Sarbanes-Oxley Act of 2002
Lillie E. Lowman
June 17, 2013
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002, also known as SOX, which is a United States Federal Law enacted on July 30, 2002, as a reaction to a number of major corporate and accounting scandals. Its general purpose was to ensure “full fair and accurate” financial disclosure by corporations. Most were notably affecting the Enron and WorldCom companies among others. These different scandals, which have cost investors several billions of dollars when the share prices of affected companies collapsed, shook public confidence in the nation’s securities markets. This act is named after ...view middle of the document...
Title 2 consists of nine sections and established standards to external auditor independence, to limit conflicts of interest. The purpose of an audit is to enhance the credibility of financial statements by providing written reasonable assurance from an independent source that they present a true and fair view in accordance with an accounting standard. This objective will not be met if users of the audit report believe that the auditor may have been influenced by other parties, more specifically company managers/directors or by conflicting interests. It restricts auditing companies from providing non-audit services (e.g., consulting) for the same clients.
Title 3 contains eight sections and mandates that senior executives take individual responsibilities for the accuracy and completeness of corporate financial reports. It defines the interaction of external auditors and corporate audit committees, and specifies the responsibility of corporate officers for the accuracy and validity of corporate financial reports. It enumerates specific limits on the behaviors of corporate officers and describes specific forfeitures of benefits and civil penalties for non-compliance. For example, Section 302 requires that the company’s “principal officers” (typically the Chief Executive Officer and Chief Financial Officer) certify and approve the integrity of their company financial reports quarterly (Wikipedia 2011).
Enhanced Financial Disclosures
Title 4 consists of nine sections. It explains enhanced reporting requirements for financial transactions, including off-balance-sheet transactions, pro-forma figures, and stock transactions of corporate officers. Title IV of the Sarbanes Oxley Act seeks to improve financial reporting by requiring that the key financial executives not only report accurately but also review and improve their financial controls and inform the public of any deficiencies.
Analyst Conflicts of Interest
Title 5 contains only one section, which includes measures designed to help restore investor confidence in the reporting of securities analysts. It defines the code of conduct for securities and requires disclosure of knowable conflicts of interest (Magazine 2007).
Commission Resource and Authority
Title 6 consists of four sections and defines practices to restore investor’s confidence in security analyst. Also, it defines the SEC’s authority to censure or bar securities professionals from practice. It states that a person can be barred from practicing as a broker, advisor, or dealer.
Studies and Reports
Title 7 contains five sections and requires the Comptroller General and the SEC to perform various studies and report their findings. The SEC wanted to make sure that Enron did not falsify their financial statements.
Corporate and Criminal Fraud Accountability
Title 8 consists of seven sections and is referred as the “Corporate and Criminal Fraud Act of 2002”. This...