The Sox Law: When Did It Begin?

The Sarbanes-Oxley Act (SOX) was signed into law in 2002 by former U.S. President George W. Bush, who described it as the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt. The act was named after its sponsors, U.S. Senator Paul Sarbanes and U.S. Representative Michael Oxley. SOX was created in response to major corporate and accounting scandals, including Enron and WorldCom, which cost investors billions of dollars and shook public confidence in the U.S. securities markets. The act mandates certain practices in financial record-keeping and reporting for corporations, with a particular focus on increasing criminal punishment, accounting regulation, and corporate responsibility.

The Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act was created in response to several major corporate and accounting scandals, including those involving Enron, WorldCom, and Tyco International, which cost investors billions of dollars and shook public confidence in US securities markets. The act aims to protect shareholders, employees, and the public from accounting errors and fraudulent financial practices by increasing criminal punishment, regulating accounting, and promoting corporate responsibility.

One of the key focuses of the act is on financial reporting, internal audits, and other business practices at publicly traded companies. It also includes provisions that apply to private companies and nonprofit organizations. The act establishes penalties for non-compliance and requires companies to make certain financial disclosures, establish internal controls, and comply with auditing standards.

SOX is arranged into 11 sections or titles, with Section 302 and Section 404 being particularly notable. Section 302 pertains to “Corporate Responsibility for Financial Reports”, while Section 404 deals with “Management Assessment of Internal Controls”. The act also includes a whistleblower protection provision, which prohibits public companies from retaliating against whistleblowing employees.

While SOX has been praised for improving investor confidence and enhancing shareholder value, it has also faced criticism for being burdensome and costly, particularly for smaller companies. However, studies have shown that the law has improved financial reporting and spurred better financial practices.

The Act's 11 sections

The Sarbanes-Oxley Act of 2002, also known as SOX, is a federal law in the United States that mandates certain practices in financial record-keeping and reporting for corporations. The act was passed in response to several accounting scandals in the early 2000s, including those involving Enron, Tyco International, and WorldCom. The 11 sections of the SOX Act are outlined below:

This title consists of nine sections and establishes the Public Company Accounting Oversight Board (PCAOB) to provide independent oversight of public accounting firms and ensure the independence of audits. It also creates a central oversight board to register auditors, define compliance audit processes, and enforce compliance with SOX mandates.

This title, consisting of five sections, requires the Comptroller General and the SEC to conduct studies and report their findings on various topics, including the effects of consolidation of public accounting firms, the role of credit rating agencies, securities violations, and the involvement of investment banks in manipulating earnings.

Increased criminal punishment

The Sarbanes-Oxley Act (SOX) was passed in 2002 to improve auditing and public disclosure in response to several accounting scandals in the early 2000s. The act introduced increased criminal penalties for certain types of misconduct, including:

Section 301

Codified as 18 U.S.C. § 1350, this section imposes criminal liability on any officer, such as a CEO or CFO, who knowingly or willfully submits non-complying financial statements.

Section 303

Codified as 15 U.S.C. § 7242, this section makes it unlawful for any officer or director to improperly influence audits through coercion, manipulation, or fraud.

Section 404

Codified as 15 U.S.C. § 7262, this section requires management to establish adequate internal control structures and procedures for financial reporting. It also mandates that management submit an end-of-year assessment on the effectiveness of the internal control structure. Failure to comply with this section can result in steep penalties, including millions of dollars in fines, years of imprisonment, or both.

Section 806

Codified as 18 U.S.C. § 1514A, this section prohibits public companies from retaliating against whistleblowing employees.

Section 906

This section addresses criminal penalties for certifying misleading or fraudulent financial reports. Executives who knowingly submit non-compliant reports may be fined up to $1 million or face up to ten years in prison. If an executive willfully certifies a misleading or fraudulent report with the intent to deceive, they may be fined up to $5 million or face up to 20 years in imprisonment.

