Sarbanes Oxley

This essay is published for informational purposes only.  It is not legal advice, nor is it intended as a substitute for the advice of your attorney.

The Sarbanes-Oxley Act [also known as the Public Company Accounting Reform and Investor Protection Act, or simply SOX] was passed in 2002 after a number of corporate accounting scandals including the bankruptcies of Enron and WorldCom.  The Sarbanes-Oxley Act of 2002 (SOX) provides for a new set of corporate governance rules and regulations for public companies.

The goal of Sarbanex-Oxley was to re-establish investor trust by creating more responsible disclosures of financial information by publicly traded companies.  The goal of establishing investor trust was based on three pillars for future financial reporting:  Accountability; Accuracy and Integrity.  SOX is one of a number of laws and regulations intended to monitor or control the actions of publicly traded companies.

Sarbanes-Oxley Section 404 states that management has the responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting.   Section 404 mandates an annual assessment by management of the internal controls and procedures affecting financial reporting, and an assertion as to their operating effectiveness.  SOX requires a corporation’s annual report to contain an internal control report that acknowledges the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and that management has conducted an assessment of the effectiveness of the internal control structure and procedures for financial reporting.  In addition, an external auditor (a C.P.A. firm) must independently assess the corporation’s internal controls.

The Sarbanes-Oxley Act (SOX) is comprised of a number of sections, each of which requires action by the reporting (issuing) company. Since it became law, perhaps the most significant new regulation has been the requirement for CFOs and CEOs to personally certify and attest to the accuracy of their companies' financial results. Most enterprises were able to comply with that SEC regulation through manual processes and without much tinkering to underlying systems and processes.  Another important portion of this federal law involves dramatically harsher punishments for individuals responsible for accounting fraud.  It has been said that Sarbanes Oxley creates strict expectations about financial reporting and imposes even stricter penalties for complaince failure.

Section 409 of the Act calls for real-time reporting of material events that could affect a company's financial performance. The time-sensitive aspect of this regulation will likely put significant pressure on existing data infrastructures.  A Section 409 disclosure may trigger a process in which the Credit Manager determines whether or not open account terms are still appropriate, and if so, under what terms and conditions future sales can be made safely.

In addition to increasing the accuracy of financial reporting by publicly traded companies, the Act also attempted to strengthen confidence among U.S. and foreign investors in the accuracy of financial statements audited by U.S. based accounting firms.

Edited by Michael C. Dennis.  Mr. Dennis is a consultant.  He can be reached by email at mcdennis13@yahoo.com