SARBANES-OXLEY ACT (SOX)

Purpose:
The Sarbanes-Oxley Act of 2002 (often shortened to SOX) is legislation
passed by the U.S. Congress to protect shareholders and the general
public from accounting errors and fraudulent practices in the
enterprise, as well as improve the accuracy of corporate disclosures.
The U.S. Securities and Exchange Commission (SEC) administers the
act, which sets deadlines for compliance and publishes rules on
requirements.
The Sarbanes-Oxley Act was enacted in response to a series of highprofile financial scandals that occurred in the early 2000s at companies
including Enron, WorldCom and Tyco that rattled investor confidence.
The act, drafted by U.S. Congressmen Paul Sarbanes and Michael
Oxley, was aimed at improving corporate governance and
accountability. Now, all public companies must comply with SOX.
Approach:
Goals:
The primary goal of the Sarbanes-Oxley Act was to fix auditing of U.S.
public companies, consistent with its full, official name: the Public
Company Accounting Reform and Investor Protection Act of 2002. By
consensus, auditing had been working poorly, and increasingly so. The
most important, and most promising, part of Sarbanes-Oxley was the
creation of a unique, quasi-public institution to oversee and regulate
auditing, the Public Company Accounting Oversight Board (PCAOB).
In controversial section 404, the law also created new disclosure-based
incentives for firms to spend money on internal controls, above
increases that would have occurred after the corporate scandals of the
early 2000s. In exchange for these higher costs, which have already
fallen substantially, Sarbanes-Oxley promises a variety of long-term
benefits. Investors will face a lower risk of losses from fraud and theft,
and benefit from more reliable financial reporting, greater
transparency, and accountability. Public companies will pay a lower
cost of capital, and the economy will benefit because of a better
allocation of resources and faster growth. Sarbanes-Oxley remains a
work in progress -- section 404 in particular was implemented too
aggressively - but reformers should push for continued improvements

in its implementation, by PCAOB, rather than for repeal of the

legislation itself.