Monday, August 24, 2015

Importance Of The Sarbanesoxley Act

The Sarbanes-Oxley Act changed how public companies conduct business.


The Sarbanes-Oxley Act of 2002 (SOX), named for its authors Senator Paul Sarbanes and Representative Michael Oxley, changed how public companies conduct business in the United States. The Act is intended "to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws," according to SOXOnline.com.


History


The Sarbanes-Oxley Act of 2002 was passed by Congress after a series of corporate scandals, involving companies such as Enron, WorldCom and Tyco. Cover-ups, shady transactions and misrepresented financial data caused shareholders to lose millions of dollars and their confidence in investing in public companies. Congress passed the Sarbanes-Oxley Act to create new rules of accountability and accuracy for public companies.


Application


The provisions of the Sarbanes-Oxley Act apply to all public U.S. companies. A public company is one that has registered with the U.S. Securities and Exchange Commission (SEC) and sells stock or similar securities. The Act also applies to international companies that have registered with the SEC to sell securities in the U.S. There are only two provisions of the Act that apply to non-profit companies: prohibition on document destruction and whistleblower protection. Certain provisions also apply to accounting firms that work with or audit public companies.


Significance


After the Sarbanes-Oxley Act took effect, public companies were required to meet certain conditions or face penalties. For example, the Act requires public companies to create an audit committee. The audit committee is part of the board of directors. It must include at least one accountant or someone who is "financially literate." The Act also requires public companies to hire outside firms to perform financial audits on an annual basis. No company may use the same firm for more than five years. Each company's chief executive officer (CEO) or chief financial officer (CFO) is required to certify that the company's financial data are accurate; the CEO or CFO face criminal penalties if they lie. The Act also makes it a crime to destroy or conceal any document during a government investigation. Finally, the Act created the Public Company Accounting Oversight Board (PCAOB), which enforces the Sarbanes-Oxley Act over public companies.


Time Frame


After the Sarbanes-Oxley Act was passed in 2002, public companies were given a limited amount of time to comply with its provisions. Public companies initially had only two years to create a system of internal controls that complied with all the requirements of the Act. Extensions were granted to certain companies that allowed them to complete their compliance by 2005. Once public companies are in compliance with the Act, they are expected to maintain their compliance, in their internal controls, their yearly financial work and internal and external audits.


Penalties


Penalties for failing to comply with the Sarbanes-Oxley Act vary depending on which rule is violated. According to SOXOnline.com, "penalties range from the loss of exchange listing, loss of D&O [directors and officers] insurance to multimillion dollar fines and imprisonment." Section 802 specifies a prison sentence of up to 20 years for employees who intentionally destroy, conceal or alter documents during a government investigation of a company. Section 807 further specifies a prison sentence of up to 25 years for anyone who commits securities fraud.