Sarbanes Oxley Act Summary

Outline:
 What is Sarbanes Oxley Act?
 Why congress passed Sarbanes Oxley?
 Major provisions
 Bottom line
 Major titles

Sarbanes Oxley Act

“The Sarbanes-Oxley Act of 2002 is a law the U.S. Congress passed on July 30 of that year to
help protect investors from fraudulent financial reporting by corporations.”

The Sarbanes-Oxley Act of 2002 cracks down on corporate scam. It shaped the Public Company
Accounting Oversight Board to supervise the accounting industry. It banned company loans to
executives and gave job protection to whistleblowers. The Act strengthens the independence
and financial literacy of corporate boards. It holds CEOs personally responsible for errors in
accounting audits. The Act is named after its sponsors, Senator Paul Sarbanes, D-Md., and
Congressman Michael Oxley, R-Ohio. It's also called SOX. It became law on July 30, 2002. The
SEC enforces it.

Why congress passed Sarbanes Oxley?

The Sarbanes-Oxley (SOX) Act of 2002 came in response to highly publicized corporate financial
scandals earlier that decade. SOX addressed the corporate scandals at Enron, WorldCom, and
Arthur Anderson. It prohibited auditors from doing consulting work for their auditing clients.
That prevented the conflict of interest which led to the Enron fraud. Although the corporations
were legally responsible, the CEOs were not. So, it was difficult to prosecute them.

Bottom line

The Sarbanes-Oxley Act was passed by Congress to curb widespread fraudulence in corporate
financial reports, scandals that rocked the early 2000s. The Act now holds CEOs responsible for
their company’s financial statements. The act created strict new rules for accountants, auditors,
and corporate officers and imposed more stringent recordkeeping requirements.
Whistleblowing employees are given protection. More stringent auditing standards are
followed. The act also added new criminal penalties for violating securities laws.

Major provisions

The Sarbanes-Oxley Act of 2002 is a complex and lengthy piece of legislation. Three of its key
provisions are commonly referred to by their section number:

1) Section 302
2) Section 404
3) Section 802

SOX section 302:

This section deals with corporate responsibility for financial reports. Some key point are
discussed as under:

 Chief executive officer and Chief financial officer must review all financial reports.
 Financial report does not contain any misrepresentations.
 Information in the financial report is "fairly presented".
 CEO and CFO are responsible for the internal accounting controls.
 CEO and CFO must report any deficiencies in internal accounting controls, or any fraud
involving the management of the audit committee.
 CEO and CFO must indicate any material changes in internal accounting controls.

SOX section 404:

According to section 404, it is responsibility of management and independent auditor to

disclose all reports periodically. All financial statements and their requirement to be accurate
and presented in a manner that does not contain incorrect statements or admit to state
material information. Such financial statements should also include all material off-balance
sheet liabilities, obligations, and transactions.
SOX section 802:

This sections shows criminal penalties for alerting documents. This section specifies the
penalties for knowingly altering documents in an ongoing legal investigation, audit, or
bankruptcy proceeding.

Objectives

Objectives of Sarbanes Oxley Act is to enhances corporate governance and strengthen

corporate accountability. It offers protection whistleblowers who disclose instances of
corporate mismanagement, fraud, or wrong-doings. Another objective of Sox is to create the
Public Company Accounting Oversight Board (‘PCAOB’ a.k.a. ‘Peek-a-Boo’) tasked with
enforcing professional standards, ethics, and competence for the accounting profession.

Sarbanes Oxley Act Titles

SOX is organized into eleven titles, each of them covering specific areas of corporate
accountability and responsibility. These titles include:

1) Public company accounting oversight board

2) Auditor independence
3) Corporate responsibility
4) Financial disclosure
5) Conflicts of interest
6) SEC power
7) Penalty
8) Corporate tax return
9) White collar crime penalty
10) Corporate fund and accountability
11) Studies and report
 CRUX
According to the above discussion it is concluded that while the implementation of the Sarbanes
Oxley Act could have proved potentially painful for smaller businesses, its ultimate deferral for
companies with market capital of less than $75M was a positive development.

Subsequent changes in audit standards are reported to have reduced the cost of audits by as
much as 25% for many companies.