Market Regulation

Sarbanes–Oxley Act of 2002

The Sarbanes–Oxley Act set new or enhanced standards for all U.S. public company boards, management, and public accounting firms.

The Sarbanes–Oxley Act of 2002 is a federal law that sets new or enhanced standards for all public company boards, management, and public accounting firms in the United States. It is also known as the Public Company Accounting Reform and Investor Protection Act (in the Senate) and the Corporate and Auditing Accountability and Responsibility Act (in the House). It is more commonly called Sarbanes–Oxley, Sarbox, or SOX. It It is named after sponsors U.S. Senator Paul Sarbanes (D-MD) and U.S. Representative Michael G. Oxley (R-OH).

As a result of SOX, top management must now individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe. SOX also increased the independence of the outside auditors who review the accuracy of corporate financial statements and increased the oversight role of board directors.

Senator Sarbanes and Representative Oxley Senator Sarbanes and Representative Oxley sponsored the 2002 Act.

The bill was enacted as a reaction to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems, and WorldCom. These scandals, which cost investors billions of dollars when the share prices of affected companies collapsed, shook public confidence in the nation's securities markets.

In response to the perception that stricter financial governance laws are needed, SOX-type laws have been subsequently enacted in Japan, Germany, France, Italy, Australia, India, South Africa, and Turkey.

Public Company Accounting Oversight Board (PCAOB)

Title I provides independent oversight of public accounting firms providing audit services (auditors). It also creates a central oversight board tasked with registering auditors, defining the specific processes and procedures for compliance audits, inspecting and policing conduct and quality control, and enforcing compliance with the specific mandates of SOX.

Auditor Independence

Title II consists of nine sections and establishes standards for external auditor independence, to limit conflicts of interest. It also addresses new auditor approval requirements, audit partner rotation, and auditor reporting requirements. It restricts auditing companies from providing non-audit services (e.g., consulting) for the same clients.

Corporate Responsibility

Title III consists of eight sections and mandates that senior executives take individual responsibility for the accuracy and completeness of corporate financial reports. It enumerates specific limits on corporate officer behaviors and describes specific benefits forfeitures and civil penalties for non-compliance.

Enhanced Financial Disclosures

Title IV describes enhanced reporting requirements for financial transactions, including off-balance-sheet transactions, pro-forma figures, and stock transactions of corporate officers. It requires internal controls to assure the accuracy of financial reports and disclosures and mandates both audits and reports on those controls.

Analyst Conflicts of Interest

Title V consists of only one section, which includes measures designed to help restore investor confidence in securities analysts' reporting. It defines the codes of conduct for securities analysts and requires disclosure of knowable conflicts of interest.

Commission Resources and Authority

Title VI defines practices to restore investor confidence in securities analysts. It also defines the SEC's authority to censure or bar securities professionals from practice and defines conditions under which a person can be barred from practicing as a broker, advisor, or dealer.

Studies and Reports

Title VII comprises five sections and requires the Comptroller General and the SEC to perform various studies and report their findings.

Corporate and Criminal Fraud Accountability

Title VIII describes specific criminal penalties for manipulating, destroying, or altering financial records or other interference with investigations while providing certain protections for whistle-blowers.

White Collar Crime Penalty Enhancement

Title IX increases the criminal penalties associated with white-collar crimes and conspiracies. It recommends stronger sentencing guidelines and specifically adds failure to certify corporate financial reports as a criminal offense.

Corporate Tax Returns

Title X consists of one section. Section 1001 states that the Chief Executive Officer should sign the company tax return.

Corporate Fraud Accountability

Title XI consists of seven sections. Section 1101 recommends naming this title the "Corporate Fraud Accountability Act of 2002." It identifies corporate fraud and records tampering as criminal offenses and assigns specific penalties for each. It also revises sentencing guidelines and strengthens their penalties. This enables the SEC to temporarily freeze transactions or payments that have been deemed "large" or "unusual."

Debate continues over the perceived benefits and costs of SOX. Opponents of the bill claim it has reduced America's international competitive edge against foreign financial service providers, saying SOX has introduced an overly complex regulatory environment into U.S. financial markets. Proponents of the measure say that SOX has been a "godsend" for improving the confidence of fund managers and other investors with regard to the veracity of corporate financial statements.