Question

Describe the Sarbanes-Oxley Act of 2002 and specifically describe the details of the act, how it affected companies, who is required to comply with the act and whether or not (in your opinion and why) it has fulfilled its goals.

Answer 1

The Sarbanes-Oxley Act of 2002 cracks down on corporate fraud. It created the Public Company Accounting Oversight Board to oversee the accounting industry.1 It banned company loans to executives and gave job protection to whistleblowers.2 The Act strengthens the independence and financial literacy of corporate boards. It holds CEOs personally responsible for errors in accounting audits.

The Act is named after its sponsors, Senator Paul Sarbanes, D-Md., and Congressman Michael Oxley, R-Ohio. It's also called Sarbox or SOX.3 It became law on July 30, 2002. The Securities and Exchange Commission enforces it.4

Many thought that Sarbanes-Oxley was too punitive and costly to put in place. They worried it would make the United States a less attractive place to do business. In retrospect, it's clear that Sarbanes-Oxley was on the right track. Deregulation in the banking industry contributed to the 2008 financial crisis and the Great Recession.

Section 404 and Certification

Section 404 requires corporate executives to certify the accuracy of financial statements personally. If the SEC finds violations, CEOs could face 20 years in jail.5 The SEC used Section 404 to file more than 200 civil cases. But only a few CEOs have faced criminal charges.

Section 404 made managers maintain “adequate internal control structure and procedures for financial reporting." Companies' auditors had to “attest” to these controls and disclose “material weaknesses."67

Requirements

SOX created a new auditor watchdog, the Public Company Accounting Oversight Board. It set standards for audit reports.8 It requires all auditors of public companies to register with them. The PCAOB inspects, investigates, and enforces the compliance of these firms.9 It prohibits accounting firms from doing business consulting with the companies they are auditing. They can still act as tax consultants. But the lead audit partners must rotate off the account after five years.10