Sarbanes–Oxley Act

Sarbanes–Oxley Act
source
Name	Sarbanes–Oxley Act
Long title	An Act to protect investors by improving the accuracy and reliability of corporate disclosures
Enacted by	107th United States Congress
Signed by	George W. Bush
Effective date	July 30, 2002
Public law	Public Law 107-204
Citations	15 U.S.C. § 7201 et seq.
Keywords	Corporate governance, Securities regulation, Accounting fraud

Sarbanes–Oxley Act The Sarbanes–Oxley Act is a United States federal law enacted to enhance securities law protections, restore investor confidence after major corporate scandals, and strengthen corporate governance and financial reporting for public companies. Sponsor Paul Sarbanes and co-sponsor Michael Oxley crafted the statute amid crises involving Enron Corporation, WorldCom, Tyco International, Arthur Andersen LLP, and Parmalat. The Act established new responsibilities for corporate officers, auditors, and boards, and created oversight bodies such as the Public Company Accounting Oversight Board.

Background and enactment

Legislative impetus arose from high-profile failures including Enron Corporation's collapse, the accounting fraud at WorldCom, and irregularities at Tyco International, provoking investigations by Securities and Exchange Commission, committees of the United States Senate, and the United States House of Representatives. Congressional deliberations involved testimony from figures tied to Arthur Andersen LLP, executives from Enron, legal scholars from Harvard Law School and Yale Law School, and regulators from the Federal Reserve System and Department of Justice. The bill proceeded through the 107th United States Congress with notable involvement from chairpersons of the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services, culminating in signature by George W. Bush.

Key provisions

The statute created the Public Company Accounting Oversight Board to oversee audits of public company financial statements and set standards for auditing and attestation. It imposed new criminal penalties codified by the United States Congress and amended sections of the Securities Exchange Act of 1934 and the Securities Act of 1933. Major sections include enhanced financial disclosure requirements, auditor independence rules, internal control reporting mandates, and whistleblower protections referencing False Claims Act-style enforcement. Corporate officers are required to certify quarterly and annual reports filed with the Securities and Exchange Commission, and the law elevated penalties related to document destruction involving agencies such as the Department of Justice and federal courts.

Corporate governance and compliance requirements

Public companies listed on New York Stock Exchange, NASDAQ, American Stock Exchange, and other exchanges must implement internal control frameworks often modeled on standards from Committee of Sponsoring Organizations of the Treadway Commission, COSO. Audit committees composed of independent directors, frequently drawing members from networks linked to Institutional Shareholder Services and Glass Lewis, oversee relationships with external auditors from firms like PricewaterhouseCoopers, Deloitte, Ernst & Young, and KPMG. Chief executive officers and chief financial officers must provide certifications and face sanctions tied to rulings by the Securities and Exchange Commission and enforcement actions from the Department of Justice. Compliance programs integrate guidance from Financial Accounting Standards Board, International Financial Reporting Standards Foundation, and industry groups such as the Business Roundtable and Financial Executives International.

Impact and criticism

Advocates, including officials from the Securities and Exchange Commission and academics at Columbia Business School and Stanford Graduate School of Business, credit the law with improving investor protection and audit quality while restoring market confidence, as evidenced by analyses from Brookings Institution, Peterson Institute for International Economics, and National Bureau of Economic Research. Critics from U.S. Chamber of Commerce, Small Business Administration, and commentators at The Wall Street Journal and The Economist argue the Act created onerous costs for compliance, contributed to regulatory burdens highlighted by studies at Harvard Business School and University of Pennsylvania Wharton School, and may have had unintended effects on the listing choices of companies relative to London Stock Exchange and Hong Kong Stock Exchange. Debate involves stakeholders such as Public Company Accounting Oversight Board, big four auditors, corporate legal departments, investor advocacy groups like Public Citizen, and trade associations like the Business Roundtable.

Enforcement and penalties

Enforcement is carried out by the Securities and Exchange Commission and criminal prosecutions pursued by the Department of Justice, with oversight implications for federal judges in the United States District Court system and appellate review at the United States Court of Appeals for the District of Columbia Circuit and the United States Supreme Court. Penalties include fines, imprisonment, disgorgement actions, and bars on serving as officer or director under statutes enforced alongside the Sarbanes–Oxley Act by regulators such as the Federal Bureau of Investigation and state attorneys general. High-profile enforcement actions have involved firms like Arthur Andersen LLP and executives from Enron Corporation and WorldCom, shaping legal precedent and administrative guidance from the Securities and Exchange Commission.

Amendments and related legislation

Subsequent legal and regulatory developments interacting with the Act include the Dodd–Frank Wall Street Reform and Consumer Protection Act, amendments via rules adopted by the Public Company Accounting Oversight Board, and interpretive releases by the Securities and Exchange Commission. Internationally, standards set forth by the International Organization of Securities Commissions and convergence efforts with International Financial Reporting Standards influenced cross-border listings on markets like the London Stock Exchange and Tokyo Stock Exchange. Litigation and statutory adjustments have been informed by decisions from the United States Supreme Court, directives from the European Securities and Markets Authority, and policy research from institutions such as RAND Corporation and American Bar Association.

Category:United States federal corporate legislation