Background & History of SOX
The Sarbanes-Oxley (SOX Compliance) Act of 2002 mostly came about due to a great deal of national attention surrounding several financial and accounting scandals by major corporations in the early-to-mid 2000’s. These corporations, like Enron, Tyco International, AIG, Adelphia, Peregrine Systems, and WorldCom were discovered to have executives within each organization who falsified accounting records to either secretly steal money for themselves, or to disguise decreasing company earnings, which falsely maintained higher company stock prices.
Because of this, most of the corporations either failed or were sold off, and left in their wake thousands unemployed and billions of dollars lost
As a result, Congressmen Paul Sarbanes , D-Md., and Michael Oxley, R-Ohio, joined forces to create the SOX Act, creating an enforcement method with the goal of protecting shareholders and the general public from accounting errors and fraudulent practices in the enterprise, as well as improving the accuracy of corporate disclosures.
The Act became law on July 30, 2002 and is named after Sarbanes and Oxley, who sponsored it. The act set deadlines for meeting compliance and established requirement rules. Moreover, Congressmen Michael Oxley and Paul Sarbanes drafted the act to create more accountability in the corporate sector.
Effects & Benefits
The Public Company Accounting Oversight Board was created due to SOX, setting specific standards for audit reports. It obligates all auditors from public companies to register with them. Also, it prohibits accounting firms from doing business consulting with the companies they are auditing. They can still act as tax consultants.
SOX compliance is both a legal obligation and an effective business practice. Although, companies should behave ethically without the need for these standards. Implementing SOX has the added benefit of protecting a company from cyberattacks like malware and ransomware. Additionally, SOX compliance includes many of the practices of any data security plan.
There are many elements of SOX compliance, all of which Nerds Support are well familiar.
A Brief Overview of the Major Elements of SOX Compliance
● Public Company Accounting Oversight Board (PCAOB)
– Provides independent oversight of public accounting firms providing audit services, as well as enforcing registration of auditors, defining the specific processes and procedures for compliance audits, inspecting and policing conduct and quality control, and enforcing compliance with the specific mandates of SOX.
● Auditor Independence
– Establishes standards for external auditor independence to limit conflicts of interest, as well as addressing new auditor approval requirements, audit partner rotation, and auditor reporting requirements.
● Corporate Responsibility
– Mandates that senior executives take individual responsibility for accuracy and completeness of all corporate financial reports.
● Enhanced Financial Disclosures
– Sets enhanced reporting requirements for financial transactions, as well as requiring internal controls for assuring the accuracy of financial reports and disclosures.
● Analyst Conflicts of Interest
– Includes measures designed to help restore investor confidence in the reporting of securities analysts.
● Commission Resources and Authority
– Defines practices to restore investor trust in securities analysts. As well as defining the SEC’s authority to censure or bar securities professionals from practice.
● Studies and Reports
– Require the Comptroller General and the SEC to perform various studies and report their findings.
● Corporate and Criminal Fraud Accountability
– Describes detailed criminal penalties for altering or destroying financial records, also including any other interference with investigations, all the while providing certain protections for informants.
● White Collar Crime Penalty Enhancement
– Increases the criminal penalties associated with white-collar crimes and conspiracies.
● Corporate Tax Returns
– States the Chief Executive Officer must sign company tax returns.
● Corporate Fraud Accountability
– Identifies corporate fraud and records tampering as criminal offenses, and lists to specific penalties for such offenses. The SOX Act contains several specific, severe consequences for violations of any and all specific parts of the act.
Penalties for not complying with SOX can lead to fines, removal from the public stock exchange, and more. By the same token, CEOs and CFOs who knowingly submit an incorrect certification to an audit faces up to 20 years in jail and $5 million in fines.
How certain are you that your organization is operating within strict SOX compliance? With Nerds Support, you’re just a call away. Our Miami IT Solutions team is ready to help you tackle all your IT needs. With over 17 years of experience in helping leaders in the accounting industry we know how to help you succeed.