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What was the Sarbanes-Oxley Act of 2002?

2016-11-21T15:43:22+00:00

The term 'Sarbanes-Oxley Act of 2002' is included in the Accounting edition of the Financial Dictionary. It's available on mazon in Kindle or Paperback version. See more details here.

The Sarbanes-Oxley Act of 2002 is also properly called the Public Company Accounting Reform and Investor Protection Act of 2002. It is more typically referred to by its abbreviation SarbOx or even SOX. Congress passed this much needed reforming federal law of the United States because of a variety of significant accounting and corporate scandals that successively rocked the nation. Among these were Enron, WorldCom, and Tyco International. Such scandals eroded the already low public trust Americans held in both accounting and reporting procedures.

The law became named after its two sponsors the democratic Senator Paul Sarbanes of Maryland and the republican Representative Michael Oxley of Ohio. The vote on the act proved to be nearly unanimous as the Senate passed it 99 – 0 while the House approved it 423 – 3. The legislation proved to be far reaching. As such it created improved or new standards for every publicly traded U.S. company management, board, and public accounting company.

Congress was also hoping to safeguard investors from fraudulent accounting practices that corporations had been increasingly engaging in over the years. The SOX decreed strict major structural changes that were intended to step up corporate financial disclosures and stop accounting fraud.

The numerous early 2000s years accounting scandals prompted Congress to act to improve the deteriorating situation. The failures at Enron, WorldCom, and Tyco had severely shattered investors’ confidence in public financial statements. These led to a massive overhaul of the standards that regulated reporting in the industry.

The act itself is comprised of 11 sections or titles. These run the whole spectrum and range from criminal penalties to the responsibilities of Corporate Boards. The SEC Securities and Exchange Commission is charged with implementing the new rulings and requirements for compliance with the provisions in the new and improved corporate governance law.

Some observers felt the new legislation turned out to be important and helpful. Others believed that it actually created more economic harm than it stopped. Still others claimed that the act itself was more modest in its scope and reach than the tough rhetoric that surrounded it proved to be.

The initial and most crucial ruling of the act set up a new semi-public agency. This Public Company Accounting Oversight Board was tasked with regulating, overseeing, inspecting, reprimanding, and disciplining any accounting firms who failed in their critical jobs as public company auditors.

The SOX Act also deals with important matters like corporate governing, auditor independence, and improved financial disclosure practices. Some analysts have called this among the most substantial changes to United States laws dealing with securities since President Franklin D. Roosevelt’s New Deal in the 1930s.

These regulations and accompanying policies for enforcement, which the SarbOx laid out, changed and supplemented legislation that already existed and pertained to regulating securities. Two key provisions emerged from the SOX Act. In Section 302, a mandate was established requiring upper level management to personally certify and sign off on the accuracy of the financial statement as reported.

Section 404 provided a new requirement regarding internal controls and methods for reporting that auditors and corporate management were required to establish. The controls had to be determined to be sufficient enough to ensure accuracy. Publicly traded companies were less than pleased by this section. It implied costly changes would be required from companies which would have to create and build the necessary internal controls from the ground up. This proved to be expensive to implement.

The term 'Sarbanes-Oxley Act of 2002' is included in the Accounting edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.