Purpose of the Sarbanes-Oxley Act
The Sarbanes-Oxley Act was passed by the US Congress in 2002 in response to corporate scandals at Enron, Tyco and other large companies. Sometimes called Sarbox or SOX, the act seeks to improve the transparency and accountability of corporate finances and financial transactions.
Oversight
SOX established the Public Company Accounting Oversight Board (PCAOB), which oversees auditing firms and determines auditing procedures and policies.
Transparency
The Sarbanes-Oxley Act requires companies to adhere to more stringent financial reporting criterion, including reporting off balance sheet transactions. It also sets timeline requirements for financial reporting.
Personal Responsibility
SOX holds senior executives personally liable for the accuracy of corporate financial reports and outlines penalties for fraud. It also requires CEOs to sign corporate tax returns and to certify quarterly financial reports.
Criminal Penalties
SOX strengthened criminal penalties and sentencing guidelines for financial fraud. It also made it a criminal offense for a CEO not to verify quarterly financial reports.
Conflicts Of Interest
SOX requires auditor independence and sets forth guidelines to prevent conflicts of interest, disallowing auditors from advising corporations in areas outside finance.
Effects
Reviews of SOX are mixed. Critics say SOX has not prevented fraud and scared companies away from U.S. stock exchanges, while proponents say share value of SOX compliant companies increases as their capital borrowing costs decrease.
