The Sarbanes-Oxley Act: What It Is and What It’s For

You might have heard about the Sarbanes-Oxley Act, but like many other acts in the legal world, it isn’t always the most straightforward law to understand.

In well-known cases like Enron or others involving high-profile CEOs, most of us know someone was accused of some kind of illegal activity, but we don’t always know exactly how or what happened. When it comes to our own workplaces and the activities of the CEOs and corporations we work for, it’s important to understand how the Sarbanes-Oxley Act can affect us, our fellow employees, and the businesses we work for.

Here’s some helpful information to give you an idea of what it is and what it might be used for.

What Is the Sarbanes-Oxley Act?

The Sarbanes-Oxley Act (SOX) was signed into law on July 30, 2002, in the aftermath of corporate scandals involving Enron, Worldcom, Arthur Andersen, and Tyco. At the time, public shock and outrage regarding these corporate scandals left many suffering from a lack of trust in publicly reported corporate financial information, and this lack of confidence was having a deleterious effect on U.S. markets.

In an effort to restore the confidence of American investors and stave off economic catastrophe, Congress passed SOX on a wave of bipartisan support. It is perhaps the most far-reaching securities legislation to have ever been passed in the United States.

The Purpose of the Sarbanes-Oxley Act

SOX joins the Securities Act of 1933 in holding publicly traded corporations accountable for the financial information they offer to the public. The Securities and Exchange Commission (SEC) enforces the Securities Act, which was intended to prevent corporate securities fraud, misrepresentation of corporate financial information to investors and the public, and deception of investors and the public regarding corporate financial information.

The provisions of SOX are intended to further guarantee the truthfulness and reliability of the financial information published by publicly traded corporations. It imposes additional requirements on financial reporting for publicly traded corporations. These include new duties for corporate boards, executives, auditors, directors, attorneys, and securities analysts, as well as new penalties for those who fail to follow the guidelines established by SOX.

An Overview of SOX

The enactment of SOX created the Public Company Accounting Oversight Board, whose purpose is to oversee the auditing of publicly traded companies. They establish standards and guidelines for audit reports. Any firm that performs audits of publicly traded companies must register with the Oversight Board, which will enforce SOX compliance for said firms.

SOX also gives auditors a list of services they can’t perform over the course of an audit, called non-audit services. An employee who leaves an audit firm may not become an executive for a former client corporation for at least one year. If an audit employee does become an executive at a former client company, his or her former firm can’t complete any audits for that company for at least a year.

Research analysts who provide research reports or make public appearances must now file a conflict of interest disclosure containing information about publicly traded firms for which they produce reports or make appearances. They must report any securities they hold in the company, and whether they received any corporate compensation. Dealers and brokers must disclose whether or not a publicly held company is a client of theirs.

SOX penalizes the destruction, alteration, concealment, or falsification of documents or records with intent to sway a federal investigation or a bankruptcy case with fines and as many as twenty years in prison. Anyone who knowingly defrauds shareholders is subject to imprisonment and fines under SOX. Work papers from new audits must be held for five years.

Finally, attorneys who represent public corporations must now adhere to new minimum standards of conduct before the SEC. Among other guidelines, they must report securities violations to the CEO of their company.

Dealing with SOX Violations

Even with an overview, SOX can be difficult to understand, making dealing with violations or allegations of violations even more complicated. In any event, if you or someone at your company may be in violation of the SOX act, it’s a serious matter.

Many people accused of violations, as well as those making the accusations, choose to hire lawyers for their cases.