SOX Act – Sarbanes-Oxley
History of the creation of SOX
The United States Securities Act of 1933 regulated the securities market until 2002. It required companies to publish a prospectus on any share they issued and listed on the stock exchange.
Corporations and investment banks were always legally responsible for publishing truthful information. This includes the quality of the audited financial statements and their supplementary information.
Although corporations were legally responsible, CEOs were not. Therefore, it was difficult to prosecute them.
The companies Enron Corporation, Tyco International, and WorldCom were the protagonists of high-profile frauds. These events diminished investors’ confidence in corporate financial statements.
The creation of the SOX Act in 2002 was intended to address these corporate scandals such as Enron, WorldCom, and Arthur Andersen.
SOX prohibited auditors from doing consulting work for their audited clients, which avoided the conflict of interest that led to the Enron fraud.
The Sarbanes-Oxley Act of 2002 came about in response to highly publicized corporate financial scandals in the early 2000s. The scandals involved companies listed on the stock exchange.
Creation of the SOX Act
The Sarbanes-Oxley Act, also known as SarOx or SOA (Sarbanes Oxley Act), is the law that regulates accounting, financial, and auditing functions and severely penalizes corporate and white-collar crime for all entities listed on the United States stock exchange.
The SOX Act was created due to the multiple frauds, administrative corruption, conflicts of interest, negligence, and malpractice of some professionals and executives who, knowing the codes of ethics, succumbed to the appeal of making easy money through companies and corporations by deceiving partners, employees, and stakeholders, including their customers and suppliers.
Likewise, many investors demanded a review of the regulatory standards that had been applied for many decades. The Sarbanes-Oxley Act of 2002 contains various aspects that seek to ensure the truthfulness of information.
The SOX Act created new rules for accountants, auditors, and corporate officers, and likewise imposed stricter record-keeping requirements and established a standard for audit reports.
Usefulness of the SOX Act
This SOX Act, also known as the Public Company Accounting Reform and Investor Protection Act, regulates accounting, financial, and auditing functions and penalizes corporate crime. This monitoring and control is carried out by increasing companies’ internal controls and implementing preventive measures that guarantee the integrity and accuracy of their financial reports.
A correct application and understanding of the Act allows companies to identify the key risks of financial reporting and assess their impact on the different areas of the organization.
SOX controls the process of maintaining records of accounts and transactions for large public and private companies, requiring that data be kept for at least 5 years.
The SOX Act of 2002 also adds new criminal penalties for violating securities laws. It also modifies or improves existing laws related to the regulation of information security. Until the Act was created, the Securities Exchange Act of 1933 was in place.
In addition, it establishes a new ethic of corporate responsibilities and strict rules to prevent and penalize corporate fraud and acts of corruption. In this regard, the Public Company Accounting Oversight Board (PCAOB) is created, a regulatory body that establishes the guidelines on the professional standards, ethics, and competence that will govern the performance of accounting activities, carrying out three specific functions: reviewing, regulating, and penalizing companies. Likewise, the PCAOB is overseen by the Securities and Exchange Commission (SEC).
Main benefits of SOX
- In the United States, the SOX Act has regulated various controls to improve the quality of financial information, based on the standards of accounting, internal control, corporate governance, audit independence, and increased penalties for financial crimes.
- The SOX Act requires large companies to handle record-keeping, in addition to controlling the information storage process. This is for the purpose of enabling the tracking and review of transactions.
- SOX requires IT departments to establish authentication protocols for the storage and retrieval of information. In this way, it assigns responsibility to specific units and individuals in the organization.
- The SOX Act protects employees who report fraud and testify in court against their employers. Companies cannot change the terms and conditions of their employment. They cannot reprimand, dismiss, or blacklist the employee. It also protects contractors. Whistleblowers can report any corporate retaliation to the SEC.
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