Compliance Glossary

Sarbanes-Oxley Act

The United States government uses legislation to maintain a business environment where investors may be confident in the accuracy of financial disclosures released by publicly-traded companies. One example is the Sarbanes-Oxley Act, a law that creates standards and accountability for corporate financial reporting and disclosures.

What is the Sarbanes-Oxley Act?

The Sarbanes-Oxley (SOX) Act was enacted on July 30th, 2002, co-sponsored by Sen. Paul Sarbanes (D-MD) and Rep. Michael G. Oxley (R-OH-4).

The SOX Act introduced a number of new financial governance laws that would impact corporate boardrooms across America in five key areas:

Corporate Accountability

The SOX Act introduces a range of provisions aimed at making senior officials and corporate officers directly and personally accountable for the truth and veracity of tax returns, financial reports, and other financial reports and disclosures. 

New Audit Requirements

The SOX Act establishes the Public Company Accounting Oversight Board, a non-profit organization with a mandate to protect the interests of investors by overseeing the audits of public companies and ensuring they are independently conducted, accurate, and informative. Standards for external auditor independence are also created by the SOX Act.

Accounting & Disclosure Standards

The SOX Act creates reporting requirements for several kinds of financial transactions, including off-balance-sheet transactions and stock transactions of C-suite executives. A senior corporate officer is required to certify that financial statements are prepared in compliance with SEC disclosure requirements. 

Additionally, firms are required by the SOX Act to maintain internal controls that ensure the accuracy of financial reports. Firms must test these internal controls annually by conducting a top-down risk assessment (TDRA) and producing an internal control assessment.

Increased Penalties for White Collar Crime

One of the major goals of the SOX Act was to increase punishments for white collar crimes, especially for corporate officers who certify false disclosures, engage in fraud, or obstruct a US agency investigation by falsifying, hiding, or destroying records.

Whistleblower Protections

The SOX Act introduces new protections for whistleblowers, explicitly prohibiting anyone in a public trading company from acting in retaliation against a whistleblower who discloses potential or actual violations of the following:

  • Securities Fraud
  • Shareholder Fraud
  • Bank Fraud
  • Wire Fraud
  • Mail Fraud
  • Any violation of SEC rules and regulations

Retaliatory actions that are specifically banned by the SOX Act include employee termination, demotion, or suspension, harassment, threats, and any type of discrimination. Even disclosing the identity of a whistleblower to others may constitute a retaliatory action under the SOX Act provisions.

Why was the Sarbanes-Oxley Act Passed?

The Sarbanes-Oxley Act was passed in 2002, shortly after a slew of corporate accounting scandals where senior corporate officers were found to have participated in the falsification or intentional misreporting of financial results.

Between 1999 and 2002, companies like Enron, Xerox, WorldCom, Tyco International, Qwest Communications, Kmart, Halliburton, and others were implicated in scandals.

Who Does the Sarbanes-Oxley Act Apply To?

The Sarbanes-Oxley Act applies to:

  • All publicly traded companies in the United States
  • All wholly-owned subsidiaries that do business in the United States
  • All foreign companies that are publicly traded and do business in the United States

Some provisions of the SOX Act also apply to privately held companies, including penalties for retaliation against whistleblowers and criminal liability for destroying or falsifying records.

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