Sarbanes Oxley Act
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Sarbanes – Oxley Act of 2002
The Sarbanes-Oxley Act was passed by the Congress on July 25, 2002. The act was a result of prominent companies involved in fraud, financial scandals and bankruptcies. Federal, State, and local governments devised the regulatory environment consisting of various laws and regulations to limit the control over business practices. They hoped the act would regulate efficient management, control, and integration of cash flow for the common man who saves his money directly in bonds and stocks. The enforcement of Sarbanes-Oxley created a unique body that would audit and enforce laws against theft and fraud by corporations and managers. “The value of the financial institutions on borrowers is dependent upon the certainty of legal rights, coupled with the predictability and speed of their fair and impartial enforcement. Legal and regulatory frameworks that empower the regulator and govern the conduct of market participants form the cornerstone of the orderly operation and development of the financial sector” (Making finance work for Africa, 2012).
The US Sarbanes-Oxley Act was initiated as a result of major scandals in the corporate sector and the manner in which they impacted the investors due to falsifying selected financial transaction and with incorrect reporting. The companies included in these scams were Enron, WorldCom and Tyco. These giant corporations misrepresented and covered up their records which resulted in massive losses to stakeholders. This led to a major crisis because the investors were shaken lost confidence to venture out again. In a democracy, the government is bound to act on such significant issues and the Congress passed the law not only to boost the confidence of the investor but also aimed to enhance governing corporate laws and increase corporate accountability which was previously lacking. The key points of the act can be surmised as bringing forth a strong, streamlined internal balance within the corporations, setting up various control levels for different designees and for managers who are in control, complete and honest disclosure of financial reports and statements which have been audited and checked per rules, and finally complete transparency of governing bodies inside the corporation regarding financial dealings.
Penalties imposed also depended and varied upon what section of the Act the companies were not in compliance with. The penalties ranged from losing exchange listings to losing insurance to fines that ranged in millions of dollars and finally to imprisonment, as well. Such stringent measures were implemented to eliminate the fear of a demoralized investor who was hit by these large corporations. The Act also penalizes for wrong certification submitted willfully upto $5 million with a prison term up to twenty years. “SOX regulations are applicable to all public companies in the U.S. and international companies that have registered equity or debt securities with the Securities and Exchange Commission and the accounting firms that provide auditing services to them” (
The Sarbanes-Oxley Act was a step taken to adhere to standards that were previously non-existent for corporations to be accountable for fraudulent activities. It also set stringent penalties for businesses that were involved in wrongdoing. The fear of penalization led corporations to be more accountable to their investors. The act allowed board members and executives to co-operate with auditors and interact seriously with each other and with corporate auditors. The top management such as CEOs and CFOs could no longer act ignorant and careless, since they were responsible for financial accuracies. They could not escape stating that they were not aware of what was going on within the company. Liability of financial reporting responsibilities and adhering to procedures and regulations with internal controlling and ensuring validity of all the records was a specific purpose of the Act. Every financial report submitted by the business is required to submit reports including internal control reports which not only proved that the data submitted was accurate, but that the company was also confident in its reports because they could back up their data that was audited and stringent measures were taken to ensure accuracy before submission of the data. It is also imperative that the annual reports contain detailed, effective submissions that