Sarbanes–Oxley Act

Sarbanes–Oxley Act
source
Shorttitle	Sarbanes–Oxley Act of 2002
Longtitle	An Act to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.
Colloquialacronym	SOX, Sarbox
Enacted by	107th
Effective date	July 30, 2002
Cite public law	107-204
Cite statutes at large	116, 745
Introducedin	House
Introducedbill	H.R. 3763
Introducedby	Michael G. Oxley (R–OH)
Introduceddate	February 14, 2002
Committees	House Financial Services, Senate Banking, Housing, and Urban Affairs
Passedbody1	House
Passeddate1	April 24, 2002
Passedvote1	334–90
Passedbody2	Senate
Passeddate2	July 15, 2002
Passedvote2	99–0
Signedpresident	George W. Bush
Signeddate	July 30, 2002

Sarbanes–Oxley Act. The Sarbanes–Oxley Act of 2002 is a landmark United States federal law enacted in response to a series of major corporate and accounting scandals, including those involving Enron, WorldCom, and Tyco International. Sponsored by Paul Sarbanes and Michael G. Oxley, the legislation established sweeping new standards for all publicly traded companies in the United States and their accounting firms. Its primary aim is to protect investors by improving the accuracy and reliability of corporate disclosures made under the securities laws administered by the U.S. Securities and Exchange Commission.

Background and legislative history

The impetus for the act stemmed from the collapse of several major corporations in the early 2000s, which revealed pervasive fraud, accounting fraud, and failures in corporate governance. The bankruptcy of Enron and the subsequent dissolution of its auditor, Arthur Andersen, along with scandals at WorldCom, Adelphia, and Global Crossing, eroded public confidence in financial markets. Congressional hearings, such as those held by the Senate Banking Committee chaired by Paul Sarbanes, investigated these failures. The House version, introduced by Michael G. Oxley, was merged with the Senate bill, passing with overwhelming bipartisan support and signed into law by President George W. Bush at a ceremony attended by Harvey Pitt of the SEC.

Key provisions and requirements

The act is organized into eleven titles containing numerous key provisions. Title I established the Public Company Accounting Oversight Board (PCAOB) to oversee the audits of public companies. Title III mandates that senior executives, such as the CEO and CFO, individually certify the accuracy of financial statements. Section 404, one of the most well-known and costly provisions, requires management and external auditors to report on the adequacy of the company's internal control over financial reporting. Other critical sections include mandates for auditor independence, enhanced financial disclosure, and protections for whistleblowers who report fraud, with violations carrying severe penalties including imprisonment.

Impact on corporate governance

The act fundamentally reshaped corporate governance in the United States by strengthening the role and independence of boards of directors. It required public companies to have fully independent audit committees with direct responsibility for overseeing the relationship with the external auditor. The requirement for CEO and CFO certification of financial reports increased personal accountability at the highest levels of management. These changes aimed to restore investor trust by ensuring greater board oversight, reducing conflicts of interest, and making senior management more directly liable for the accuracy of corporate financial information.

Impact on public accounting and auditors

The creation of the Public Company Accounting Oversight Board (PCAOB) under Title I marked a seismic shift in the regulation of the public accounting profession, which was previously largely self-regulated. The PCAOB, overseen by the SEC, was given authority to set auditing standards, inspect registered public accounting firms, and investigate and discipline auditors. Strict rules on auditor independence were enacted, prohibiting firms like PwC or Deloitte from providing certain types of non-audit services, such as consulting, to their audit clients to prevent conflicts of interest.

Criticism and controversy

A primary criticism of the act, particularly Section 404, has been the high cost of compliance, especially for smaller public companies and foreign private issuers. Critics, including some members of the U.S. Chamber of Commerce, argued that the regulatory burden discouraged companies from listing on U.S. stock exchanges like the New York Stock Exchange and the NASDAQ. Some economists and legal scholars, such as those at the University of Chicago, contended that the act imposed a one-size-fits-all solution and may have inadvertently reduced the competitiveness of American capital markets. Debates also centered on whether the benefits of increased investor protection justified the significant compliance expenses.

Subsequent amendments and related legislation

In response to criticism, the SEC and the PCAOB issued guidance to ease the compliance burden, particularly for smaller companies under the Small Business Efficiency Act. The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 provided a permanent exemption from the auditor attestation requirement of Section 404(b) for smaller public companies. Internationally, the act influenced other regulatory regimes, such as the J-SOX provisions in Japan and aspects of corporate governance reform in the European Union. Its core principles regarding corporate governance and auditor oversight continue to underpin the U.S. financial regulatory landscape.

Category:United States federal securities legislation Category:2002 in American law Category:Corporate governance