Sarbanes-Oxley and Corporate Governance

Sarbanes-Oxley and Corporate Governance

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October 17, 2016

Miriam Gold

Sarbanes-Oxley and Corporate Governance

Named after Senator Paul Sarbanes and Representative Michael Oxley, the Sarbanes-Oxley Act is a set of rules and regulations that companies must adhere to.  The idea of the act is to prevent investors and stockholders from the potential accounting fraud from publicly traded companies.  

Background

The Sarbanes-Oxley Act (SOX) was passed by Congress in 2002.  SOX is named after Senator Paul Sarbanes and Representative Michael Oxley.  SOX was created to respond to accounting malpractices in the early 2000's.  Public scandals including Enron, Tyco, and WorldCom, investors wanted confidence in the financial statements and demanded an overhaul of the regulatory standards.  SOX mandates strict reforms to improve financial disclosures from corporations in the attempt to prevent accounting fraud ("Sarbanes-Oxley Act Of 2002 - Sox", n.d.).  

Regulation and Requirement

Section 302 is found under Title III of the Act, pertains to "Corporate Responsibility for Financial Reports."  Under this section, companies are to prepare periodic statutory financial reports.  In the reports, certain certifications must be included.  Those certifications include: the report must be reviewed by the signing officer; the report cannot contain any information that is untrue or leaves out materials that can be considered misleading. The statement and information must be fairly represented in the financial condition and all materials. It is the responsibility of the signing officer(s) to evaluate internal controls within the previous ninety days and report their findings.  All deficiencies in the internal control involving employees must be listed involving internal activities, and any changes that have a significant impact on the internal controls must be reported ("Sarbanes-Oxley Act Section 302 ", n.d.).  

Implementation

There are two steps a company can use to implement SOX practices into their business.  First, a company must look at the internal control financial management system; this includes expense and travel reimbursements.  How revenue is recorded, checks received and how credit cards are processed?  It is important to segregate the duties among employees to create a check and balance system to prevent internal fraud.  Second talk with the CEO and chief operating office to make sure they and the entire management team, including the board, are financially literate for they will be in charge of reviewing monthly financial reports. Sarbanes-Oxley for Small Businesses includes other practices: