Sarbanes-Oxley Act of 2002 - SOX

known also as the corporate responsibility act of 2002, signed July 30, 2002 in the wake of Enron and other accounting and corporate governance scandals, introducing radical reforms in four key areas:

Corporate Responsibility: Requires CEOs and CFOs to certify financial reports and forfeit profits and bonuses from earnings restated due to securities fraud; prohibits executives from selling company stock during blackout periods; requires insiders to report company stock trades within two days; prohibits company loans to executives not available to outsiders; requires immediate disclosure in “plain English” of material changes in company’s financial condition.


New Criminal Penalties: Creates a new crime with 20-year prison term for destroying, altering, or fabricating records in federal investigations, or any “scheme or artifice” to defraud shareholders; raises maximum penalty for securities fraud to 25 years; increases CEO, CFO penalties for false statements to SEC or failing to certify financial reports to $5 million fine, 20-year prison term; requires key audit documents and email be preserved for five years and creates a 10-year felony for destroying such documents; raises maximum penalties for mail, wire fraud to 20 years, for defrauding pension funds to 10 years.


Accounting Regulation: Establishes a five-member oversight board with investigative and disciplinary powers that is majority independent, funded by publicly held companies, and overseen by SEC; curtails consulting services by auditors to clients in nine categories; requires accounting firms to rotate lead or reviewing partners from client assignments every five years.


New Protections: Extends statute of limitations on securities fraud to five years, or two from discovery; liberalizes whistle-blowers’ abilities to sue and prove retaliation; prohibits investment firms from retaliating against analysts who criticize firm’s clients; directs civil penalties from SEC enforcement actions to accounts that benefit victimized investors; increases SEC budget by $776 million for fiscal 2003; prevents officials facing fraud judgements from taking refuge in bankruptcy.

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An act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX) mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud. SOX was enacted in response to the accounting scandals in the early 2000s. Scandals such as Enron, Tyco, and WorldCom shook investor confidence in financial statements and required an overhaul of regulatory standards.  

Investopedia Says:
The rules and enforcement policies outlined by the SOX Act amend or supplement existing legislation dealing with security regulations. The two key provisions of the Sarbanes-Oxley Act are:

1. Section 302: A mandate that requires senior management to certify the accuracy of the reported financial statement 
2. Section 404: A requirement that management and auditors establish internal controls and reporting methods on the adequacy of those controls. Section 404 had very costly implications for publicly traded companies as it is expensive to establish and maintain the required internal controls.

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