What is the Sarbanes-Oxley Act?

The Sarbanes-Oxley Act (SOX Act) was passed by the congress of the United States on July 30, 2002, this act is also called the Corporate Responsibility Act of 2002. This act was enacted to safeguard investors from corporate fraud which are fraudulent accounting activities by corporations. The Act strengthens financial literacy and accountability of corporate boards by initiating strict reforms to prevent financial accounting fraud. Before the Sarbanes-Oxley Act of 2002, a lot of corporate financial frauds and accounting maladies were recorded, this led to public scandals. Popular instances of these scandals are Enron Corporation, Tyco International plc and WorldCom financial malpractices that made investors lose credibility in corporate boards.

What Does Sarbanes-Oxley Act (SOX) Do?

A demand for an overhaul of existing regulatory standards binding corporate financial accounting led to the passage of SOX Act of 2002. The SOX Act was able to protect investors from corporate frauds through two provisions that are contains in Section 302 and 404 of the Act. In addition to the reform provisions contained in the aforementioned sections, the Sarbanes-Oxley Act enforced reform regulations in four major areas. These areas include Accounting regulation in corporate boards, corporate responsibility, accounting regulation as new protections to safeguard investors. The provision in section 302 of the SOX Act stipulates that top officials of corporate boards are responsible for the accuracy of financial reports issued by their corporations. This requires that board management need to certify the validity and precision of their financial statements. Section 404 on the other hand requires that board management and auditors create a control policy or technique for the adequacy of internal reporting methods, they also have to maintain this internal control technique. This requirement however demands huge fund because it is expensive to establish and monitor internal controls. Furthermore, in order to protect investors from the possibility of fraudulent accounting activities by corporations, SOX Act formulates three record keeping rules in section 802. These rules will help maintain the adequacy and credibility of financial records. The first rule protects against false records while the second rule gives a time frame for retention of records or string of records. The third rule also gives specific instructions on the type of records that companies need to retain, this also include the storage of electronic communications. These rules however do not specify how records should be stored. SOX Act also provides audits, accuracy and control measures that will crack-down corporate fraud.