The Sarbanes-Oxley Act

Enacted in 2002, as a result of decreased investor trust, specifically due to fraudulent and scandalous actions on the part of major US corporations, the Sarbanes-Oxley Act set forth to make public corporations and directors legally compliant in terms of accounting transparency and accuracy of reporting. One of the biggest shocks to the investors or shareholders of the doomed and bankrupt corporations was the extent to which the underhanded tactics reached both legal and accounting counsel. It was always assumed that the accounting offices that audited the financials would bring forth discrepancies in reporting. That proved to be a dangerous assumption. As a result, the Public Company Accounting Oversight Board was created “to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports”.

Also known as SOX, SOA, SarbOx, and the Public Company Accounting Reform and Investor Protection Act, the act was named after the two men who spearheaded the effort. Senator Paul Sarbanes was a Democrat from Maryland, and Representative Michael Oxley was a Republican from Ohio. Although SOX was put into law in 2002, it did not become effective until November 2004. Of course, it was not the type of law that corporations and directors could just ease into. They had to take measures early on in order to be compliant and maintaining compliance of the act is an ongoing duty.

Although the act is quite voluminous, there are several key points of importance:

• Officers and directors of companies can no longer receive personal loans from the companies.
• Regulations were put into place to monitor audit committees whose purpose is to determine whether a company is compliant or not.
• Provided protection for whistleblowers.
• SOX also speaks about the need for archiving conversations. This relates to emails, instant messages, text messages, and other forms of correspondence that may or not prove underhanded dealings.
• The act requires that CEOs and CFOs of public corporations personally attest to the veracity of the financial documents.
• Basically, the act was to ensure that public companies engaged in accounting practices that were considered more transparent to vested outside parties; that overseeing corporations became more aggressive; and that management could be held criminally responsible for transgressions. Specifically, the act summarized its mandate as being able “to protect investors by improving the accuracy and reliability of corporate disclosure made pursuant to the securities laws, and for other purposes”.

Interestingly, one phrase that came out of the whole financial fiasco was “creative accountants” which really meant crooks and deceits. As Canada set into practice its own set of laws to address the same issues as the US Sarbanes-Oxley Act, “creative accountants” was trademarked by the Certified Management Accountants to prevent the use of the term in a negative way. The trademark made it illegal in Canada to use the term with respect to negative or crooked accounting practices. The CMA went one step further and rebranded themselves, fusing the term into their body of work.

As a direct result of the enactment of SOX, the Canadian Securities Administrators created mandatory certification for CFOs and CEOs.

Tags: Business Law, CEO, CFO, Law, Management, Public Company Accounting Reform and Investor Protection Act, Sarbanes-Oxley Act, SarbOx, SOA, SOX