Sarbanes-Oxley Prevents Corporate Fraud in Four Ways! The 2002 Sarbanes-Oxley Act imposes strict penalties on corporate fraud. It established the Public Company Accounting Oversight Board to regulate the accounting sector. Whistleblowers received job protection, and executive loans from companies were prohibited. The Act improves the corporate boards' financial savvy and independence. It holds CEOs liable for any errors found during accounting audits. The Act is named for its sponsors, Congressman Michael Oxley of Ohio and Senator Paul Sarbanes of Maryland. Additionally known as "Sarbox" or "SOX," The law was enacted on July 30, 2002. It is enforced by the Securities and Exchange Commission (SEC). Sarbanes-Oxley was viewed by many as being too expensive and punitive to implement. They feared it would reduce the allure of doing business in the United States. In hindsight, it is obvious that Sarbanes-Oxley was a good idea. The Great Recession and the 2008 Financial Crisis were made worse by banking industry deregulation.
Certification and Section 404
Corporate executives must personally certify the accuracy of the financial statements in accordance with Section 404. CEOs could receive a 20-year prison sentence if the SEC discovers violations. Only a few CEOs have been charged with a crime despite the SEC using Section 404 to file more than 200 civil cases. Managers were required to uphold "adequate internal control structure and procedures for financial reporting" by Section 404." The auditors of the companies were required to "attest" to these controls and "disclose" any "material weaknesses."Requirements
SOX established the Public Company Accounting Oversight Board as a new auditor watchdog. It established criteria for audit reports. All auditors of publicly traded companies must register with them. These firms' compliance is inspected, looked into, and enforced by the PCAOB. It makes it illegal for accounting firms to work as consultants for the businesses they are auditing. After five years, the head audit parties involved must leave the account, but they may continue to act as tax consultants. The so-called Big Four businesses continue to rule the oligarchic accounting industry: Ernst & Young, PricewaterhouseCoopers, KPMG, and Deloitte. SOX hasn't increased competition in this sector.Internal Measures
Public companies are required to employ an impartial auditor to examine their accounting procedures. For small-cap companies, which are those with a market valuation of less than $75 million, this rule was delayed. The majority of large corporations (83 percent) concurred that SOX boosted investor confidence. A third claimed that it decreased fraud.Whistleblower
Employees who report the issue and appear in court as witnesses against their employers are protected by SOX. A worker's employment contract cannot be modified by the employer. They are unable to berate the worker, fire them, or put them on a blacklist. SOX safeguards contractors as well. Any corporate retaliation can be reported to the Occupational Safety and Health Administration by whistleblowers.Impact on the American Economy
Private companies must also implement internal control frameworks and governance modeled after SOX. If not, they will have more challenges. They will struggle to raise money. Additionally, they'll pay more for insurance and have more civil liability. This would result in a decline in status among prospective clients, investors, and contributors. SOX raised the price of audits. Small businesses were more affected by this than were big businesses. Some businesses may have decided to use private financial support instead of the stock market as a source of funding as a result.Why Congress passed Sarbanes-Oxley
Up until 2002, securities were governed by the Securities Act of 1933. Businesses were required to publish prospectuses for all publicly listed company they issued. According to the law, the company and its investment group had to be honest. Audited financial statements were among them. The CEOs were not held legally accountable, even though the corporations were. So, bringing them to justice was challenging. The advantages of "cooking the books" far exceeded the uncertainties to any particular person. SOX addressed Arthur Anderson, WorldCom, and Enron corporate scandals. The provision of consulting services by auditors to their auditing clients was prohibited. Due to the removal of the conflict of interest, the Enron fraud was avoided. The Enron scandal, the weak stock market, and the impending reelections prompted Congress to act.To sum up
Congress passed the Sarbanes-Oxley Act to stop widespread fraud in corporate financial reports, which caused scandals that erupted in the early 2000s. The Act now holds CEOs liable for the financial statements of their businesses. Employees who report misconduct are protected. Higher auditing requirements are followed. These are only a few of the specifications outlined in SOX. Despite criticism that SOX is a costly compliance requirement, particularly for small businesses, its emphasis on rigorous auditing standards has aided in restoring and bolstering investor interest in American companies.Most Commonly Asked Questions (FAQs)
To whom does Sarbanes-Oxley apply?
Every publicly traded company must follow the SOX regulations in the US.What takes place if an organization doesn't follow Sarbanes-Oxley regulations?
Which of the 11 sections of SOX was broken will determine how severe the penalty is for noncompliance? Long prison terms and fines in the millions of dollars are among the possible punishments, as are paying a penalty or losing a listing on an exchange.An explanation of a Sarbanes-Oxley audit
An impartial third party conducts a compliance audit to examine how a company's financial statements were produced. To check whether the company is in compliance with SOX, the auditor will examine financial statements and speak with a few employees.