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Term Definition
The Sarbanes-Oxley Act of 2002 (Pub. L. No. 107-204, 116 Stat. 745, also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called SOX or Sarbox; July 30, 2002) is a United States federal law passed in response to a number of major corporate and accounting scandals involving prominent companies in the United States. The first and most important part of the Act establishes a new quasi-public agency, the Public Company Accounting Oversight Board, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as auditor independence, corporate governance and enhanced financial disclosure.
The legislation is wide-ranging and establishes new or enhanced standards for all US public company Boards, Management, and public accounting firms. The Act contains 11 titles, or sections, ranging from additional Corporate Board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. The Act was named after sponsors Senator Paul Sarbanes (D–Md.) and Representative.
The Sarbanes-Oxley Act's major provisions include:
- Creation of the Public Company Accounting Oversight Board (PCAOB).
- A requirement that public companies evaluate and disclose the effectiveness of their internal controls as they relate to financial reporting, and that independent auditors for such companies "attest" (i.e., agree, or qualify) to such disclosure.
- Certification of financial reports by CEOs and CFOs.
- Auditor independence, including outright bans on certain types of work for audit clients and pre-certification by the company's Audit Committee of all other non-audit work.
- A requirement that companies listed on stock exchanges have fully independent audit committees that oversee the relationship between the company and its auditor.
- Ban on personal loans to any Executive Officer and Director.
- Accelerated reporting of trades by insiders.
- Prohibition on insider trades during pension fund blackout periods.
- Additional disclosure.
- Enhanced criminal and civil penalties for violations of securities law.
- Significantly longer maximum jail sentences and larger fines for corporate executives who knowingly and willfully misstate financial statements, although maximum sentences are largely irrelevant because of the ability of judges to declare consecutive sentences under the Federal Sentencing Guidelines.
Area of Application
Compliance
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