Sox Act of 2002

Sarbanes-Oxley Act of 2002

Danielle Williams

ACT 561

February 29, 2016

Julio Jimenez

Sarbanes-Oxley Act of 2002

Overview

The Sarbanes-Oxley Act of 2002, or SOX, was enacted following the failures of various functions designed to protect the interests of the investing public. SOX completely revised the regulatory framework for the public accounting and auditing professions by focusing on and improving stronger ethics and compliance programs. This paper will explore the main aspects of the regulatory environment which will protect the public firm fraud within corporations and evaluate whether the Sarbanes-Oxley Act of 2002 will be effective in avoiding future frauds.

Summary of Major Sections

SOX is divided into sections that each highlight requirements to which companies must adhere to remain in compliance. SOX Section 302 outlines the responsibilities corporate employees have for financial reporting. One of the main aspects of Section 302 is the review of all financial reports by the CEO and CFO. The CEO and CFO must review all financial reports to make sure there are no misrepresentations; all information is "fairly presented," and to place the responsibility of the internal accounting controls in their hands.

Section 404 of SOX describes the assessment of internal controls by management. Management is responsible for an "adequate" internal control structure, and the effectiveness of these controls must be assessed by management. In addition to management's reporting of the controls, registered external auditors must attest to the accuracy of the company's management's assertion that the internal controls are in place and operating effectively.

Section 409 of SOX requires companies to disclose any material changes in its financial condition or operations in real-time; section 902 declares it a crime for anyone to attempt or conspire to commit any fraud offenses. It is criminal to corruptly alter, destroy, conceal, or mutilate any documents with fraudulent intentions.

Lastly, Section 906 addresses the responsibilities corporations take on with financial reporting and the criminal penalties for false or misleading financial reports.

Has SOX Been Successful?

When figuring out if the Sarbanes-Oxley Act of 2002 has been effective, we look to see if any aspects of investor protection have become any stronger since the enactment. In an article on the success of SOX, Curtis C. Verschoor says "SOX is widely credited for strengthening at least two major areas of investor protection: (1) CEO and CFO responsibility and accountability for all financial disclosures and related controls; and (2) increased professionalism and engagement on the part of corporate audit committees (Verschoor, 2012)." The addition of the CEO's signature on the financial reports means that he or she will be held responsible for producing the highest possible quality of reports. Verschoor goes on to say that "SOX Section 404 also requires public companies to disclose whether or not they have adopted a code of ethics applicable to their senior financial officers.  (Verschoor, 2012)." Companies listed on the New York Stock Exchange are now required to adopt and disclose on their websites a code of business conduct which must be followed by all directors, officers, and employees.