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    Sox 2002

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    The Sarbanes-Oxley Act of 2002 (SOX): 1) Cracked down on corporate fraud by creating the PCAOB to oversee auditors, banning loans to executives, and protecting whistleblowers. 2) Holds CEOs personally responsible for accounting errors and requires they certify financial statements. 3) Was enacted in response to corporate accounting scandals at Enron, WorldCom, and Arthur Anderson to increase transparency and accountability in financial reporting.

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    Sox 2002

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    The Sarbanes-Oxley Act of 2002 (SOX): 1) Cracked down on corporate fraud by creating the PCAOB to oversee auditors, banning loans to executives, and protecting whistleblowers. 2) Holds CEOs personally responsible for accounting errors and requires they certify financial statements. 3) Was enacted in response to corporate accounting scandals at Enron, WorldCom, and Arthur Anderson to increase transparency and accountability in financial reporting.

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    The Sarbanes-Oxley Act of 2002 (SOX): 1) Cracked down on corporate fraud by creating the PCAOB to oversee auditors, banning loans to executives, and protecting whistleblowers. 2) Holds CEOs personally responsible for accounting errors and requires they certify financial statements. 3) Was enacted in response to corporate accounting scandals at Enron, WorldCom, and Arthur Anderson to increase transparency and accountability in financial reporting.

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    © All Rights Reserved
    73 views2 pages

    Sox 2002

    Uploaded by

    commo
    The Sarbanes-Oxley Act of 2002 (SOX): 1) Cracked down on corporate fraud by creating the PCAOB to oversee auditors, banning loans to executives, and protecting whistleblowers. 2) Holds CEOs personally responsible for accounting errors and requires they certify financial statements. 3) Was enacted in response to corporate accounting scandals at Enron, WorldCom, and Arthur Anderson to increase transparency and accountability in financial reporting.

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    The Sarbanes-Oxley Act of 2002 cracks down on corporate fraud.

    It created the Public Company


    Accounting Oversight Board to oversee 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 Sarbox or SOX. It became law on July 30, 2002. The Securities and
    Exchange Commission enforces it.

    Many thought that Sarbanes-Oxley was too punitive and costly to put in place. They worried it
    would make the United States a less attractive place to do business. In retrospect, it's clear that
    Sarbanes-Oxley was on the right track. Deregulation in the banking industry contributed to the
    2008 financial crisis and the Great Recession.

    Section 404 and Certification


    Section 404 requires corporate executives to certify the accuracy of financial statements
    personally. If the SEC finds violations, CEOs could face 20 years in jail. The SEC used Section 404
    to file more than 200 civil cases. But only a few CEOs have faced criminal charges.

    Section 404 made managers maintain “adequate internal control structure and procedures for
    financial reporting." Companies' auditors had to “attest” to these controls and disclose “material
    weaknesses."

    Requirements
    SOX created a new auditor watchdog, the Public Company Accounting Oversight Board. It set
    standards for audit reports. It requires all auditors of public companies to register with them. The
    PCAOB inspects, investigates, and enforces compliance of these firms. It prohibits accounting
    firms from doing business consulting with the companies they are auditing. They can still act as tax
    consultants. But the lead audit partners must rotate off the account after five years.

    But SOX hasn't increased the competition in the oligarchic accounting audit industry. It's still
    dominated by the so-called Big Four firms. They are Ernst & Young, PricewaterhouseCoopers,
    KPMG, and Deloitte.

    Internal Controls
    Public corporations must hire an independent auditor to review their accounting practices. It
    deferred this rule for small-cap companies, those with a market capitalization of less than $75
    million. Most or 83 percent of large corporations agreed that SOX increased investor confidence. A
    third said it reduced fraud.

    Whistleblower
    SOX protects employees that report fraud and testify in court against their employers. Companies
    are not allowed to change the terms and conditions of their employment. They can't reprimand, fire,
    or blacklist the employee. SOX also protects contractors. Whistleblowers can report any corporate
    retaliation to the SEC.

    Effect on the U.S. Economy


    Private companies must also adopt SOX-type governance and internal control structures.
    Otherwise, they face increased difficulties. They will have trouble raising capital. They will also face
    higher insurance premiums and greater civil liability. These would create a loss of status among
    potential customers, investors, and donors.
    SOX increased audit costs. This was a greater burden for small companies than for large ones. It
    may have convinced some businesses to use private equity funding instead of using the stock
    market.

    Why Congress Passed Sarbanes-Oxley


    The Securities Act of 1933 regulated securities until 2002. It required companies to publish a
    prospectus about any publicly-traded stocks it issued. The corporation and its investment bank
    were legally responsible for telling the truth. That included audited financial statements.

    Although the corporations were legally responsible, the CEOs were not. So, it was difficult to
    prosecute them. The rewards of "cooking the books" far outweighed the risks to any individual.

    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. Congress responded to the Enron media fallout, a lagging stock
    market, and looming reelections.

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