What is the Sarbanes-Oxley (SOX) Act of 2002?
The Sarbanes-Oxley Act of 2002 is currently a law that the U.S. Congress passed July 30 of the year to help protect investors from fraudulent financial reporting by corporations. Also referred to as the SOX Act of 2002 along with the Corporate Responsibility Act of 2002, it lacked rigorous reforms to existing securities regulations and imposed tough new penalties on lawbreakers.
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The Sarbanes-Oxley Act of 2002 came in response to financial scandals in the early 2000s involving publicly traded firms like Enron Corporation, Tyco International plc, and WorldCom. The high-profile frauds shook investor confidence in the trustworthiness of corporate financial statements and directed several to need an overhaul of decades-old regulatory criteria.
- The Sarbanes-Oxley (SOX) Act of 2002 came in response to highly publicized corporate financial scandals before that decade.
- The action created rigorous new rules such as accountants, auditors, and corporate officials and enforced stricter recordkeeping requirements.
- The action also included brand new criminal penalties for violating securities laws.
The action took its title from its two patrons --Sen. Paul S. Sarbanes (D-Md.) and Rep. Michael G. Oxley (R-Ohio).
Sarbanes-Oxley Act Of 2002 -- SOX
Recognizing the Sarbanes-Oxley (SOX) Act
The regulations and enforcement policies summarized at the Sarbanes-Oxley Act of 2002 amended or enacted existing legislation dealing with safety regulation, such as the Securities Exchange Act of 1934 and other laws imposed by the Securities and Exchange Commission (SEC). The law set out reforms and developments in four main areas:
- Corporate obligation
- Improved criminal punishment
- Enforcement law
- New protections
Important Provisions of this Sarbanes-Oxley (SOX) Act of 2002
The Sarbanes-Oxley Act of 2002 is a complicated and lengthy piece of legislation. Three of its key provisions are usually referred to by their part numbers: Section 302, Section 404, and Part 802.
Due to this Sarbanes-Oxley Act of 2002, company officers who intentionally certify false financial statements may go to prison.
Section 302 of the SOX Act of 2002 mandates that senior company officials personally certify in writing the organization's fiscal statements"comply with SEC disclosure requirements and fairly present in all material aspects the operations and financial condition of the issuer." Physicians who sign off on financial statements they understand to be erroneous are subject to criminal penalties, including prison conditions.
Section 404 of the SOX Act of 2002 expects that management and auditors set internal controllers and reporting approaches to ensure the adequacy of these controls. Some critics of these authorities have complained that the requirements in Section 404 may have a negative influence on publicly traded firms since it is frequently expensive to establish and maintain the required internal controls.
Section 802 of the SOX Act of 2002 comprises the 3 principles that influence recordkeeping. The first deals with the destruction and falsification of documents. The next rigorously define the retention period for saving documents. The next principle summarizes the particular company records that firms will need to shop, including electronic communications.
Aside from the financial side of a business, such as audits, precision, and controllers, the SOX Act of 2002 also summarizes requirements for information technology (IT) departments regarding digital records. The act doesn't define a set of business practices in this respect but rather defines which business records will need to be stored on file and for a long time. The criteria outlined in the SOX Act of 2002 don't define how a business should keep its documents, just that it is the company IT department's obligation to store them.
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- 107th Congress, 2nd Session. " H.R.3763 - Sarbanes-Oxley Act of 2002." Accessed Aug. 30, 2020.
- St. John's University School of Law. " Enron's Legislative Aftermath: Some Reflections on the Deterrence Aspects of this Sarbanes-Oxley Act of 2002," Page 1. Accessed Aug. 30, 2020.
- Congress. " Senator Paul S. Sarbanes." Accessed Aug. 30, 2020.
- Congress. " Representative Michael G. Oxley." Accessed Aug. 30, 2020.
- Securities and Exchange Commission. " The Laws That Govern the Securities Industry." Accessed Aug. 30, 2020.
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