Back To: BUSINESS ENTITIES, CORPORATE GOVERNANCE, & OWNERSHIP

What is the Sarbanes-Oxley Act?

The Sarbanes-Oxley Act (SOX Act) was passed by the congress of the United States on July 30, 2002, this act is also called the Corporate Responsibility Act of 2002. This act was enacted to safeguard investors from corporate fraud which are fraudulent accounting activities by corporations. The Act strengthens financial literacy and accountability of corporate boards by initiating strict reforms to prevent financial accounting fraud. Before the Sarbanes-Oxley Act of 2002, a lot of corporate financial frauds and accounting maladies were recorded, this led to public scandals. Popular instances of these scandals are Enron Corporation, Tyco International plc and WorldCom financial malpractices that made investors lose credibility in corporate boards.

What Does Sarbanes-Oxley Act (SOX) Do?

A demand for an overhaul of existing regulatory standards binding corporate financial accounting led to the passage of SOX Act of 2002. The SOX Act was able to protect investors from corporate frauds through two provisions that are contains in Section 302 and 404 of the Act. In addition to the reform provisions contained in the aforementioned sections, the Sarbanes-Oxley Act enforced reform regulations in four major areas. These areas include Accounting regulation in corporate boards, corporate responsibility, accounting regulation as new protections to safeguard investors. The provision in section 302 of the SOX Act stipulates that top officials of corporate boards are responsible for the accuracy of financial reports issued by their corporations. This requires that board management need to certify the validity and precision of their financial statements. Section 404 on the other hand requires that board management and auditors create a control policy or technique for the adequacy of internal reporting methods, they also have to maintain this internal control technique. This requirement however demands huge fund because it is expensive to establish and monitor internal controls. Furthermore, in order to protect investors from the possibility of fraudulent accounting activities by corporations, SOX Act formulates three record keeping rules in section 802. These rules will help maintain the adequacy and credibility of financial records. The first rule protects against false records while the second rule gives a time frame for retention of records or string of records. The third rule also gives specific instructions on the type of records that companies need to retain, this also include the storage of electronic communications. These rules however do not specify how records should be stored. SOX Act also provides audits, accuracy and control measures that will crack-down corporate fraud.

Related Topics

• Corporate Governance Law (Intro)
• What is Business Governance?
• Berle-Means Thesis 
• Corporate Governance Rating Definition
• Who are the members of a corporation?
• Corporate Charter
• Shareholder Register
• Common Stock
• Preferred Stock
• Par Value
• Authorized Shares
• Issued Shares of Stock
• Unissued Shares of Stock
• Outstanding Shares
• Institutional Shares
• Dual Class Shares
• What is a closely-held corporation?
• Close Corporation Plan Definition
• What is a Private Company vs a Public Company?
• What is the role and purpose of the corporation?
• What is the Agency theory of corporate governance?
• Shareholder-Centric Perspective
• Shareholder Value
• What is the Stakeholder theory of corporate governance?
  
• What is the role & rights of Shareholders in the corporation?
  
• Shareholder Democracy Definition
• Quorum Definition
• Information Circular
• Straight and Cumulative Voting
• Statutory (Straight)
  
• Cumulative Voting
• Plurality Voting
• Class Voting Shareholders
• Changing the Voting Rules
• Supermajority (Voting)
• Shareholder Sponsored Proposal 
• What are the variations on attributes of Ownership structure?
• Stock Split
• What are the fiduciary duties owed by shareholders?
• When is a shareholder personally liable for corporate obligations?
• Appraisal Rights
• Dissenter's Rights
• Say on Pay Rights
• How can shareholder enforce their rights (direct and derivative actions)?
• Amotion
• What is the process for bringing a Derivative action?
• What are corporate vote Proxies?
• Proxy Statement
• Proxy Fight or Contest Definition & Explanation 
• What is Shareholder Activism and the significance of Institutional Investors?
• Activist Investor
• Overview of Board of Directors
• Board Decision Making
• Advisory Board (Observer Directors)
• What is the role of the Board of Directors?
• Board of Trustees
• Board of Governors
• What is the composition of the board of directors?
• Chairman of the Board
• CEO as Chairman of the Board
• Inside Director
  
• Outside Director
• Outside Director or Non-Executive Director Definition
• Independent Outside Director
• Budget Committee
• Audit Committee
• Compensation Committee
• Nomination Committee (Corporate Board)
• What standards govern the actions of the board of directors?
• Duty of Candor Definition
• Duty of Care (Board of Directors)
• Duty of Loyalty (Directors) 
• Self-Dealing
• Board Evaluation Definition
• What is the Business Judgment Rule?
• What is D&O insurance?
• Codetermination (Foreign)
• What is the role of Managers of the corporation?
• What standards govern manager actions?
• Chief Executive Officer (CEO)
• Chief Financial Officer
• Chief Information Officer (CIO)
• Chief Investment Officer (CIO)
• Chief Legal Officer
• Chief Operating Officer
• Chief Risk Officer
• Chief Security Officer
• Chief Technology Officer (CTO)
• What are the primary state and federal corporate governance laws?
• What is the role of the state in corporate governance?
• What is the role of Securities Laws in corporate governance?
• What is the role of the Foreign Corrupt Practices Act in corporate governance?
• What is the Sarbanes-Oxley Act (SOX) effect on corporate governance?
• Sarbanes-Oxley Act (SOX)
• What is the Dodd-Frank Wall Street Reform and Consumer Protection Act effect on corporate governance?
• Corporate Monitors
• What industry organization standards affect corporate governance?
• How do proxy advisory firms affect corporate governance?
• What is the role of ethics in corporate governance?
• What are the major causes of corporate governance issues?
• What are the access to information issues?
• What are decision-making structure issues?
• What are the power struggle or competition issues?
• Holding Company
• What are hostile takeovers and defenses to hostile takeovers?
• Williams Act
• Staggered Board
• Shark Repellent Defenses?
• Poison Pill Defenses?
• Flip Over Poison Pill Definition
• Flip In Poison Pill Definition
  
• Voting Poison Pill Plan
• Delay-Tactic Defenses?
• Legal Lockup Defenses?
• White Knight and Pac Man Defenses?
• Jonestown Defense
• Lady Macbeth Strategy
• Macaroni Defense
• Yellow Knight
• Back-end Plan Definition
• Backflip Takeover Definition
• Dead Hand Provision Definition
• Kamikaze Defense
• Operating Company Property Company Model
• Whitemail
• Scorched Earth Policy Definition
• Revlon Rule
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• Cadbury Rules Definition