An Overview Of The Sarbanes-Oxley Act

The Sarbanes-Oxley Act is actually a compilation of two bills that were passed in the United States Senate in 2002. A bill to be passed in the House was tabled by Congressman Michael Oxley in April 2002 and was known as the Corporate and Auditing Accountability and Responsibility Act. Later in June 2002, Senator Paul Sarbane’s tabled the Senate bill 2673 or the “Public Company Accounting Reform and Investor Protection Act.” In an effort to rectify the two bills together, the United States Conference Committee approved the Sarbanes-Oxley Act (SOX).

In simple terms, the SOX Act is used as a guideline for making public companies more accountable to recording and reporting their financial information. The Act was introduced to improve the accuracy of companies governed by the Securities and Exchange Commission (SEC), and allows the SEC to oversee any regulations in regard to this law.

The Sarbanes-Oxley Act of 2002 was created at a crucial time in history when scandals from various large companies resulted in lost of billions by investors. As a result the Act was created to make companies more accountable, and also further reduce the occurrence of other financial scandals. Therefore, it has abolished the ability for chief executive officers to state they were not fully aware of the financial reports issued.

The SOX Act is divided into eleven titles that outline the major changes to financial reporting and investor protection:

The Public Company Accounting Oversight Board: Title I

This section of the law is mainly used to establish the rights of the Public Company Accounting Oversight Board (PCAOB). It lists the duties and responsibilities of the board in outlining compliance procedures, and other areas such as auditor registration.

Independent External Auditors: Title II

The second title outlines the guidelines for having an external auditor. It discusses how the external auditor should be approved, and how their findings should be reported. This section also states the necessity of companies to rotate their auditor, and only provide auditing services and nothing else.

Company Responsibility For Accurate Reporting: Title III

The eighth title in the SOX Act is used to ensure that the executive members are held responsible for the reports generated. In this title, chief executive officers have to view and approve the details of the finance report. This section of the act further describes the interaction between an external auditor and the company’s audit committee.

Complete Disclosure of Financial Records: Title IV

Before Title IV was introduced, public companies were not required to have internal measures in place to comply with reporting accuracy. Not only do these controls have to be in place now, but audits also have to be completed on these controls.

Securities Analyst Code of Conduct: Title V

This is fairly straightforward, and it is used to protect investors by outlining the behavior of securities analysts, especially when a conflict of interest arises.

Commission Resources and Authority: Title VI

Title six also used to protect investors by establishing the Securities and Exchange Commission as the governing body to administer financial standards and policies in the industry. It also lists the responsibilities of brokers and dealers and disciplinary steps if they fail to comply with the standards.

SEC Reports: Title VII

This section of the Act gives guidelines on the reports of the Securities and Exchange Commission. These reports would outline research completed by the SEC on various subjects to protect the investor.

Corporate and Criminal Fraud Act of 2002: Title VIII

One of the most important sections of the SOX Act is contained in title eight. This title is well known because it is now used to provide safety for

“whistle blowers” who report their company. In a way that clearly outlines illegal practices for corporate fraud, the penalties associating with various fraudulent practices are contained here.

Increased Penalty For White Collar Crime: Title IX

Before the recent financial scandals, it was a general idea that “white collar crime” was too lenient for the amount of money companies were defrauded. Therefore, this area explicitly outlines the behavior associated with “white collar crime” and the sentences for these have been increased.

CEO Tax Return Accountability: Title X

This area of the Act is fairly straightforward and simple, and it requires all CEO’s to review and sign the tax return generated by the company.

Corporate Fraud Accountability: Title XI

The last title is mainly concerned with reiterating that corporate fraud is a criminal offence and more accountability is necessary. It also specifies the various disciplinary action will be taken, such as freezing accounts.

In summary, the Sarbanes-Oxley Act was written at a time when the United States House and Senate both felt there was a need for more stringent financial laws to be put in place. Proponents for the Act state that it is necessary to help restore investor confidence in businesses and companies, while those against the Act have stated that it is too stringent and will only be a deterrent to foreign investment.