Section 1107

Codified as 18 U.S.C. § 1513(e), this section imposes criminal penalties on individuals who retaliate against whistleblowers.

White Collar Crime Penalty Enhancement (Title IX)

This section increases the criminal penalties associated with white-collar crimes and conspiracies. It recommends stronger sentencing guidelines and specifically criminalizes the failure to certify corporate financial reports.

Whistleblower protection

The Sarbanes-Oxley Act (SOX) was enacted in 2002 in response to a series of major corporate and accounting scandals, including those involving Enron, Tyco International, Adelphia, Peregrine Systems, and WorldCom. These scandals cost investors billions of dollars and shook public confidence in the US securities markets.

SOX includes provisions that specifically protect whistleblowers. Here is an overview of these provisions:

• Section 806 of SOX, codified at 18 U.S.C. § 1514A, prohibits public companies from retaliating against whistleblowing employees. This section provides a civil cause of action for employees of public companies who are retaliated against because of disclosures related to mail, wire, bank, or securities fraud.
• To pursue a whistleblower claim, an employee must file a written complaint with the Occupational Safety and Health Administration (OSHA), which is part of the Department of Labor, within 180 days of the employer's retaliation.
• Remedies under Section 806 include reinstatement with the same seniority status, back pay with interest, compensation for special damages (including litigation costs, expert witness fees, and reasonable attorney fees), and other "make-whole" relief.
• Section 1107 of SOX, 18 U.S.C. § 1513(e), imposes criminal penalties on anyone who knowingly takes action to harm or retaliate against a whistleblower. This includes interfering with the lawful employment or livelihood of any person who provides information to law enforcement about the commission or possible commission of any federal offense.
• The anti-retaliation protections provided by SOX apply to employees of private companies that contract with public companies, as well as contractors, subcontractors, and agencies of publicly traded companies.
• SOX broadly defines "protected activity" to include reports made to federal regulatory and law enforcement agencies, Congress, an employee's supervisor, and internal corporate investigators.
• The law also protects employees who participate or testify in SEC regulatory proceedings or other federal proceedings related to fraud against shareholders.
• Employees are protected even if they are wrong about their allegations, as long as they were motivated by a reasonable belief. However, employees must clearly articulate a reasonable belief that a specific practice is an SEC violation or fraud affecting shareholders.
• Adverse employment actions prohibited by SOX include discharge, demotion, suspension, threats, harassment, or any other form of discrimination in the terms and conditions of employment.
• SOX prohibits the waiver of whistleblower rights and remedies, including through predispute arbitration agreements.

Corporate responsibility

The Sarbanes-Oxley Act of 2002, also known as SOX, is a federal law that established new auditing and financial regulations for public companies. The act was created to protect shareholders, employees, and the public from accounting errors and fraudulent financial practices.

• CEOs and CFOs must review all financial reports to ensure they are "fairly presented" and do not contain misrepresentations.
• CEOs and CFOs are responsible for establishing and maintaining internal accounting controls.
• Senior executives must certify that they have disclosed any significant internal control deficiencies and fraud involving staff with significant roles in internal controls.
• Improper influence or interference by corporate personnel in audits is deemed unlawful if it results in financial statements being materially misleading.
• The chief executive officer and chief financial officer may be required to forfeit bonuses and compensation received following an accounting restatement triggered by a violation of securities laws.
• Federal courts are authorized to bar violators of certain SEC rules from serving as officers or directors of an issuer if their conduct demonstrates unfitness to serve.
• Insider trading during pension fund blackout periods is prohibited, and any profits realized from such trades must be returned to the issuer.
• Senior executives must disclose changes in securities ownership or security-based swap agreements within two business days of the transaction.

Overall, the Sarbanes-Oxley Act's corporate responsibility provisions aim to increase accountability and transparency in financial reporting, ensuring that senior executives take responsibility for the accuracy and integrity of their company's financial information.

Frequently asked questions