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Sarbanes–Oxley Act

The Sarbanes–Oxley Act of 2002 (Pub.L. 107–204, 116 Stat. 745, enacted July 30, 2002), also known as the “Public Company Accounting Reform and Investor Protection Act” (in the Senate) and “Corporate and Auditing Accountability, Responsibility, and Transparency Act” (in the House) and more commonly called Sarbanes–OxleySarbox or SOX, is a United States federal law that set new or expanded requirements for all U.S. public company boards, management and public accounting firms. There are also a number of provisions of the Act that also apply to privately held companies; for example, the willful destruction of evidence to impede a Federal investigation.

The bill, which contains eleven sections, was enacted as a reaction to a number of major corporate and accounting scandals, including Enron and WorldCom. The sections of the bill cover responsibilities of a public corporation’s board of directors, adds criminal penalties for certain misconduct, and required the Securities and Exchange Commission to create regulations to define how public corporations are to comply with the law.

Due to widely globalization for US public listed company do business globally, ie US origin multi-national-corporation (MNCs) will direct and indrect required for provide SOX Compliance.

Major elements

    1. Public Company Accounting Oversight Board (PCAOB)
      Title I consists of nine sections and establishes the Public Company Accounting Oversight Board, to provide independent oversight of public accounting firms providing audit services (“auditors”). It also creates a central oversight board tasked with registering auditors, defining the specific processes and procedures for compliance audits, inspecting and policing conduct and quality control, and enforcing compliance with the specific mandates of SOX.
    2. Auditor Independence
      Title II consists of 9 sections and establishes standards for external auditor independence, to limit conflicts of interest. It also addresses new auditor approval requirements, audit partner rotation, and auditor reporting requirements. It restricts auditing companies from providing non-audit services (e.g., consulting) for the same clients.
    3. Corporate Responsibility
      Title III consists of eight sections and mandates that senior executives take individual responsibility for the accuracy and completeness of corporate financial reports. It defines the interaction of external auditors and corporate audit committees, and specifies the responsibility of corporate officers for the accuracy and validity of corporate financial reports. It enumerates specific limits on the behaviors of corporate officers and describes specific forfeitures of benefits and civil penalties for non-compliance. For example, Section 302 requires that the company’s “principal officers” (typically the Chief Executive Officerand Chief Financial Officer) certify and approve the integrity of their company financial reports quarterly.
    4. Enhanced Financial Disclosures
      Title IV consists of nine sections. It describes enhanced reporting requirements for financial transactions, including off-balance-sheet transactions, pro-forma figures and stock transactions of corporate officers. It requires internal controls for assuring the accuracy of financial reports and disclosures, and mandates both audits and reports on those controls. It also requires timely reporting of material changes in financial condition and specific enhanced reviews by the SEC or its agents of corporate reports.
    5. Analyst Conflicts of Interest
      Title V consists of only one section, which includes measures designed to help restore investor confidence in the reporting of securities analysts. It defines the codes of conduct for securities analysts and requires disclosure of knowable conflicts of interest.
    6. Commission Resources and Authority
      Title VI consists of four sections and defines practices to restore investor confidence in securities analysts. It also defines the SEC’s authority to censure or bar securities professionals from practice and defines conditions under which a person can be barred from practicing as a broker, advisor, or dealer.
    7. Studies and Reports
      Title VII consists of five sections and requires the Comptroller General and the SEC to perform various studies and report their findings. Studies and reports include the effects of consolidation of public accounting firms, the role of credit rating agencies in the operation of securities markets, securities violations, and enforcement actions, and whether investment banks assisted Enron, Global Crossing, and others to manipulate earnings and obfuscate true financial conditions.
    8. Corporate and Criminal Fraud Accountability
      Title VIII consists of seven sections and is also referred to as the “Corporate and Criminal Fraud Accountability Act of 2002“. It describes specific criminal penalties for manipulation, destruction or alteration of financial records or other interference with investigations, while providing certain protections for whistle-blowers.
    9. White Collar Crime Penalty Enhancement
      Title IX consists of six sections. This section is also called the “White Collar Crime Penalty Enhancement Act of 2002”. This section increases the criminal penalties associated with white-collar crimes and conspiracies. It recommends stronger sentencing guidelines and specifically adds failure to certify corporate financial reports as a criminal offense.
    10. Corporate Tax Returns
      Title X consists of one section. Section 1001 states that the Chief Executive Officer should sign the company tax return.
    11. Corporate Fraud Accountability
      Title XI consists of seven sections. Section 1101 recommends a name for this title as “Corporate Fraud Accountability Act of 2002”. It identifies corporate fraud and records tampering as criminal offenses and joins those offenses to specific penalties. It also revises sentencing guidelines and strengthens their penalties. This enables the SEC to resort to temporarily freezing transactions or payments that have been deemed “large” or “unusual”.

Benefits to firms and investors

  • SOX enhanced corporate transparency. It particular helpful for cross-listed firms become significantly more transparent following SOX. Corporate transparency is measured based on the dispersion and accuracy of analyst earnings forecasts.
  • SOX 404 indeed led to conservative reported earnings but also reduced — rightly or wrongly — stock valuations of small firms. Lower earnings often cause the share price to decrease.
  • Borrowing costs are much lower for companies that improved their internal control, by between 50 and 150 basis points (.5 to 1.5 percentage points).
  • Those firm with no material weaknesses in their internal controls, or companies that corrected them in a timely manner, experienced much greater increases in share prices than companies that did not. The report indicated that the benefits to a compliant company in share price were greater than their SOX Section 404 costs.
  • Corporations have improved their internal controls and that financial statements are perceived to be more reliable.
  • Firms with reported material weaknesses have significantly higher fraud.