Sarbanes–Oxley Act of 2002
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| Sarbanes–Oxley Act of 2002 | |
|---|---|
 U.S. Government · Public domain · source | |
| Title | Sarbanes–Oxley Act of 2002 |
| Enacted by | 107th United States Congress |
| Effective | July 30, 2002 |
| Signed by | George W. Bush |
| Public law | Public Law 107–204 |
| Nickname | SOX |
Sarbanes–Oxley Act of 2002 was a United States federal statute enacted in response to major corporate scandals, intended to protect investors by improving the accuracy and reliability of corporate disclosures, and to restore public confidence after high-profile failures. The law followed a sequence of events involving Enron Corporation, WorldCom, Arthur Andersen LLP, and other high-profile entities, and was signed into law by George W. Bush after passage by the 107th United States Congress, involving policymakers such as Paul Sarbanes and Michael G. Oxley.
Background and enactment
The legislative drive toward the act emerged from collapses like Enron Corporation, WorldCom, and Tyco International and accounting firm failures exemplified by Arthur Andersen LLP, which precipitated investigations by bodies including the Securities and Exchange Commission and committees of the United States House of Representatives and the United States Senate, where Senators such as Paul Sarbanes and Representatives such as Michael G. Oxley sponsored bills. Public hearings featured testimony from executives of Enron Corporation, WorldCom, Arthur Andersen LLP, and auditors from firms such as PricewaterhouseCoopers, Deloitte, and KPMG, and drew attention from media organizations including The New York Times and The Wall Street Journal as well as oversight by the Federal Bureau of Investigation and committees like the Senate Judiciary Committee. The measure attracted bipartisan support in the 107th United States Congress and was enacted as Public Law 107–204 when signed by George W. Bush.
Key provisions and sections
Major components established new structures and rules such as the creation of the Public Company Accounting Oversight Board and requirements codified in sections including 302, 404, and 906, which addressed corporate responsibility and internal control reporting; these provisions implicated entities like Nasdaq, the New York Stock Exchange, and registrants filing with the Securities and Exchange Commission. The act imposed auditor independence standards affecting firms such as Deloitte, PricewaterhouseCoopers, Ernst & Young, and KPMG and restricted non-audit services rendered to clients like Enron Corporation or WorldCom. It enhanced criminal penalties codified in statutes enforced by agencies including the Department of Justice and procedures involving courts such as the United States District Court for the Southern District of New York and appellate review at the Supreme Court of the United States. Provisions on document retention and whistleblower protection engaged stakeholders including SEC enforcement staff, Whistleblower Protection Act advocates, and advocacy organizations like Public Citizen.
Implementation and compliance requirements
Implementation required issuers listed on exchanges such as the New York Stock Exchange and Nasdaq to establish internal control frameworks aligning with standards from bodies like the Committee of Sponsoring Organizations of the Treadway Commission and to obtain external audit attestation from registered firms overseen by the Public Company Accounting Oversight Board. Compliance programs often involved consultations with accounting firms including PricewaterhouseCoopers, Deloitte, Ernst & Young, and KPMG, and corporate legal counsel from firms such as Skadden, Arps, Slate, Meagher & Flom and Sullivan & Cromwell to meet requirements in sections 302 and 404, affecting chief executive officers and chief financial officers at companies such as General Electric, Microsoft Corporation, and ExxonMobil. The Securities and Exchange Commission issued interpretive rules and guidance that interacted with reporting obligations under statutes like the Securities Exchange Act of 1934 and disclosure regimes administered by exchanges including NYSE American.
Enforcement, penalties, and litigation
Enforcement actions have been pursued by the Securities and Exchange Commission, criminal prosecutions by the Department of Justice, and civil suits in federal courts such as the United States District Court for the Southern District of New York and the United States Court of Appeals for the Second Circuit, implicating corporate defendants like Enron Corporation alumni, WorldCom, and audit firms including Arthur Andersen LLP. Penalties under the act and related criminal statutes have led to prosecutions involving individuals such as former executives from Enron Corporation and WorldCom and sanctions against audit firms, with litigation spanning appellate review at the United States Court of Appeals for the District of Columbia Circuit and potential certiorari petitions to the Supreme Court of the United States. Whistleblower provisions produced litigation involving agencies such as the Occupational Safety and Health Administration and interest from organizations including Citizens for Responsibility and Ethics in Washington.
Impact and effectiveness
The act reshaped practices on exchanges like the New York Stock Exchange and Nasdaq and influenced corporate governance at firms such as General Electric, Citigroup, AIG, Microsoft Corporation, and Apple Inc. by requiring enhanced disclosure, internal controls, and audit oversight by the Public Company Accounting Oversight Board. Studies by institutions such as the Harvard Business School, Stanford Graduate School of Business, and regulatory analyses from the Securities and Exchange Commission and Government Accountability Office assessed effects on audit quality, cost of compliance, and investor confidence, while market reactions involved participants including institutional investors such as Vanguard and BlackRock. Implementation influenced international standards via bodies like the International Organization of Securities Commissions and accounting standard-setters including the International Accounting Standards Board.
Criticisms and reform proposals
Critiques came from executives of corporations including General Electric and from accounting firms like PricewaterhouseCoopers and Deloitte who argued that sections such as 404 imposed high compliance costs and affected capital formation discussed by policy analysts at institutions like the Cato Institute, Brookings Institution, and Heritage Foundation. Reform proposals advocated by lawmakers in the United States Congress and commentators from publications such as The Wall Street Journal and Financial Times suggested amendments to reduce burdens on smaller issuers listed on exchanges like the NASDAQ SmallCap Market and to recalibrate oversight by the Public Company Accounting Oversight Board and enforcement by the Securities and Exchange Commission, while proposals from academics at Columbia Law School and Yale Law School recommended targeted changes to whistleblower procedures and auditor liability.