The Sarbanes-Oxley Act

The Sarbanes-Oxley Act, often abbreviated as SOX, is a federal law passed in the United States in 2002. It describes the requirements for the boards of directors of public companies, management companies, and public accounting, with the objective of to protect the general public and the company’s shareholders from mistakes. or fraudulent activities.

The Sarbanes-Oxley Act was named after its principal architects, Senator Paul Sarbanes and Representative Michael Oxley. Sarbanes served in the House of Representatives from 1971 to 1977 and as a United States Senator from Maryland from 1977 to 2007. Michael Oxley was a member of the Republican Party who served as the United States Representative in Congress from 1981 to 2005. Both Sarbanes and Oxley sponsored the creation of the Sarbanes-Oxley Act, which was passed by both the House and Senate and signed into law by George W. Bush.

The Act was conceived in response to numerous accounting scandals in the early 2000s at companies such as Texas-based commodities company Enron, telecommunications company WorldCom, and security systems company Tyco. These scandals reportedly resulted in billions of dollars in losses and shook investor confidence in US markets. Therefore, the Sarbanes-Oxley Act requires that an accounting framework be created for all publicly traded organizations in the United States, including non-US companies doing business in the country.

The Act is made up of eleven sections, but it is generally accepted that sections 302, 404, 401, 409, 802 and 906 are the most important in terms of compliance. These sections include key provisions such as the internal procedures necessary to ensure accurate financial disclosure, the requirement to provide evidence of ‘off-balance sheet’ items that are often used to disguise debts and assets, and the criminal penalties that must be met in case of non-compliance -compliance. To comply with the Act, organizations must establish a financial accounting framework and generate financial reports that are verifiable through traceable sources.

Section 404 is considered a contentious element of the Sarbanes-Oxley Act. Section 404 requires organizations to publish information in their annual reports on the scope and adequacy of their internal control structure and analyze the effectiveness of these controls. This section has been argued to be the most costly element of the Act to implement, and has been compared to an inefficiency tax that disproportionately hurts smaller companies with fewer financial resources to devote to completing the report.

Since the Act was passed, commentators have argued that the effects of the Act have been broadly beneficial, stating that markets have benefited from the reforms and the ability to evaluate companies more effectively. However, others have pointed out that the 2008 financial crisis was still possible despite the high levels of reform implemented by the Act, which apparently did little to prevent the subsequent collapse and economic consequences.