The Sarbanes-Oxley Act 2002 also known as the ‘Public Company Accounting Reform and Investor Protection Act. An Act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX) mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud.

Background :-

The Sarbanes-Oxley Act was enacted in response to the accounting scandals in the early 2000’s. Scandals such as Enron, Tyco and Wordcom shook investor confidence in financial statements and required an overhaul of regulatory standards. These Scandals, which cost investors billions of dollars when the share prices of affected companies collapsed, shock public confidence in the nation’s securities markets.

Introduction :-

The Sarbanes-Oxley Act of 2002 is mandatory. All Organisations large and small must comply with the provisions contained in it. The legislation introduced major changes to the regulation of financial practice and corporate governance. The Act named after Senator Paul Sarbanes and representative Michael Oxley legislation, who were its main architects. The Act establishes a new quasi-public company, the Public Company Oversight Board for overseeing, regulating, inspecting and disciplining accounting firms in their roles as auditors of public companies.

Implications of the SOX :-

  1. Creation of the Public Company Accounting Oversight Board (PCAOB).
  2. A requirement that public companies evaluate and disclose the effectiveness of their internal controls, as they relate to financial reporting and that independent auditors for such companies “attest” to such disclosure.
  3. Certification of financial reports by chief executive officers and chief financial officers.
  4. Auditor Independence.
  5. A requirement that companies listed on stock exchanges officers have fully independent audit committees.
  6. Ban on most personal loans to any executive officer or director.
  7. Accelerated reporting of insider trading.
  8. Prohibition on insider trades during pension fund blackout periods.
  9. Additional disclosure.
  10. Enhanced criminal and civil penalties for violation of securities law.
  11. Significantly longer maximum jail sentences and larger fines for corporate executives who knowingly and willfully misstate financial statements.
  12. Employee protections allowing those corporate fraud whistle blowers who file complaints with OSHA within 90 days.

Sarbanes-Oxley Compliance :-

Compliance with the legislation need not be a daunting task. Like every other regulatory requirement, it should be addressed methodically, via proper analysis and study. Also like other regulatory requirements, some sections of the act are more pertinent to compliance than others.

Key Provisions:-

A. Section 302 :- Disclosure Controls

This Section is of course listed under Title III of the act, and pertains to ‘Corporate Responsibility for Financial Reports’. Periodic statutory financial reports are to include certifications that :-

v  The Signing Officers have reviewed the report.

v  The report does not contain any material untrue statements for material omission or be considered misleading.

v  The financial statements and related information fairly present the financial condition and the results in all material respects.

v  The Signing officers are responsible for internal controls and have evaluated these internal controls within the previous 90 days and have reported on their finding.

v  A list of all deficiencies in the internal controls and information on any fraud that involves employees who are involved with internal activities.

v  Any significant changes in internal controls or related factors that could have a negative impact on the internal controls.

B. Section 303 :- Improper influence on Conduct of Audits

It Shall be Unlawful to take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial statements of that issuer for the purpose of rendering such financial statements materially misleading.

C. Section 401 :- Disclosure in periodic reports (Off-balance sheet items)

The Bankruptcy of Enron drew attention to off-balance sheet instruments that were used fraudulently. During the year 2010, the court examiner’s review of the Lehman Brother bankruptcy also brought these instruments back into focus, as Lehman had used an instrument called “Repo 105” to allegedly move assets and debt off-balance sheet to make its financial position look more favourable to investors.

Sarbanes -Oxley required the disclosure of all material off-balance sheet items.

D. Section 404 :- Assessment of internal control

This section is listed under Title IV of the act (Enhanced Financial Disclosures), and pertains to ‘Management Assessment of Internal Controls’.

Issuers are required to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. This statement shall also assess the effectiveness of such internal controls and procedures.

The registered accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting.

More to come in Part -II of the article…kindly wait…!!!


The above Article is compiled by Javed Ansari, the Accounting Technician having the Accounting Technician certificate issued by the Institute of Chartered Accountants of India under the Integrated Professional Competence Course. For Any Query feel free to contact:-  EMAIL ID:, Cell: +91 9650709321

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