Sarbanes-Oxley Act (SOX-2002)

Sarbanes-Oxley Act was introduced to USA financial reporting legislation in 2002 and set of regulations were prepared by Senator Paul Sarbanes and Michael Oxley. To acknowledge the great contribution of  Act makers this piece of legislation was named as Sarbanes-Oxley Act (SOX) but it is also called as Public Company Accounting Reform and Investor Protection Act of 2002 in legal dictionaries. Sarbanes-Oxley Act basically focuses on financial reporting practices and the corporate governance in business organizations and it has more focus on director’s affairs with firm to avoid directors taking undue advantage of at the interest of shareholders.

Sarbanes-Oxley Act was introduced as a result of major scandals in USA economy such as Enron, WorldCom and Arthur Andersen fraud. Enron had irregular accounting practices and it was neglected by its auditors Arthur Andersen which ultimately resulted in collapse of both firm resulting in one of the major corporate governance failures in USA history. WorldCom scandal occured as a result of fraudulent share holding/trading activities carried out by its CEO Bernard Ebbers where he exercised an undue influence on share prices by misusing  his shareholding and his powers as CEO.

The Sarbanes-Oxley Act clears the dilemmas caused by transparency, integrity and disclosure practices of financial markets. It enforces new laws such as:

• All annual and quarterly financial reports have to be certified by the chief executive officer and chief financial officer of the firm for those reports to be official.
• The chief executive officer and chief financial officer are liable for criminal penalties for knowingly approving erroneous financial statements.
• Audit firms can not provide consultancy or advisory services to organizations for whom they work as auditors.
• CEO or any other director can not recieve any kind of a loan from the organization even if it was given as a compliment.
• Internal financial controls are mandatory for listed companies and those controls have to be audited by certified auditors annually.
• Insider trading has to be reported as soon as it is occurred.

Even though Sarbanes-Oxley Act has served the corporate governance in many angles by resolving dilemmas it is criticized for its requirement of high documentation and internal controls. Tight reporting procedures and internal controls have resulted in high cost to the organization. It is said that cost of compliance exceed its benefits in some business organizations. Nevertheless the strict legislation is required to avoid another Enron or WorldCom scandal.

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