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Last modified: March 18, 2017
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The Sarbanes-Oxley act, also known as SOX, was legislated in 2002 after the financial irregularities and the ensuing problems that occurred in certain prominent companies such as Enron, WorldCom and so on. This legislation was enacted mainly to protect shareholders and the general public from accounting malpractices and frauds in the business houses. It brought in some vital and essential modifications in the regulation of financial practices and in corporate governance.
The Sarbanes-Oxley act is called after its chief draftsmen, Senator Paul Sarbanes and Representative Michael Oxley. This act also established a number of deadlines for compliance to the law. The Sarbanes-Oxley act is administered by the Securities and Exchange Commission or the SEC that is in charge of establishing the deadlines for compliance and publishing rules on requirements. The Sarbanes-Oxley act specifies the business records that have to be maintained in store and also for how long they should be stored. It is neither a series of business practices nor guidelines on how to store business records.
The Sarbanes-Oxley Act is organized into eleven titles that define the exact mandates and requirements for financial reporting with each title further divided into various sections:
With regard to compliance, the sections 302, 401, 404, 409, 802 and 906 are considered the most relevant as they define the implementation of the key provisions of the act. To put them briefly:
- Sarbanes–Oxley Section 302: deals with the disclosure controls
- Sarbanes–Oxley Section 303: defines the improper influence on the conduct of audits
- Sarbanes-Oxley Section 401: deals with disclosures in periodic reports on items not reported in the company’s balance sheet
- Sarbanes–Oxley Section 404: sets out the guidelines on the assessment of internal control
- Sarbanes–Oxley 409 is similar to section 404 but meant for smaller public companies
- Sarbanes–Oxley Section 802: spells out the criminal penalties that could be imposed for influencing the investigation by a US Agency or by other appropriate administration
- Sarbanes–Oxley Section 906: elucidates the criminal penalties for CEO/CFO financial statement certification.
In order to protect the whistle-blowers from reprisals, Sarbanes–Oxley Section 1107 explains the criminal penalties that could be imposed for retaliation against whistle-blowers.
There are some criticisms aimed at the Sarbanes-Oxley act, especially with regard to the compliance issue. Critics, especially those belonging to the Information Technology departments, feel that the storage of the corporations’ electronic and digital records and messages for long periods, sometimes more than five years, is a challenge because it is difficult to maintain such an archive in a cost-effective manner.
Some people believe that the Sarbanes-Oxley act has developed an ethical culture in organizations because it compels the top management to be more transparent in their dealings and the employees to be more accountable, besides protecting the whistle-blowers. However, others such as the Wall Street Journal argue that the Sarbanes-Oxley act has not been able to prevent frauds or establish justice. They further add that the act has wiped out the establishment of new public companies in the U.S. and damaged venture capital business and entrepreneurship.
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