What is the Sarbanes-Oxley (SOX) Act of 2002?

On July 30, 2002, the US Congress approved the Sarbanes-Oxley Act of 2002, a legislation designed to protect investors from corporate financial reporting fraud. First Session of the 107th Congress. “H.R. 3763, Sarbanes-Oxley Act of 2002.”

The SOX Act of 2002, also known by another name, required strict amendments to already-existing securities laws and imposed harsh new penalties on offenders.

The early 2000s financial scandals involving publicly listed corporations, including Enron Corporation, Tyco International plc, and WorldCom, prompted Congress to pass the Sarbanes-Oxley Act of 2002. Investors: The high-profile scams shook investor faith in the reliability of company financial statements, and many called for a revision of long-standing regulatory requirements.

Understanding the Sarbanes-Oxley (SOX) Act

The Securities Exchange Act of 1934 and other laws governed by the Securities and Exchange Commission (SEC) were among the security regulation laws modified or enhanced by the regulations and enforcement practices delineated in the Sarbanes-Oxley Act of 2002.5. The new legislation included enhancements and revisions in four main areas:

• Corporate accountability
• Enhanced penalties for crimes
• Accounting guidelines
• new safeguards

The Sarbanes-Oxley (SOX) Act of 2002’s principal provisions

Long and complicated, the Sarbanes-Oxley Act of 2002 is a law. Section 302, Section 404, and Section 802.1 are the three main provisions generally known by their respective section numbers. Corporate officials who knowingly certify misleading financial statements may face jail under the Sarbanes-Oxley Act of 2002.

Section 302 of the SOX Act of 2002 says that senior corporate officers must personally certify in writing that the company’s financial statements “fairly present in all material respects the financial condition and results of operations of the issuer” at the time of the financial report and that they meet SEC disclosure requirements. Officers who approve financial statements they know to be false face criminal charges and maybe even lengthy jail sentences.

To ensure the efficacy of such controls, the SOX Act of 2002’s Section 404 requires management and auditors to establish internal controls and reporting procedures. Because setting up and maintaining the required internal controls may be costly, some legal opponents have claimed that the requirements under Section 404 may negatively affect publicly listed corporations.

The three regulations about recordkeeping are included in Section 802 of the SOX Act of 2002. The first addresses record fabrication and destruction. The second one specifies the duration for which records must be kept. The third rule specifies business documents—including electronic communications—that businesses must maintain.

In addition to the financial aspects of a company, such as audits, controls, and accuracy, the SOX Act of 2002 specifies standards for IT departments about electronic records. The statute specifies which corporate documents must be kept on file and for how long rather than prescribing business procedures in this area. The SOX Act of 2002’s guidelines only state that the company’s IT department is in charge of storing data; they don’t define how a corporation should preserve its information.

Conclusion

• In reaction to widely reported corporate financial scandals earlier in the decade, the Sarbanes-Oxley (SOX) Act of 2002 was passed.
• The legislation required stricter record-keeping standards and new procedures for accountants, auditors, and company executives.
• New criminal penalties for breaking securities rules were also imposed under the legislation.