Question

What is Sarbox and how does it affect equity investments in the public markets?

Answer 1

The Sarbanes Oxley Act Also known as Sarbox is a law passed in July of 2002,which aims to safeguard the investors from fraudulent reporting pertaining to the finances of the company..The law requires publicly listed companies to ensure there are internal controls put in place and the review of the said controls by the firm's management to ensure that the financial reporting pertaining to the firm is transparent and reliable.The Act was introduced following corporate frauds that had affected investor confidence and aimed to regain the trust investors had prior to the corporate frauds.The Sarbanes Oxley Act carried criminal penalties for the management if it was found guilty of review and the subsequent approval of financial statements that did not properly reflect the financial status or performance of the firm.The SOX Act of 2002 also required publicly listed firms to maintain certain financial statements for a specified period of time.The increase in regulation and the requirements for improved internal controls and their subsequent review meant more costs for the corporations that wanted to go public.As a result more companies turned to private equity funding,since the cost of raising funds through pubic offering or even remaining a public company were huge and constantly rising due to the compliance requirements associated with SOX Act.