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Sarbanes-Oxley Act of 2002

Passed to protect investors from fraudulent corporate accounting activities and fraudulent reporting, it requires strict financial disclosures from corporations. This act was specifically designed to prevent the kinds of accounting fraud that were associated with the Enron, WorldCom and Tyco scandals, which debilitated investor confidence. Until this time, regulated securities were governed by the Securities Act of 1933.

 

Commonly referred to as Sarbox or SOX, the Sarbanes-Oxley Act of 2002 was the brainchild of Senator Paul Sarbanes, D-Md., and Congressman Michael Oxley, R-Ohio. This bipartisan legislation regulates corporate accounting in a number of critical ways and is enforced by the U.S. Securities and Exchange Commission. Since SOX was adopted, it is widely reported that investor confidence in public companies is up and that incidences of corporate accounting fraud are down.

 

Among other things, SOX established the Public Company Accounting Oversight Board. This body now oversees the auditing process of public companies and otherwise helps to regulate the accounting industry. SOX also strengthened the independence of corporate boards, increased legal protections for whistleblowers who testify in court and prohibited the financing of loans for corporate executives. SOX insists that CEOs certify the accuracy of corporate financial statements and that they be held liable for any material errors found when those statements are audited. However, white collar privilege has led to very few indictments tied to such errors. As a result of SOX, most public corporations are required to hire independent auditors in order to obtain neutral-party reviews of their corporate accounting practices.

 

EXAMPLE:

CEO: “If we just cook the books a little, our investors won’t panic.”

Accountant: “Yes, but then you can be civilly and criminally charged under the Sarbanes-Oxley Act of 2002.”

CEO: “Sooo…”

Accountant: “So, don’t do that.”