Sarbanes-Oxley Act
Quick Definition
A 2002 federal law that established strict corporate governance and financial reporting standards to protect investors from fraudulent accounting.
Key Takeaways
- Enacted in 2002 after the Enron and WorldCom accounting scandals
- CEO and CFO must personally certify accuracy of financial statements (Section 302)
- Requires independent audit of internal controls over financial reporting (Section 404)
- Created the PCAOB to oversee public company auditors
- Enhanced criminal penalties for securities fraud up to 25 years
What Is Sarbanes-Oxley Act?
The Sarbanes-Oxley Act of 2002 (SOX) is landmark legislation enacted in response to major corporate accounting scandals at Enron, WorldCom, and Tyco. The law established comprehensive requirements for corporate governance, internal controls, and financial reporting. Key provisions include Section 302 (requiring CEO and CFO personal certification of financial statements), Section 404 (requiring management assessment and independent audit of internal controls over financial reporting), creation of the Public Company Accounting Oversight Board (PCAOB) to oversee auditors, enhanced criminal penalties for securities fraud (up to 25 years), protection for corporate whistleblowers, and requirements for audit committee independence. SOX applies to all publicly traded companies in the U.S. and foreign companies listed on U.S. exchanges.
Sarbanes-Oxley Act Example
- 1Under Sarbanes-Oxley Section 302, a CEO was held personally liable for certifying financial statements that contained material misstatements.
- 2The cost of SOX Section 404 compliance — requiring detailed documentation and testing of internal controls — can exceed $2 million annually for large companies.
Related Terms
SEC (Securities and Exchange Commission)
The primary U.S. federal agency responsible for regulating securities markets, protecting investors, and enforcing federal securities laws.
Form 10-K
A comprehensive annual report filed with the SEC that provides a detailed overview of a public company's financial performance and business operations.
Form 10-Q
A quarterly report filed with the SEC that provides unaudited financial statements and updates on a public company's operations.
Dodd-Frank Act
Comprehensive financial reform legislation enacted in 2010 to reduce systemic risk and protect consumers after the 2008 financial crisis.
Compliance Officer
A professional responsible for ensuring a financial institution adheres to all applicable laws, regulations, and internal policies.
FDIC
Independent federal agency that insures bank deposits up to $250,000 per depositor, per institution, and supervises financial institutions for safety and soundness.
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