The Sarbanes-Oxley Act of 2002 was created to prevent accounting fraud in publicly traded companies. It includes provisions for the SEC to set new rules and established the Public Company Accounting Oversight Board to monitor reforms. The act increased accountability and transparency, but some critics argued that it would disproportionately impact small businesses.
The Sarbanes-Oxley Act of 2002 was a landmark piece of financial legislation in the United States designed to overhaul the regulatory framework pertaining to publicly traded companies. This legislation was passed in response to a series of high-profile cases of accounting fraud that made headlines in the early 2000s, including scandals at energy company Enron and telecommunications company Worldcom. The legislation is designed to limit the possibility of accounting fraud at this level in the future.
The bill was spearheaded by a bipartisan team led by Senator Paul Sarbanes (D-Maryland) and Representative Michael G. Oxley (R-Ohio). It includes several sections, each designed to address specific regulatory deficiencies that the authors felt contributed to sloppy accounting practices in public companies. Applying to all publicly traded companies, the act also included provisions for the Securities and Exchange Commission (SEC) to set new rules and established the Public Company Accounting Oversight Board to monitor many of the reforms in the act.
Several provisions of the 2002 Sarbanes-Oxley Act were important. All were intended to increase accountability and transparency by making it harder for companies to commit acts of accounting fraud. One section, 404, proved controversial as it required companies to establish better internal controls and report on the effectiveness of those controls. Critics of the 2002 Sarbanes-Oxley Act have argued that this section would disproportionately impact small businesses because of the high cost involved in implementing such controls.
Another section of interest, 303, states that members of senior management must verify and certify the accuracy of accounting reports. This holds management responsible for false or questionable financial reports. Section 802 established criminal penalties for violating the law, emphasizing that rather than simply being a civil wrong, some forms of accounting fraud could be made criminal under the Sarbanes-Oxley Act of 2002.
Also known as the SOX Act, the Sarbanes-Oxley Act of 2002 was passed almost unanimously by Congress, with some prominent representatives voting against it. After signing it, President George W. Bush indicated that it was one of the most important financial regulations in the United States since the 1930s, when significant reforms were undertaken to address the flaws that led to the Great Depression. While the 2002 Sarbanes-Oxley Act certainly closed numerous regulatory loopholes and strengthened oversight, critics argued that companies interested in fraudulent practices would find new ways to circumvent the law, staying one step ahead of the legislation.
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