Join 1000s of Professionals
FREE MEMBERSHIP

CPA Education & Training
Access to Forms & Tools
CPA Articles & White Papers
CPA News, Jobs, Blogs & More

SOX - Sarbanes-Oxley Act

A number of major corporate and accounting scandals, including Enron, Peregrine Systems, Tyco International and WorldCom, resulted in a decline of public trust in reporting practices of major organizations. This act was a remarkably swift reaction to these corporate scandals that was signed by President George W. Bush six months after Congress initially convened to review it. It has been the most sweeping reform of public company governance and disclosures since the 1930s (New Deal). To restore investor confidence, the act established a framework for corporate accountability, including strict new standards and penalties for violations in the areas of corporate governance, disclosures, audits, financial reporting and conflicts of interest.

This legislation is not free-standing. It is part of a broader scheme of combined federal and state provisions establishing comprehensive corporate governance criteria and practices. Non-governmental organizations, such as stock exchanges and professional discipline and standards-setting bodies, also play critical roles. Potentially the most important aspect of the Act, is the establishment of the Public Company Accounting Oversight Board. The PCAOB is charged with overseeing, regulating, inspecting and disciplining accounting firms in their roles as auditors of public companies. Additionally, the Sarbanes-Oxley Act details criteria in the following areas:

• Requirement for companies listed on stock exchanges have fully independent audit committees
• Ban on individual loans to executive directors and officers
• Intricate disclosure requirements
• Accelerated reporting of insider trading
• Employee protection for "whistleblowers"

The principal burdens for good governance, and the principal liabilities for failures, are placed on directors, senior management, auditors and counsel. Many matters that were previously treated as civil or administrative issues are now criminal violations. The resulting penalties for these indiscretions have become much more severe for those who willingly misstate information on financial statements.

Related Products