What is Sarbanes-Oxley Act (SOX)?

May 6, 2012

Learn about Sarbanes-Oxley Act (SOX), its provisions and impact on public companies and their auditors.

1. Definition of the Sarbanes-Oxley Act (SOX)

On July 30, 2002, the Sarbanes-Oxley Act of 2002 (SOX) was signed into law by President George W. Bush. The Sarbanes-Oxley Act was named so because it was introduced by Senator Paul S. Sarbanes and House Representative Michael G. Oxley.

This Act was intended to improve financial reporting practices. The SOX provisions, however, apply only to public companies and public accounting firms that audit financial statements of public companies.

The SOX Act is organized into eleven (11) titles, which are listed below:

#

Title

Some Provisions

I

Public Company Accounting Oversight Board (PCAOB)

Establishes PCAOB.

Outlines PCAOB responsibilities.

II

Auditor Independence

Dictates auditor independence standards, including:

  • Services outside the scope of practice of auditors
  • Audit partner rotation
  • Auditor reports to audit committees
  • Conflicts of interest
  • Rotation of registered public accounting firms

III

Corporate Responsibility

Establishes responsibilities of public company audit committees.

Establishes corporate responsibility for financial reports.

Establishes officer and director bars and penalties.

Prohibits improper influence on conduct of audits.

Prohibits insider trading during pension fund black-out periods.

IV

Enhanced Financial Disclosures

Enhances financial disclosure requirements, including:

  • Management assessment of internal controls
  • Disclosures in periodic reports
  • Disclosures of transactions involving management and principal stockholders
  • Conflict of interest provisions

V

Analyst Conflicts of Interest

Discusses the treatment of securities analysts by registered securities associations and national securities exchanges.

VI

Commission Resources and Authority

Outlines resources and authority of the Securities and Exchange Commission (SEC).

VII

Studies and Reports

Discusses such studies as:

  • GAO study and report regarding consolidation of public accounting firms
  • Commission study and report regarding credit rating agencies
  • Study and report on violators and violations
  • Study of enforcement actions
  • Study of investment banks

VIII

Corporate and Criminal Fraud Accountability

Establishes such provisions as:

  • Criminal penalties for altering documents
  • Criminal penalties for defrauding shareholders of publicly traded companies
  • Statute of limitations for securities fraud
  • Protection for employees of publicly traded companies who provide evidence of fraud
  • Debts non-dischargeable if incurred in violation of securities fraud laws

IX

While-Collar Crime Penalty Enhancements

Discusses increased penalties for while-collar crimes, including:

  • Criminal penalties for mail and wire fraud
  • Criminal penalties for violations of the Employee Retirement Income Security Act of 1974 (ERISA)

X

Corporate Tax Returns

Requires corporate tax returns to be signed by the chief executive offer (CEO).

XI

Corporate Fraud and Accountability

Establishes enhanced regulation of general corporate fraud, including:

  • Tampering with a record or otherwise impeding an official proceeding
  • Authority of the Commission to prohibit persons from serving as officers or directors
  • Increased criminal penalties under Securities Exchange Act of 1934
  • Retaliation against informants
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