Define: Sarbanes Oxley Act

The Sarbanes-Oxley Act, also known as SOX, is a federal law enacted in 2002 to enhance corporate governance and financial reporting standards for publicly traded companies in the United States.

The main purpose of the Sarbanes-Oxley Act is to protect investors by improving the accuracy and reliability of corporate disclosures and financial statements, as well as to increase corporate accountability and transparency.

The Sarbanes-Oxley Act applies to all publicly traded companies in the United States, including foreign companies listed on U.S. stock exchanges.

Some key provisions of the Sarbanes-Oxley Act include the establishment of the Public Company Accounting Oversight Board (PCAOB), requirements for internal control assessments, auditor independence rules, and increased penalties for corporate fraud.

The PCAOB is a nonprofit corporation established by the Sarbanes-Oxley Act to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports.

Under Section 404 of the Sarbanes-Oxley Act, companies are required to annually assess and report on the effectiveness of their internal controls over financial reporting.

Non-compliance with the Sarbanes-Oxley Act can result in severe penalties, including fines, imprisonment, and civil liability. Individuals may face fines up to $5 million and imprisonment for up to 20 years, while corporations may face fines up to $25 million.

The Sarbanes-Oxley Act imposes stricter requirements on corporate governance, such as the independence of board members, the establishment of audit committees, and the disclosure of executive compensation.

While the Sarbanes-Oxley Act primarily applies to publicly traded companies, certain provisions, such as whistleblower protections, can also apply to private companies that are subsidiaries of public companies.

The Sarbanes-Oxley Act has significantly improved financial reporting and corporate practices by increasing transparency, strengthening internal controls, and holding executives accountable for their actions. However, it has also imposed additional costs and administrative burdens on companies.