#24. Sarbanes-Oxley Act (2002) on Corporate Governance in International Context in Hindi & English The Sarbanes-Oxley Act1 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.
#What is the main purpose of the Sarbanes Oxley Act of 2002?
The Sarbanes-Oxley Act was signed into law on 30 July 2002 by President Bush. The Act is designed to oversee the financial reporting landscape for finance professionals. Its purpose is to review legislative audit requirements and to protect investors by improving the accuracy and reliability of corporate disclosures.
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.
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.2 It set standards for audit reports. It requires all auditors of public companies to register with them. The PCAOB inspects, investigates, and enforces the 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% of large corporations agreed that SOX increased investor confidence.3 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. Whistleblowers4 can report any corporate retaliation to the SEC.
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.
The Sarbanes-Oxley Act was passed by Congress to curb widespread fraudulence in corporate financial reports, scandals that rocked the early 2000s. The Act now holds CEOs responsible for their company’s financial statements. Whistleblowing employees are given protection. More stringent auditing standards are followed.
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