SOX Compliance

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SOX compliance refers to best practice regulations of corporations set forth by the Sarbanes-Oxley Act of 2002. This United States federal law does several things to control corporate financial reporting and accuracy. It also created a supervisory board, the Public Company Accounting Oversight Board (PCAOB) that is the main body that oversees, regulates, inspects and disciplines accounting firms that are auditors for publicly owned companies.

The law was generated by Senator Paul Sarbanes and US Representative Michael Oxley following a series of accounting scandals in major corporations. Enron, Tyco and WorldCom are some of the most famous cases that cost investors billions. Besides the losses in share prices, the securities markets suffered losses in public confidence.

SOX compliance sets new or better “best practice” standards for publicly held U.S. companies, their boards, management and for public accounting firms. Privately held companies do not need to comply with SOX regulations.

The Act sets up rules governing oversight, auditing, corporate responsibilities, financial disclosures, conflict of interest, authorities, studies and reports, fraud accountability, penalties for white collar crime, corporate tax returns, and criminality for corporate fraud accountability. SOX attempts to rule over the relationship between publicly held companies and their financial reporting practices, as well as auditing firm objectivity. Violation of the law can result in criminal penalty fines and up to 20 years in prison or both. Whistleblower protection is provided, with offenders getting up to 10 years, fines or both.

Criticism of the Act is slanted towards saying it costs too much, putting American companies at a disadvantage competitively against internationals. Some companies leave the U.S. stock exchanges for exchanges abroad. New IPOs are greatly reduced because of compliance costs. Critics claim the Act damages entrepreneurship, hurts venture capital business and has not been shown to reduce fraud.

Allen Greenspan, former Federal Reserve Chairman, praised the Act. He says it forces companies to act in the interest of shareholders who own the company, and gets company owners to use resources to the optimum effectiveness. The Act has resulted in financial statements that are more reliable and accurate, thus enhancing investor confidence.

Further reading: Corporate Governance | Audit | Performance Improvement

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