What Is the Sarbanes-Oxley Act (SOX)?
The Sarbanes-Oxley Act of 2002, also known as Sarbanes-Oxley, Sarbox or SOX, was passed by Congress to require public companies and their top management to fully disclose their financial and accounting practices and activities. Sarbanes-Oxley, which comprises 11 sections, also contains provisions that address privately held companies.
Major corporate and accounting scandals that shook investor confidence—such as those surrounding Enron and Worldcom— were the impetus for Sarbanes-Oxley. Sponsored by Senator Paul Sarbanes and Representative Michael G. Oxley, SOX requires that senior management certify the accuracy of their company’s financial statement. It also exacts harsh penalties for fraudulent financial activity and increases oversight by the company board of the directors. And it ensures the independence of outside auditors reviewing corporate financial statements.
In addition, the Sarbanes-Oxley Act requires the Securities and Exchange Commission (SEC) to publish rules and regulations as well as deadlines for compliance by public corporations. Since SOX’s passing, the SEC has set up numerous rules to administer Sarbanes-Oxley. It also created the Public Company Accounting Oversight Board to oversee, inspect and govern accounting firms acting as auditors of the internal control practices of public companies.
Smaller companies with a market cap of less than $75 million are exempt from SOX requirements, according to the Dodd-Frank Act. Meanwhile, countries such as Canada, Germany, France, Australia and Japan have since adopted stricter financial governance laws similar to the major elements set forth in the Sarbanes-Oxley Act.