What is Sarbanes-Oxley Act (SOX)?

3. SOX provision examples – part two

Enhanced Financial Disclosure: in accordance with the SOX Section 404, company’s management must create and maintain adequate internal controls over financial reporting and must present its assessment of the internal controls. Annual reports filed with the SEC must be accompanied by the management’s statement regarding the effectiveness of the internal controls. The company’s auditor must also attest to the management’s assessment of the company’s internal controls.

Public companies are required to disclose off-balance sheet transactions, arrangements, obligations, and other relationships with unconsolidated entities or other persons that may have a material current or future effect on:

  • Financial condition
  • Change in financial condition
  • Results of operations
  • Liquidity
  • Capital expenditures
  • Capital resources
  • Significant components of revenues or expenses

Off-balance sheet arrangements include obligations under certain guarantee contracts, obligations under certain derivative instruments, a retained or contingent interest, and a material variable interest.

Corporate and Criminal Fraud Accountability: the Act requires auditors to retain audit and review records for seven (7) years after the completion of the audit or review of financial statements. Auditors must retain records that contain financial data, analysis, opinions, and conclusions that are related to audit or review as well as records sent or received in connection with the audit or review.

The Act establishes significant fines and penalties for corporate and criminal fraud. For instance, a failure by an auditor to properly maintain audit and review workpapers for at least five (5) years from the end of the fiscal year the audit or review was performed could result in fines and/or imprisonment of ten (10) years, or less. In accordance with the Act, "whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence" federal investigation or bankruptcy could face significant fines and/or imprisonment of not more than 20 years.

White-Collar Crime Penalty Enhancements: according to the Act, mail fraud, wire fraud, or false (willful) certification of financial reports could be punished with a fine of no more than $5 million or the imprisonment of up to 20 years, or both.

Corporate Fraud and Accountability: the Act gives the Securities and Exchange Commission a right to prohibit persons from serving as officers or directors of public companies that are registered pursuant to section 12 or that file reports pursuant to section 15(d). The Act also establishes increased criminal penalties under Securities Exchange Act of 1934 as well as whistleblower protection: retaliation against informants could be punished with a fine or imprisonment of no more than 10 years, or both.

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