SOX Law – Sarbanes Oxley
History of the Creation of SOX
The United States Securities Act of 1933 regulated the stock market until 2002. It required companies to publish a prospectus on any stock issued and listed on the stock exchange.
Corporations and investment banks were always legally responsible for publishing truthful information. This includes the quality of audited financial statements and their supplementary information.
Although corporations were legally responsible, CEOs were not. Therefore, it was difficult to prosecute them.
High-profile fraud cases involving Enron Corporation, Tyco International, and WorldCom reduced investor confidence in corporate financial statements.
The creation of the SOX Law in 2002 aimed to address these corporate scandals, including Enron, WorldCom, and Arthur Andersen.
SOX prohibited auditors from providing consulting services to their audited clients, preventing conflicts of interest that led to the Enron fraud.
The Sarbanes-Oxley Act of 2002 was introduced in response to highly publicized corporate financial scandals in the early 2000s. These scandals involved publicly traded companies.
Creation of the SOX Law
The Sarbanes-Oxley Act, also known as SarOx or SOA (short for Sarbanes-Oxley Act), regulates financial, accounting, and auditing functions, imposing severe penalties for corporate and white-collar crimes on all entities listed on the U.S. stock exchange.
Due to multiple frauds, administrative corruption, conflicts of interest, negligence, and malpractice by professionals and executives who, despite knowing ethical codes, succumbed to the lure of easy money—deceiving partners, employees, and stakeholders, including clients and suppliers—the SOX Law was created.
Additionally, many investors demanded a review of regulatory standards that had been applied for decades. The Sarbanes-Oxley Act of 2002 includes various provisions to ensure the accuracy of information.
The SOX law established new rules for accountants, auditors, and corporate officers, imposing stricter record-keeping requirements and setting a standard for audit reports.
Purpose of the SOX Law
This SOX Law, also known as the Corporate and Investor Protection Public Accounting Reform Act, regulates financial, accounting, and auditing functions, and penalizes corporate crime. This monitoring and control are conducted through increased internal controls within companies and the implementation of preventive measures that ensure the integrity and accuracy of their financial reports.
A proper application and understanding of the law allow companies to identify key risks in financial information and assess their impact on different organizational areas.
SOX controls the record-keeping process for accounts and transactions in large public and private companies, requiring data retention for at least five years.
The SOX Act of 2002 also introduces new criminal penalties for violating securities laws. It also modifies or enhances existing laws related to information security regulation. Before the SOX Act, the primary regulation was the Securities Exchange Act of 1933.
Additionally, it establishes new corporate responsibility ethics and strict standards to prevent and penalize corporate fraud and corruption. In this regard, the Public Company Accounting Oversight Board (PCAOB) was created as a regulatory body that sets guidelines for professional standards, ethics, and competence in accounting activities, performing three specific functions: reviewing, regulating, and sanctioning companies. The PCAOB is also overseen by the Securities and Exchange Commission (SEC).
Main Benefits of SOX
- The SOX law has regulated various controls in the United States to improve the quality of financial information, based on accounting standards, internal control, corporate governance, audit independence, and increased penalties for financial crimes.
- SOX requires large companies to maintain records and control the information storage process. This ensures transaction tracking and review.
- SOX mandates that IT departments establish authentication protocols for the storage and retrieval of information. This assigns responsibility to specific units and individuals within the organization.
- The SOX Law protects employees who report fraud and testify in court against their employers. Companies cannot alter their employment terms and conditions, reprimand, fire, or blacklist the employee. It also protects contractors. Whistleblowers can report any corporate retaliation to the SEC.
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