The Sarbanes-Oxley Act requires truth in accounting.
The Sarbanes-Oxley Act is a law that reformed accounting requirements for public companies. Named after the main sponsors, Senator Paul Sarbanes and Representative Michael Oxley, it grew out of the corporate accounting scandals of the early 2000s.
Corporate Responsibility For Financial Reports
Financial officers must sign off on all financial reports.
Section 302 of the act requires financial reports be signed by the financial officers and top executives, and not contain any untrue statements or omissions that mislead investors.
Off Balance Liabilities
Off balance liabilities must be reported.
Off balance liabilities must be published in periodic financial reports. Prior to the act, companies would move debt into various off balance instruments, such as transferring liabilities to a third party, that allowed firms to hide the liabilities from their balance sheets given to investors, leaving false impressions of the organizations' financial position.
Internal Control Structures
The company or its accounting firm must report on the scope and effectiveness of its internal controls, which are procedures and checks against fraud. A description of these internal controls must be included in the firm's annual report.
Urgent Updates
Section 409 requires companies to update the public on major material changes in their financial situation. This must be done on an urgent basis and be presented in a way easy to understand, utilizing graphs and visuals when appropriate.
Criminal Penalties
Obstructing investigations can result in imprisonment.
Section 802 sets the punishments for altering or destroying financial documents with the intent of obstructing an investigation. Perpetrators face fines and up to 20 years in federal prison. Accountants who willfully fail to maintain required financial records may face fines and imprisonment of up to 10 years.
