Also known as the Public Company Accounting Reform and Investor Protection Act of 2002, SOX or Sarbox, named after sponsors Senator Paul Sarbanes (D-MD) and Representative Michael G. Oxley (R-OH), is a US Federal Law enacted July, 30 2002. The quick passage of SOX was preceded by corporate misconduct at Enron, Global Crossing, WorldCom, Tyco, Adelphia, and other large corporations. The overarching goal of the SOX Act was to restore investor confidence in the market.
Highlights of the SOX Act of 2002– Title I Public Company Accounting Oversight Board (Sections 101 to 109) Creation of the Public Company Accounting Oversight Board (PCAOB) to oversee public accounting firms that must register with the PCAOB.
Securities and Exchange Commission (SEC) to recognize accounting standards [in 2003, the SEC reaffirmed the Financial Accounting Standards Board (FASB) as the accounting standard setter]; study and report on principles-based accounting [in 2008 the SEC announced a plan to move from US Generally Accepted Accounting Principles (US GAAP) to the more principles-based International Financial Reporting Standards (IFRS)].
– Title II Auditor Independence (Sections 201 to 209) Changes to public accounting firm practice: such as, it is unlawful for public accounting firms to provide non-audit services to an issuer [public company] contemporaneously with the audit.
– Title III Corporate Responsibility (Sections 301 to 308) Delineates responsibilities of the audit committee members [of the board of directors] of issuers. Requires CEO and CFO to sign off on audit report.
– Title IV Enhanced Financial Disclosures (Sections 401 to 409) Required disclosure on annual/financial reports [submitted to SEC]: such as, regarding material off-balance sheet transactions; internal controls report; adoption of code of ethics for senior financial officers.
– Title V Analyst Conflict of Interest (Section 501) National Securities Exchanges and registered securities associations to adopt conflict of interest rules for securities analysts.
– Title VI Commission Resources and Authority (Section 601 to 604) Increases SEC appropriations; right to deny persons from appearing in front of SEC. Federal courts authorized to prohibit persons from participating in an offering of penny stock. Amendments to The Securities Exchange Act of 1934 and Investment Advisors Act of 1940 regarding brokers and dealers.
– Title VII Studies and Reports (Sections 701 to 705) US Government Accountability Office (GAO) to study and report on consolidation of public accounting firms; investment banks in regards to Enron, etc. violations. SEC to study and report on credit rating agencies; securities laws violations and their enforcement.
– Title VIII Corporate and Criminal Fraud Accountability (Sections 801 to 807) Felony for knowingly destroying/falsifying documents that could be used for federal investigation [also applies to private organizations]. Auditors required to retain audit or review-work papers for 5 years. Extends statute of limitations on securities fraud. US Sentencing Commission to review Federal Sentencing Guidelines related to obstruction of justice and extensive criminal fraud. ‘Whistleblower protection’ for employees and accounting firms. Enacts criminal penalties with fines and imprisonment for defrauding shareholders.
– Title IX White-Collar Crime Penalty Enhancements (Sections 901 to 906) Enhances white-collar crime penalties; US Sentencing Commission to amend Federal Sentencing Guidelines.
– Title X Corporate Tax Returns (Section 1001) Federal Income Tax Return of a corporation to be signed by CEO of corporation.
– Title XI Corporate Fraud Accountability (Sections 1101 to 1107) Fine and/or imprisonment for tampering with a record or otherwise impending an official proceeding. SEC power to freeze payments to directors, officers, etc. during investigation of possible violations of securities laws; prohibit persons from serving as directors or officers if the person has committed securities fraud; increased criminal penalties under Securities Exchange Act of 1934. US Sentencing Commission to review Federal Sentencing Guidelines applicable to securities and accounting fraud and related offenses.