Sarbanes-Oxley (SOX) Act of 2002

What Is the Sarbanes-Oxley (SOX) Act of 2002?

The Sarbanes-Oxley Act of 2002 is a law the U.S. Congress gave July 30 of that year to assist with safeguarding investors from fraudulent financial reporting by corporations. Otherwise called the SOX Act of 2002, it commanded severe changes to existing securities regulations and forced intense new punishments on lawbreakers.

The Sarbanes-Oxley Act of 2002 came in response to financial embarrassments in the mid 2000s including publicly traded companies, for example, Enron Corporation, Tyco International plc, and WorldCom. The high-profile frauds shook investor confidence in the dependability of corporate financial statements and drove numerous to demand an update of decades-old regulatory standards.

The act took its name from its two backers — Sen. Paul S. Sarbanes (D-Md.) and Rep. Michael G. Oxley (R-Ohio).

Figuring out the Sarbanes-Oxley (SOX) Act

The rules and enforcement policies framed in the Sarbanes-Oxley Act of 2002 amended or enhanced existing laws dealing with security regulation, including the Securities Exchange Act of 1934 and different laws upheld by the Securities and Exchange Commission (SEC). The new law set out changes and augmentations in four principal areas:

1. Corporate responsibility
2. Increased criminal discipline
3. Accounting regulation
4. New assurances

Major Provisions of the Sarbanes-Oxley (SOX) Act of 2002

The Sarbanes-Oxley Act of 2002 is a complex and extended piece of legislation. Three of its key provisions are ordinarily alluded to by their section numbers: Section 302, Section 404, and Section 802.

Due to the Sarbanes-Oxley Act of 2002, corporate officers who purposely guarantee false financial statements can go to jail.

Section 302 of the SOX Act of 2002 commands that senior corporate officers personally confirm recorded as a hard copy that the company's financial statements conform to SEC disclosure requirements and "genuinely present in all material regards the financial condition and consequences of operations of the backer" at the hour of the financial report. Officers who approve financial statements that they know to be incorrect are subject to criminal punishments, including jail terms.

Section 404 of the SOX Act of 2002 expects that management and auditors lay out internal controls and reporting methods to guarantee the adequacy of those controls. A few pundits of the law have grumbled that the requirements in Section 404 can adversely affect publicly traded companies since it's frequently costly to lay out and keep up with the important internal controls.

Section 802 of the SOX Act of 2002 contains the three rules that influence recordkeeping. The primary arrangements with destruction and misrepresentation of records. The second stringently characterizes the retention period for putting away records. The third rule frames the specific business records that companies need to store, which incorporates electronic communications.

Other than the financial side of a business, like audits, exactness, and controls, the SOX Act of 2002 likewise frames requirements for data technology (IT) divisions with respect to electronic records. The act doesn't determine a set of business practices in such manner yet rather characterizes which company records should be kept on file and for how long. The standards framed in the SOX Act of 2002 don't determine how a business ought to store its records, just that it's the company IT division's responsibility to store them.

Features

• The act made severe new rules for accountants, auditors, and corporate officers and forced more tough recordkeeping requirements.
• The act likewise added new criminal punishments for abusing securities laws.
• The Sarbanes-Oxley (SOX) Act of 2002 came in response to exceptionally plugged corporate financial embarrassments before that decade.