The Sarbanes-Oxley (SOX) Act: Holding Corporations Accountable

School: Colorado Technical University - Course: FINC 225 - Subject: Accounting

Introduction The U.S. Congress passed theSarbanes-Oxley(SOX)Actin 2002. This Act aims to hold corporations accountable, maintain investor confidence, and improve corporate governance. It regulates the activity of all public companies in the United States. It also applies to international companies that fall under the regulatory authority of the Securities and Exchange Commission (SEC), including companies that have registered equity or debt securities with the SEC and the accounting firms that provide services to them. (SoxLaw.com, 2021) This lesson looks more closely at this Act. Learn: Sarbanes Oxley Act Learning Materials Sarbanes-Oxley Act Overview Although there were laws in existence to address unlawful corporate and financial behavior, a series of scandals took place in the early 2000s that provided the impetus for Congress to further tighten legal controls. Some of the incidents that prompted further legal oversight were the following:

 Auditors who, rather than remain neutral in their relationship with their client, created a direct conflict of interest by entering into other business relationships with the client  Boards of directors who failed to fulfill their responsibility of providing oversight to senior management  Chief executive officers (CEOs) who failed to ensure the reliability of financial reports published to the stockholders in the annual report  Managers who intentionally misled employees regarding the financial viability of the company and actively encouraged further investment  Auditors who did not use accepted and appropriate auditing practices  Accountants who used practices that violated Generally Accepted Accounting Principles (GAAP), misrepresenting the earnings of the company Ultimately, the house of cards fell; the most notable wasthis company. Employees who had invested most or all of their savings and retirement funds into their employer's company lost all of their investments. The financial fallout to many was devastating, and other consequences included the suicides of one former Enron executive and a family member. Although several of the company executives were convicted and sentenced to prison, Congress still felt compelled to act. The result was the Sarbanes-Oxley (SOX) Act of 2002. This Act addressed the actions that led to the financial demise of the companies, including the following:  Requiring auditors to maintain neutrality, submit audit practices for review, regularly rotate lead auditors, and include internal controls as part of the audit  Demanding accountability for board members who failed to fulfill their duties as members of the board  Requiring CEOs to take personal responsibility for the financial reports that were published to stockholders  Enacting stiff fines and prison sentences for violations of the Act Additionally, the Public Company Accounting Oversight Board was created to oversee the audits of public companies to protect the interests of investors.