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Definition: Sarbanes-Oxley Act Of 2002 – SOX
It is an act enacted in US in 2002 to protect investors by improving the reliability and accuracy of corporate reports and disclosures for the purpose of securities laws. It was introduced by Senator Paul Sarbanes and Michael G. Oxley and hence the name. It sets new standards for all US publicly listed companies, accounting firms and some private companies.
It was implemented to avoid further accounting and corporate scandals such as Worldcom and Enron. Due to this enactment, the top management must certify that the financial information being disclosed is accurate. This Act also ensured increased involvement of the Board of Directors in Accounting and elevates the independence of the external auditors in auditing the financial accounts of a company.
The Bill consists of eleven sections, the most important of them being 302, 401, 404, 409 and 802. The Act covers:
• Responsibilities of the company’s board of Directors
• Penalties, both criminal and civil, for misconduct
• Compliance laws as to how the companies need to comply to the Act
The various important sections cover the following:
• Section 302: Related to the Corporate Responsibility of Financial Reports i.e. who must be the signing officers, reviewers of the report, if the financial information is fair and related to the company
• Section 401: Related to Disclosures in Financial Reports i.e. the accuracy in the financial information being reported, the data to be submitted and whether the company follows the accounting principles
• Section 404: Pertains to Management Assessment of Internal Controls i.e. information on the adequacy and scope of the internal structure for financial reporting , the effectiveness of the internal structure
• Section 409: Related to Real Time Issuer Disclosure i.e. Enhanced Financial Disclosure by the issuers in their operations
• Section 802: Corporate and Criminal Fraud Accountability containing Criminal Penalties for modifying documents. For falsifying, destroying or concealing documents which are required for legal investigation, various penalties are listed which include 20 years of imprisonment. This section would avert scandals such as Enron, Worldcom etc
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