financial condition.
- Criminal Penalties: SOX imposes severe criminal penalties, including fines and imprisonment, for executives who engage in fraud or misconduct.
Overall, the Sarbanes-Oxley Act has significantly impacted corporate governance, financial reporting, and auditing practices in the United States, with the goal of preventing financial fraud and protecting the interests of investors.