Sarbanes-Oxley Act

Definition

The Sarbanes-Oxley Act (SOX) is a United States federal law that was enacted in 2002 to enhance corporate governance and financial reporting requirements for public companies. It was a legislative response to high-profile corporate scandals, such as Enron and WorldCom, aimed at restoring public confidence in the accuracy and reliability of financial information disclosed by publicly traded companies.

5 Must Know Facts For Your Next Test

1. The Sarbanes-Oxley Act established new or enhanced standards for all U.S. public company boards, management, and public accounting firms.
2. It mandated that senior executives personally certify the accuracy of financial information, increasing their accountability and liability.
3. SOX requires public companies to establish and maintain adequate internal controls and procedures for financial reporting, with annual assessments of their effectiveness.
4. The Act created the Public Company Accounting Oversight Board (PCAOB) to oversee the auditing of public companies.
5. SOX introduced stricter penalties for corporate fraud and increased the independence of external auditors from the companies they audit.

Review Questions

• Explain how the Sarbanes-Oxley Act addresses business ethics and corporate governance.
  • The Sarbanes-Oxley Act was enacted to improve corporate governance and enhance the reliability of financial information disclosed by public companies. It does this by mandating stricter standards for financial reporting, increasing the personal accountability of executives, and establishing independent oversight of the auditing process. These measures aim to restore public trust in the accuracy and integrity of financial information, which is crucial for ethical business practices and informed decision-making by investors and other stakeholders.
• Describe the key provisions of the Sarbanes-Oxley Act and their impact on important business laws and regulations.
  • The Sarbanes-Oxley Act introduced several key provisions that significantly impacted business laws and regulations. It established new standards for corporate governance, including the requirement for senior executives to personally certify the accuracy of financial reports. SOX also mandated the implementation of robust internal controls and procedures for financial reporting, which companies must assess annually. Additionally, the Act created the Public Company Accounting Oversight Board to oversee the auditing of public companies, thereby increasing the independence and accountability of external auditors. These provisions were designed to enhance transparency, accountability, and the reliability of financial information, ultimately strengthening the legal and regulatory framework governing public companies.
• Analyze how the Sarbanes-Oxley Act has influenced the ethical responsibilities of businesses and their leaders.
  • The Sarbanes-Oxley Act has significantly influenced the ethical responsibilities of businesses and their leaders. By mandating personal certification of financial reports and increasing the penalties for corporate fraud, the Act has raised the stakes for executives, making them more accountable for the accuracy and integrity of their company's financial information. This, in turn, has heightened the ethical obligations of business leaders to ensure transparent and honest reporting, as well as the implementation of robust internal controls to prevent and detect financial misconduct. Moreover, the creation of the Public Company Accounting Oversight Board has strengthened the independence and oversight of the auditing process, further reinforcing the ethical duty of businesses to provide reliable and trustworthy financial data to investors and other stakeholders. The Sarbanes-Oxley Act has thus become a critical component of the legal and ethical framework governing the conduct of public companies and their leadership.

Related terms

Corporate Governance: The system of rules, practices, and processes by which a company is directed and controlled, including the relationships among the stakeholders and the goals for which the corporation is governed.

Financial Reporting: The process of disclosing financial information about a business entity to users such as shareholders, creditors, and regulators.

Public Company: A company whose securities (stocks, bonds, or options) are traded on a public stock exchange and are available for purchase by the general public.