Sarbanes Oxley Act, a federal law enacted in 2002 to protect investors and strengthen corporate governance. The law impacts not just public companies, but also privately-held ones which have publicly traded stock or which are owned by other public companies.
The main reason SOX was enacted was the Enron scandal, in which the energy company’s accounting firm, Arthur Andersen, was implicated in helping the company hide its financial problems.
SOX applies to all companies listed on U.S. stock exchanges and requires public companies to adhere to tighter financial reporting standards, including more stringent internal controls, access control systems, and auditing procedures. SOX also created the Public Company Accounting Oversight Board (PCAOB), a government agency charged with regulating the accounting profession.
1. Sarbanes Oxley is a law passed in 2002 to protect investors and ensure that public companies are being honest with the information they provide.
2. The act consists of 11 sections, or Titles, which cover topics like auditing (Title II), corporate responsibility for financial disclosures (Title III), oversight of securities markets, and regulation of investment advisers (Title VII).
3. Title IV focuses on internal control over financial reporting, requiring management to assess risks from fraud by employees or outsiders as well as risks from errors in accounting estimates or disclosure controls.
5. SOX applies to all companies listed on U.S. stock exchanges, including privately-held ones with publicly traded stock or which are owned by other public companies.
6. Sarbanes Oxley compliance is not optional; companies that do not comply can be fined, face prison time, or have their stock delisted from exchanges.
7. One of the most important aspects of SOX is the creation of the Public Company Accounting Oversight Board (PCAOB), a government agency charged with regulating the accounting profession. It has the power to investigate and sanction auditors who do not comply with SOX, as well as audit firms that do not meet certain quality standards.
8. Many large companies have established in-house compliance teams to help ensure that they are meeting all of the requirements of Sarbanes Oxley.
9. The cost of complying with Sarbanes Oxley can be significant, with some companies spending millions of dollars on new systems and procedures.
10. Despite the costs, many companies believe that the benefits of compliance outweigh the expenses. These benefits include improved financial reporting, reduced risk of fraud, and stronger investor confidence.
11. SOX 404 requires management to assess whether their company’s financial statements are “fairly presented in accordance with Generally Accepted Accounting Principles” (GAAP) Management is then responsible for putting in place the necessary controls to ensure that financial statements are accurate.
Impact of SoX on the Accounting Industry
In the aftermath of the Enron scandal, Sarbanes Oxley was enacted to tighten financial reporting standards and improve corporate governance. The law has had a significant impact on the accounting profession, with the PCAOB playing a key role in overseeing and regulating auditors.
As companies work to comply with the various requirements of SOX, they are increasingly turning to third-party providers for assistance. These providers offer a range of services, from compliance consulting to software and hardware solutions.
The accounting industry is likely to continue to experience significant growth in the years ahead as companies strive to meet the requirements of Sarbanes Oxley. The PCAOB has been very active in issuing new standards and guidance, and the compliance burden on companies is likely to increase in the years ahead.
Resources Available to Help You Become Sox Compliant
The best way to become Sarbanes Oxley compliant is to understand the requirements of the law and develop a compliance plan. The Securities and Exchange Commission offers helpful resources, including an overview of the law, frequently asked questions, and tips for developing a compliance plan.
The Small Business Administration also offers resources to help businesses comply with Sarbanes Oxley. These resources include a guide to understanding the law, a checklist for implementing Sarbanes Oxley compliance, and case studies of businesses that have successfully complied with the law.
