BellWether Blog


Part 1: Can you Summarize the Sarbanes-Oxley Act?

The Sarbanes-Oxley Act of 2002, popularly known as SOX was passed by the United States Congress for investor protection. The act was passed in 2002 so as to avoid fraudulent accounting practices by some corporations so that the investors can remain safer. The SOX brought about some strict rules and guidelines in order to reform the way financial disclosure were being handled by corporations to date. It was made as a result of the exposure of many accounting scandals and fraudulent affairs that emerged in the beginning of the 2000s. Some of these scandals include Tyco, WorldCom and Enron because of which investor trust was shaken to the core.

The act is composed of 11 titles that define various responsibilities of the corporate boards as well the criminal penalties that would be levied if the companies do not follow the rulings of the Securities and Exchange Commission or SEC. The most important parts of the SOX act are Section 302 and Section 404. In Section 302, it has been made mandatory for the top management of the company to certify that the financial statement is true and verified. On the other hand, Section 404 defines a new requirement for the management for devising internal controls so that the adequacy of the reports can be judged. This section has become a matter of debate for the publicly listed companies as it increases the cost of these companies significantly and the challenges that must be met by purchasing managers.

The Sarbanes-Oxley Act had many implications. In fact, Harvey Pitt, the SEC Chairman adopted more than a dozen of new rules to properly implement this act. The Public Company Accounting Oversight Board (PCAOB) was also designed as a quasi-public agency in order to review, regulate, inspect and even displace the accounting firms to abide by the law. The Sarbox Act was approved by the Senate with 1 abstaining and 99 in favor of the act. The Sarbox act talks about independence of the auditors, corporate responsibilities and more financial disclosures. It also enhanced the penalty on white collar crime. Moreover, it made the firms and their top management more accountable for all the financial decisions and practices being adopted in their firms.

The act also turned into a public debate because of its high cost implications, as per Section 404. Some opponents suggest that the Act has reduced the competitive advantage of the US by making financial regulation lengthier and more complex. On the other hand, supporters suggest that the SOX has rightly pulled the trigger for making sure that the investors retain confidence in their investments.

December 3, 2013
BY Bellwether

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