ACCT 229: Sarbanes-Oxley Act (SOX)

Sarbanes-Oxley Act

What does SOX stand for?

To try and reduce unethical corporate behavior and subsequently decrease the likelihood of future corporate scandals

Why did congress pass SOX in 2002?

Senator Paul Sarbanes of Maryland and Congressman Michael Oxley of Ohio

Who sponsored SOX?

All US publicly traded companies and any international companies that trade on the US stock exchanges must comply with SOX.

Who must comply with SOX?

Management must assess and report on the effectiveness of the company's internal control structure and procedures over financial reporting. (sec. 404)

Management Provision 1

New rules require a code of ethics be established and reported.

Management Provision 2

New penalties exist for management if the financial statements are inaccurate or incomplete (including both fines and imprisonment). SOX requires the CEO and the CFO to certify the annual financial statements.

Management Provision 3

Firms must provide a mechanism for anonymous reporting of fraudulent activities in the company (whistle-blower protection).

Management Provision 4

SOX seeks to strengthen the Board by implementing new rules for the composition of the Board of Directors, requiring some directors to be independent of management.

Board of Directors Provision 1

SOX requires audit committee members (made up of members of the Board of Directors) to be independent of management.

Board of Directors Provision 2

New rules for auditors include stronger rules regarding auditor independence. (Audit firms can no longer provide management consulting services to their audit clients.)

The External Auditors Provision 1

Auditors report to the client's audit committee rather than to the client's management team.

The External Auditors Provision 2

The new Public Company Accounting Oversight Board (PCAOB) has the power to regulate auditing firms.

Enforcement Provision 1

All accounting firms that audit publicly traded companies must register with the PCAOB and follow its rules.

Enforcement Provision 2